Is America Becoming a Renter Nation?
Wall Street now owns over 200,000 American homes and is raising money to buy more. The impact on neighborhoods, local economies, the future of American homeownership rates and value of your own home could be significant.
America’s rental homes together account for a whopping $14 billion industry, surely nothing to sneeze at Until recently this industry has been somewhat fragmented with local mom and pops owning much of what’s known as “scattered residential units,” essentially small apartment buildings and single family homes. But in just the last two years, large institutional investors have bought up over 200,000 single family homes, many through short sales and foreclosures, to re-purpose as rental properties. In fact over $250 million in foreclosed homes have been purchased by institutional investors from Fannie Mae alone.
And now, in a classic example of history repeating itself, these large institutional investors are beginning to securitize the cash flow from their rental income, essentially selling shares of the rental income in much the same way that they sold shares of the income from home mortgage loan payments (known as residential mortgage backed securities or RMBS), which, as we know now, helped fuel the real estate bubble. In fact, the first institutional rental fund to do so raised almost $500 million, attracting more investors than it could accept. Ironically many of the players behind residential mortgage backed securities are the same players now focusing attention on rentals.
Bringing the past full circle, many of the investors in this growing heard of institutional rental funds are once again mutual funds , America’s pensions and insurance companies, further extending the opportunity but also potentially the risk, to pocketbooks everywhere. $5 to $7 billion in these new residential rental backed securities are expected to be issued this year but the market could easily grow to $20 billion.
Much like we learned about slicing and dicing mortgage backed securities, packaging these new rental securities and predicting their true value, risks and performance involves assumptions – for example, how long it will take and cost to properly renovate and rent the homes, what are the maximum rental rates that can be charged, how often tenants will default on their lease and rental payments and how much money on-going maintenance and repairs will wind up costing.
Up until now these figures are only available for larger apartment building style properties, a product almost everyone agrees is an entirely different animal. For this reason, ratings agencies are hesitant to grant these new securities the highest ratings…at least for now.
And Wall Street lenders are racing to provide financing for these ventures. By some estimates scattered residential rental lending could become a $2.5 trillion business. Financing rental homes has traditionally been tougher than financing the purchase of your own home. But presumably this growing breed of new loans will, likewise, be bundled and securitized, creating a secondary market to buy the loans from originators thereby encouraging originators to make more loans and ignore more risk.
Easier financing – for example requiring smaller down payments - could give investors (even smaller and mid sized ones) an upper hand in bidding for available homes, making it harder for average folks to buy a home and leading some members of Congress and economists to worry about another credit bubble. For example, Representative Mark Takano (D) CA recently asked the House Financial Services Committee to hold hearings on the impact that single family rental bonds could have on America’s homes and homeowners. If we learned anything from the real estate bubble and bust, its that financial oversight of new innovations like this is key to ensuring that tax payers are protected against future bailouts and other hazards. For example, if large institutional landlords take on too much debt or these homes don’t return the profit they expect, will they dump homes on the market? The last thing any of us needs is the downward pressure that would put on our own home values and local economies.
In the final twist of irony, many of the tenants in this new breed of scattered rental homes are actually former foreclosed owners of the homes they now rent. Being able to stay in the same geographic are and rent can provide the opportunity to begin a new. The problem is that many of these folks are now paying 40% or more of their income towards rent. In fact, a whooping half of US renters already spend more than 30% of their income on rent, up 12% from only a decade ago. And the number of Americans spending more than 50% of their income on rent has risen from 19% to 27% over the past ten years. Overall, median rents have increased by 6% from 2000 to 2012 while income for renters has fallen by 13%. When folks spend most of their income on rent headed to Wall Street investors, there’s little left for them to spend in the local economy. At these rates it’s going to be difficult for today’s renter to ever save enough money for a down payment and own a home again.
If you don’t rent, why should you care? That’s easy. Consumer spending is 70% of GDP. The thing is consumers only spend when they have the funds or feel comfortable enough doing so, sometimes called the “wealth effect.” Home equity has historically been the primary source of wealth and the wealth effect for average Americans. And, obviously, renters have no home equity. The bottom line is that all of us will be impacted if America becomes a renter nation.
I’m not saying this is all bad, just that proactive recognition of this new industry and exploration of its potential impacts including the need for and safe guards, if any, would put us ahead of the eight ball this time instead of behind it like the last time around.