The recovery in the existing housing market has been somewhat of an enigma to me. After four years (2008 - 2011) of falling or flat prices, values started to increase in earnest last year, and now in early 2013, we start to see bidding wars pop up in some areas of the country. My question is how much of the pricing recovery has been driven by investor cash compared to primary residence buyers using financing to purchase, and what happens to the market if the investor cash leg is pulled out or even reverses to investor selling instead of buying?
Before discussing the prospects for Silver Bay Realty Trust (SBY) specifically, I would like to highlight some information concerning the influx of big money into the residential home market. The biggest mover into buying homes has been The Blackstone Group LP (BX). Blackstone is the world's largest real estate private equity firm with $57 billion of real estate assets under management. Since 2009, the company has also become the largest residential home owner in the U.S. investing over $3 billion primarily in foreclosed properties. From a recent Wall Street Journal article I found these facts to be of interest:
- Blackstone is estimated to now own 20,000 homes.
- Blackstone is buying $100 million worth of homes per week.
- Total residential real estate investment is expected to reach $4 billion.
- Blackstone plans to stop buying residential real estate by the end of 2013.
- The article noted that Colony Capital, another private equity firm, owns about 8,000 homes.
- Also, an article in the Tampa Bay Times stated that Blackstone has spend $150 million to buy 1,000 homes in a 6 month period just in the Tampa area.
This level of investment money plus all of the private investment money going into the rental home market makes it easy to understand why home prices have been rebounding in places like Las Vegas, Phoenix. Florida and several parts of California.
Falling Rental Rates
Investors Saturate Rental Market for Single-Family Homes, Causing Rents to Fall Year-over-Year in Las Vegas, Chicago, Fort Lauderdale, Washington DC, Orange County, Los Angeles, and San Diego
Although the headline pretty much covers the point, I will highlight just the Phoenix numbers out of the Trulia data. In the Arizona city, home prices increased by 24.2% over the last years, while rental rates increased by 0.3%. Investors who bought after mid-2012 or so may not be getting the returns they expected from rental income. With even more properties coming into these markets as the Blackstones of the world continue buying homes, the growing rental inventory will both push down rental rates and make it tougher to just get homes rented.
Will the Silver Bay Plan Work?
- Total homes owned: 3,405
- Number rented as of 12/31/2012: 1,705 for a 50% occupancy rate.
- Cash and escrow deposits totaled $248 million out of $677 million of total assets.
- Real estate assets are located in Arizona, California, Florida, Georgia, Nevada, North Carolina, and Texas, with over 50% in Phoenix and Orlando/Tampa
These numbers show that as of the end of 2012, Silver Bay Realty had one-third of its market cap in cash that needs to be invested into a rising price environment. At the same time, half of the homes it owns must still be rented out in the face of flat to falling rental rates. It is a possibility that the late 2012 IPO of Silver Bay Realty was a little late to party to get rich on residential party.
My biggest concern is what will happen to home prices when the flood of investment dollars dries up and stops chasing available homes to purchase. Will there be enough demand from occupying home buyers to support prices? A tougher scenario would be if investors who bought at low prices in 2009, 2010 and 2011 have difficulties renting out homes and decide to sell off homes to lock in the price gains. Suddenly or slowly, the real estate market could go from a bidding war to an oversupply of un-rented inventory for sale.
I think Silver Bay Realty has put together a good business plan and has put procedures in place to be successful. However, the company still needs the home price and rental values to play along with the game. To a great extent, large investor ownership of residential real estate is a new approach to real estate investing, and unlike the broadly diversified Blackstone Group, Silver Bay Realty has all of its eggs in this basket. At this point in time, I think it is best to wait and see if the company can hatch chicks in the form of profits and dividends or it will end up with a mess of dropped eggs on the floor of an unfriendly real estate market.