Purchases of single-family rental properties by investors are on the rise in Sunbelt cities like Phoenix; Austin, Texas; Las Vegas; Tampa; and Charlotte, among others, according to research by John Burns Real Estate Consulting.
The increased buying activity is raising concerns that large institutional investors are disproportionately represented in these markets and “are driving up home prices to unsustainable levels,“ said John Burns, CEO of John Burns Real Estate Consulting.
His concerns are fueled by business headlines like this, from CNN: “Wall Street is buying up family homes. The rent checks are too juicy to ignore.”
Burns concedes he is still working with the data and, at this point, only has a working hypothesis. A problem with that data so far, Burns said, is that it is difficult to distinguish large institutional buyers from mom-and-pop landlords with a handful of properties, or even how many are single buyers simply purchasing a vacation home.
One trend, however, is clear. Since the beginning of this year, private-label securitizations backed by mortgages on single-family rental properties have risen sharply.
Still, most of those securitizations don’t appear to involve institutional investors. In fact, Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac, suggests that much of the increased activity in the private-label market this year is likely due to an upswing in vacation-home buying, a trend the National Association of Realtors has documented. That may have an impact on prices in some markets, but the blame there can’t be placed squarely on Wall Street.
In fact, two more recent deals can now be added to this year’s tally of private-label securitizations backed by investment properties — a surge that began after changes were made this past January to the Preferred Stock Purchase Agreements governing Fannie Mae and Freddie Mac. Those new deals have come to light since HousingWire first wrote about the PSPA-propelled increase in private-label securitizations in late October.
The added offerings bring the total number of private-label securitizations backed by investor properties and second homes to 39 year-to-date through the end of October, and increase the mortgage volume involved to more than 55,000 loans valued at $16.7 billion.
The key change made to the PSPA that spurred the private-label boom was a cap placed on the government-sponsored enterprise’s acquisition of mortgages secured by second homes and investment properties. Consequently, investor-securitizations that normally went the route of the GSEs instead found their way to the private-label market. The amendments to the PSPA, however, were suspended in September of this year and are now under review by the Federal Housing Finance Agency, which oversees the GSEs.
Those PSPA-fueled private-label offerings, however, represent only one securitization pipeline and do not include a hybrid private-label securitization structure used by many of the nation’s largest institutional investors, including major players like Invitation Homes, American Homes 4 Rent, Progress Residential and Cerberus Capital Management.
In fact, the holdings of those five companies combined accounted for about 176,000 of the estimated 300,000 single-family rentals controlled by institutional investors nationwide as of the end of the first quarter of this year, which is up from 200,000 in 2017, according to a market report prepared by Amherst Pierpont, a leading fixed-income broker dealer.
These institutional investors are far from a dominant force in the national rental market, however, collectively owning only about 2% of all single-family rental properties in the country, Sharga said. “And the mom-and-pop investors, the people who own between one and 10 properties, represent anywhere from 85% to 90% [of that market],” Sharga added.
One way the trail of these two different groups of rental-property buyers can be distinguished in the data is via the securitization vehicles they utilize in financing their holdings.
“Yes, there are there are different [private-label securitization] structures, and what Invitation Homes is doing is a bit different than what’s used by some of the [mom-and-pop] investor properties that Fannie and Freddie would otherwise securitize,” explained Ed DeMarco, president of the Housing Policy Council. “They are not quite the same thing.”
A white paper published by the Urban Institute that explores the financing structure used by many of these large institutional owners of rental properties, like Invitation Homes, explains that the company pioneered in 2013 a hybrid single-family rental securitization vehicle that is structured as a hybrid commercial/residential mortgage-backed securities offering. It was used to acquire foreclosed properties and convert them into rentals.
“The security is collateralized by a single loan that is in turn secured by first-priority mortgages on the … income-producing single-family residences,” the Urban Institute report states. The typical private-label offering, by contrast, involves issuing securities that are backed directly by a large pool of mortgages, without the single-loan structure sandwiched in between.
That may seem like a small distinction, but the structure matters when considering market impacts. Specifically, deals structured as hybrid single-loan offerings face some strict restrictions in terms of disposing of the properties used as collateral for that single securitized loan.
“For the institutional guys, they have some very specific guidelines in terms of what the owners can and can’t do in terms of property disposition,” Sharga explained. “So, that’s one of the reasons I’m not as concerned about a lot of these properties being sold off at distressed pricing or being affected by some sort of bubble scenario [in markets where they operate].
“The other reason I’m not as concerned about a bubble, candidly, is that the time horizon of rental-property investors tends to be longer than people who are buying properties to fix and flip. And besides, there’s also the obvious conflict of an investor selling below market if they don’t have to, right?”
That’s not to say the institutional buyer side of the rental market isn’t a force to be reckoned with. Since 2013, according to the Amherst Pierpont report, institutional investors like Invitation Homes and American Homes 4 Rent, have collectively undertaken about 80 of these hybrid single-family rental securitizations involving total issuance of $43 billion.
And these so-called Wall Street investors own thousands of rental properties in cities highly concentrated in the Sunbelt, places like Phoenix, 7,206 properties; Dallas, 5,532 and Tampa, 5,205, according to the Amherst Pierpont report — which includes data on city-specific property ownership current as of August 2020.
Sharga points out that the cities where institutional investors tend to have the heaviest presence also track well with the areas that suffered the greatest devastation in terms of foreclosures in the wake of the global financial crisis because that’s how they got their start — purchasing foreclosed properties and converting them into rentals.
But times move on, as does the economy and the threats it faces.
“I think a mitigating factor now is that we’re seeing the institutional folks moving into more moderately priced markets,” Sharga said. “… You’ve seen their buying patterns move away from the coasts and into the Midwest and Southeast, where property values are more reasonable, and where they can rent out a property at an affordable rent and still make a good profit.
“So, I guess you could make a counter-argument that probably does have an inflationary effect on prices in those markets.”
