Prescient or Nervous Nelly?
That a company the size of Blackstone is still going strong in the housing space and Och-Ziff is getting out, begs the question of who’s right? That’s a hard one to answer, however the big risk is that home prices fall again and the current raft of buyers look to get out fast, further depressing prices.
Clearly, large sales would depress prices. However, these buyers aren’t mom-and-pops in over their heads, trying to get by on a stagnant salary, or worse, scraping to get by after losing their jobs. They are well-financed companies that can hold on to investments for lengthy periods of time, even if those investments aren’t performing as well as expected. Moreover, if the rental income from these homes is used to back a bond, selling homes one at a time out of the bond deal becomes increasingly complicated. That means that bulk sales would be likely, which would probably be looked at differently than single home sales.
The REIT Option
In addition, selling the homes isn’t the only way out of these purchases. Silver Bay Realty Trust Corp (NYSE:SBY), for example, was created by Two Harbors Investment Corp (NYSE:TWO). The real estate investment trust owns, rents, and manages single family homes. The company came public in late 2012. Silver Bay used the money it got from its initial public offering to buy over 3,000 homes from its parent Two Harbors, with the intention of acquiring additional single family homes to grow its business.
While Altisource Residential Corp (NYSE:RESI), another notable single-family REIT, was set up as a blank-check company to buy homes, which increases the risks for its shareholders, such entities could help stabilize the market. With cash on hand and a need to buy homes, Altisource would be an ideal buyer of single-family home portfolios. As a REIT, however, Altisource would unlikely want to buy homes tied to bond deals. Regardless, Blackstone and other big buyers could easily follow the REIT exit strategy if they want out or find willing and motivated buyers.
There are Risks
Still, there are good reasons why the single-family home, as an asset class escapade, could fail. For example, housing markets change over time. So what was once a desirable place to own can slowly turn into a place where you wouldn’t want to walk alone at night. Also, managing thousands of single-family homes is still an untested proposition. So while Och-Ziff highlighted the return issue, there are many other legitimate concerns here, some of which may have played into the less than desirable return profile the company noted.
Investors looking to get into the single family home rental market should probably avoid Altisource until it actually has a notable home portfolio. Silver Bay, with a sizable portfolio, could be a good option for more aggressive investors. Blackstone, meanwhile, is far more than just a home buyer, making it an appropriate option for more conservative investors. Even if the current home price run-up turns out to be short-lived, Blackstone and Silver Bay probably aren’t going to be running for the exits.
The article Is The Single Family Home Market A Bubble Again? originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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