BACKGROUND

The climate for buying residential real estate in America changed dramatically during the eight months between August 2012 and May 2013. Six years of recessionary housing markets ended and the housing recovery kicked into high gear. Year-over-year price increases entered double digit figures for the first time in a decade. Inventories of homes for sale were down 18.68 percent compared to 2011 and 40 percent below peak in September 2007. i Inventories continued to fall as summer ended. They improved only a point or two when the spring buying season arrived.

Inventory shortages were more serious in lower price tiers, making it very difficult for first-time buyers to take advantage of historically low interest rates below 3.5 percent. High levels of negative equity kept one out of five homeowners frozen in place and unable to sell, driving down inventories, especially among lower priced homes. Declines in foreclosures and REOs inventories caused by a multi-year decline in foreclosure starts put upward pressure lower tiered properties more than more expensive homes.

INVENTORIES PLUNGED IN THE SECOND HALF OF 2012

 

If things were tough for first-time buyers, they were even tougher for small real estate investors who saw foreclosure discounts—the difference between the median price for full-price homes in a market and the median REO price-shrink and even disappear altogether in some markets. iii

BY 2012 Q4, FORECLOSURE DISCOUNTS HAD FALLEN TO PRE-BUST LEVELS 

Another factor changed the game dramatically for smaller real estate investors in 2012. Some 50 or more Institutional investors, or hedge funds, entered residential real estate and began buying up tens of thousands of properties. Backed by huge amounts of private equity capital tempted by the exceptional returns of 8 to 10 percent reported by smaller investors who buy foreclosures, rehabilitate them and rent them out. By late 2012, according to a recent JP Morgan Chase report, Wall Street has already raised or committed as much as $10 billion for REO-to-rental, enough to purchase 15 percent of all bank-owned homes. iv

In the intervening months fund purchases have had significant impacts on the local real estate markets where they have been active. Home prices in all six leading hedge funds markets experienced double digit median home price increases last year. They have driven up REO prices for individual investors and owner-occupant buyers. Ripple effects from the drought of REOs in those markets have driven lower-tier home prices up increased 15 percent over a year ago, compared to only 6 percent in other markets with a lesser hedge fund presence, according to an analysis by CoreLogic. v

HEDGE FUNDS’ IMPACT HAS BEEN DRAMATIC BUT LOCALIZED TO DATE 

Real estate investors play a major role in the national housing economy. Investors purchased 24 percent of all existing homes sold in 2012, a decline from 27 percent in 2011, according to the National Association of Realtors.

Rising prices, whether for homes in general or foreclosures alone, contributed to the declining in investor market share.

“As prices go up, return on investment goes down. This year I expect to see prices go up and return go down. Return on investment and affordability are closely linked. It really comes down to income, affordability and what a person can pay for rent,” Sean O‘Toole, CEO of ForeclosureRadar said recently. “People got confused that investment is appreciation. That’s where you get your return on investment. The real source of return on investment is return on rents.”

However, now there are indications the supply of single family rentals may exceed demand and rents, as a result, are suffering.

Rents overall rose just 2.4 percent year-over-year according to the Trulia Rent Monitor— the smallest increase since Trulia started tracking rents one year ago. Rents are rising only on apartments, now at 2.9 percent year-over-year; single-family home rents have essentially flattened, rising just 0.1 percent. vi Trulia Price Monitor Oversupply of single family rentals may be a factor. The number of single-family rentals nationally has increased by almost one third since the housing market last peaked: that’s nearly 4 million more single-family homes rented in 2012 than in 2005.

ASKING RENTS FOR SINGLE FAMILY HOMES HAVE FLATTENED AS PRICES ROSE

 Higher prices, fewer foreclosures and competition from funds with deep pockets have had an impact on investors’ actions in the marketplace over the past eight months. 

Real estate investors play a major role in the national housing economy. Investors purchased 24 percent of all existing homes sold in 2012, a decline from 27 percent in 2011, according to the National Association of Realtors. At a time when excessive inventories of distress sales were depressing home values, investors ignited upturns in many markets overwhelmed by low values.

However, in the past year the monthly investor share of existing homes purchases, including hedge fund purchases, has exceeded 20 percent only twice since April 2012. Both of these were during winter months, December 2012 and February 2013, when owner-occupant purchases are typically low.

BY 2012 Q4, INVESTOR MARKET SHARE WAS BELOW 20 PERCENT

WHAT ARE INVESTORS PURCHASING INTENTIONS?

REAL ESTATE INVESTORS ARE RESPONDING TO HIGHER PRICES BY BUYING FEWER PROPERTIES IN THE NEXT 12 MONTHS

Investor purchasing intentions have changed significantly since ORC surveyed investors in August, when only 30 percent said they planned to buy fewer properties in the next 12 months than they did in the previous year. In the latest survey, the percent of investors who said they plan to cut back on purchases in the coming year has risen to 48 percent. Only 20 percent of investors said they plan to increase purchases compared to 39 percent ten months ago.

WHAT ARE INVESTORS PLANS REGARDING RENTALS?

REAL ESTATE INVESTORS ARE RESPONDING TO HIGHER PRICES BY HOLDING THEIR RENTAL PROPERTIES AT LEAST FIVE YEARS OR LONGER.

While they may be buying fewer new properties in the year to come, over half of investors who own rental properties plan to hold them for at least five years or more. One-third, 33 percent, of investors plan to keep their rentals for ten years or more.

“Higher prices are reducing returns on investment and investors are responding by cutting back on their purchasing plans until conditions sort out. Fewer foreclosures, rising property values and competition from hedge funds are making it tough to find good ideals on distress sales,” said Chris Clothier, partner in Memphis Invest and Premier Property Management Group.

“On the other hand, investors are planning to hold onto their rental properties for at least eight to ten years and realize the benefits of rising rents and low vacancy rates. Cash flow is much more important than appreciation,” said Clothier.

HOW ARE INVESTORS FINANCING PURCHASES TODAY?

CASH IS KING

How those who do plan to make purchases will pay for them has also changed over the past ten months. In August, nearly one out of four investors said they will use all cash on their next purchase and the balance would use some form of financing. Today the percentage has increased to 37 percent. Most investors today plan to use a commercial mortgage. “Cash sales make sense when prices are rising. They lower investors’ costs and increase return on investment,” said Clothier.

 

HOW HAS THE CLIMATE FOR INVESTING CHANGED IN FIVE YEARS?

About half of investors said real estate investing is harder today than when large numbers of foreclosures started five years ago.

 

HOW HAS THE ENTRY OF HEDGE FUNDS AFFECTED SMALLER INVESTORS?

ONLY ONE OUT OF EIGHT SAY HEDGE FUNDS HAVE AFFECTED THEM.

The entry of institutional investors into residential real estate is often cited as a source of competition for properties and a reason foreclosure inventories are shrinking but only 13 percent of investors in the survey said the large competitors have impacted their businesses significantly while 54 percent said they have experienced no impact at all.

DESPITE THE CHALLENGES, INVESTORS ARE OPTIMISTIC ABOUT THE FUTURE OF INVESTING

MORE THAN HALF OF THE INVESTORS PARTICIPATING IN THE SURVEY SAID THEY BELIEVE THAT FIVE YEARS FROM NOW THERE WILL MORE REAL ESTATE INVESTORS THAN THERE ARE TODAY.

“The reasons people invest in real estate—cash flow, passive income for retirement, exceptional return--will be as important five years from now as they are today,” Clothier said. 

METHODOLOGY

The study was conducted using ORC International’s CARAVAN Omnibus survey using both landline and mobile telephones on May 2-5/9-12/16-19 2013 among 3020 adults, 1,507 men and 1,513 women 18 years of age and older, living in the continental United States. Some 1,970 interviews were from the landline sample and 1,050 interviews from the cell phone sample.

The margin of error for the survey is +/-03 percent. All CARAVAN® interviews are conducted using ORC International’s (ORC) computer assisted telephone interviewing (CATI) system.

The CARAVAN® landline-cell combined sample is a dual frame sampling design. This means that the sample is drawn from two independent non-overlapping sample framesÑone for landlines and one for cell phones.

ABOUT MEMPHIS INVEST

Memphis Invest provides single-family rental real estate investment services to domestic and international clients looking to include residential real estate ownership in their investment portfolios. Founded in 2004, the company is a full-service investment company that provides all of the essential services for an investor from acquisition, renovation, rental and on-going property management for individuals looking to build their real estate investment portfolio. A privately held, family-owned business based in Memphis, Tenn., the company is led by three generations of the Clothier family. Memphis Invest is committed to providing a personal level of customer service to investors that are looking for a company that mitigates risk while protecting investment capital.

ABOUT PREMIER PROPERTY MANAGEMENT GROUP

Specializing in Memphis property management, Premier’s management team works for investors nationwide to handle all of their investing and management needs. As a licensed rental property management company in Memphis, TN, Premier Property Management Group strives to offer outstanding quality and top-notch customer service for your Memphis rental property management needs.

Premier Property Management Group is a full service real estate firm, currently owning and managing over 1500 properties.

CONTACT INFORMATION

For further information about the survey, contact:

Chris Clothier
Partner
Memphis Invest
chris@memphisinvest.com
901-751-7191

MEDIA:

Steve Cook
scook@commsconsulting.com
202-257-3652

ENDNOTES

i Realtor.com Real Estate Trend Data August 2012.
ii CoreLogic Negative Equity Report September 12, 2012 http://www.corelogic.com/about-us/news/corelogic-reports-number-of-residential-properties-in-negative-equity-decreases-again-in-second-quarter-of-2012.aspx
iii Realtor.com Real Estate Trend Data August 2012.http://www.realestateeconomywatch.com/2012/11/competition-drives-down-foreclosure-discounts/
iv “Your New Landlord Works on Wall Street. Hedge funds are snatching up rental homes at an alarming rate.” By David Drayen. New Republic. February 12, 2013. http://www.newrepublic.com/article/112395/wall-street-hedge-funds-buy-rental-properties
v http://www.corelogic.com/about-us/news/corelogic-releases-march-marketpulse-report.aspx Report Examines the Role of Investors in Purchase of REOs. March 18, 2013. 
vi Trulia Price Monitor http://trends.truliablog.com/2013/04/trulia-price-rent-monitors-mar-2013/