Sizing Up The Single Family Home Sector

 |  Includes: BX, SBY
by: Daniel Lauchheimer

Last year, in an interview on CNBC, Warren Buffett said that he saw single family homes as the best investment opportunity available to investors. In October 2012 he put his money where his mouth is by buying the $1.5bn ResCap loan portfolio, giving him control over 47,000 whole loans tied to single family homes. Mr. Buffett's bullishness has been echoed by many large asset managers. Most notably, Blackstone (BX) has spent $2.5bn on amassing a portfolio of 16,000 single family homes. In this article, I will examine the underlying economics that support the optimistic view on housing, the major players in the market, and finally how regular investors can profit from this trend.

Underlying Economics

In any market prices get dictated by supply and demand. According to the Census Bureau, in the heady years of 2005 and 2006 the U.S. produced 1.9mm housing units, a staggering figure way above the average. Housing unit production slowed in 2007 to a more normal 1.5mm, in 2008 that number dropped to 1.1mm, and in the next 4 years the U.S. housing market came to a screeching halt. In the years 2009 through 2012 the U.S. produced only 650k homes per year. See table:


New Housing Construction (000's)

Household Formations (000's)






















Click to enlarge

Clearly, we overbuilt early on, but now we seem to have gone in the opposite direction. Although household formation stalled between 2008-10 to 500,000 per year (roughly 50% below the peaks), it has since picked up to 1.1mm in 2011, and 1.2mm in 2012. While 2008-10 saw an "absorption" of the old housing stock through a lack of building, the continued lack of building in 2011 and 2012 despite the increase in household formations, has caused prominent investors, like Mr. Buffett, to place a major wager on the single family housing market.

Effect On Price

The changing economics have still not translated into changing prices. Housing prices still remain 36% off their all time highs from 2006, and ownership rates stand at 15 year lows. We can speculate that this anomaly -- prices not reflecting supply and demand -- to a number of factors -- continued investor skepticism, foreclosure inventory, quality of supply etc.-- but bottom line is that major investors think prices will eventually swing more to the upside.

Zeroing In

With all this said, we cannot treat every housing market equally, Clearly some markets have been more adversely affected than others. According to Case Shiller Index the hardest hit markets -- Las Vegas, Chicago, Tampa, and Atlanta have seen an average 30% drop in home prices since October 2008, with Las Vegas dropping a staggering 41%. Prices have not recovered despite the shifting housing landscape, cheap credit, and supply and demand equilibrium.

Major Players

As mentioned, Mr. Buffett and BX have taken large positions in the single family market. However, they have been joined by many other players. Effectively managing the properties remains one of the biggest questions surrounding the single family housing market. Take BX, for example, how can BX manage 16,000 homes located in completely different locations? When it comes to apartment complexes, you have 100-200 apartments in one location, thus decreasing the complexities of managing so many units at one point, but you cannot accomplish this in the single family housing space. This major concern has put banks in the defensive when lending on these ambitious projects. Only companies that have established themselves as responsible operators have gotten the critical financing necessary to really invest at scale.

I will now present the major owners of single family homes, the number of homes the own, and their financing.


Homes Owned

Financing (Amount, Source)

Blackstone (NYSE:BX)


$600mm, Deutsche Bank (DB)

American Homes 4 Rent


$600mm, Alaska Permanent Fund -- unclear if debt, preferred, or common equity

Colony Capital


No information found

Waypoint Homes


$245mm, Citibank (C)

Silver Bay Realty Trust (NYSE:SBY)


$245mm, IPO

American Residential Properties


No information found

Beazer Homes (NYSE:BZH)

No information found

No information found

TCW Home Place Partners Fund

No information found

No information found

Click to enlarge

What we can see from the above chart is that most regular investors do not have a way into this market at scale. However, investors do have some options. Most notably, SBY provides investors with the purest play into the single family home market. However, BX also gives investors nice access into the single family market.

BX, in addition to its sizable single family portfolio, also has one of the most sizable real estate portfolios in the world. Last year, the company spent around $17bn on commercial real estate, ranging from its large foray into the single family market, its purchase of $9bn in malls from Centro (CNP.ASX), and $1bn in industrial properties from Prologis (NYSE:PLD). This all comes on top of its purchase of Hilton Hotels, and Equity Office Properties in previous years. For the more enterprising of you, trying to find a single family home in one of the downtrodden markets mentioned above, fixing it up, and renting it up might prove a profitable investment.

Final Thoughts

With the continued low interest rates, everyone has to focus on how to earn some sort of real return. Cash, Government Bonds, and other traditional fixed income products, won't provide investors with the return they need. Compounding this problem, as the baby boomer generation continues their move into retirement they will need to invest in assets that provide them with stable yield. In previously linked Bloomberg article, B. Wayne Hughes, owner of Homes 4 Rent, estimates that single family home rental should earn an unlevered return of 6-7%, which while sounding low, still offers investors a nice spread more conservative fixed income products. Putting this all together, single family homes, because of the attractive economics, and macro interest rate and population trends, should provide investors with a nice investment for many years to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.