A Truly Pure Play On A Housing Rebound

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Single family homes are the bedrock of this country and up until now, the purview of the regular Joe. The 2007 to 2009 housing led recession, however, may have changed that, with giants like Blackstone Group (NYSE: BX) moving aggressively to buy, fix, and rent out these properties. How is a small investor to compete? Recently public Silver Bay Realty Trust (NYSE: SBY) might just be the answer.

A Changing Market
Single family homes are an interesting asset class. Large investors have avoided it because it is a highly fragmented market that spans the entire country. While smaller investors have bought up collections of homes for investment purposes for years, the legwork of keeping tabs on individual properties and tenants was simply too much work for big participants. Apartment buildings were much easier and more cost effective to handle.

The recession, however, left a massive number of homes owned, usually unwillingly, by banks and the federal government. With so many available homes, prices plunged. Add in the computer and the Internet, and owning and managing a large collection of single family homes started to look a lot more feasible. Not surprisingly, hedge funds and asset management firms stepped in.

Prices Heading Up
Blackstone has been one of the most aggressive, and outspoken, about its plans. Jonathan Grey, the company's global head of real estate, seems to be on the phone with Bloomberg every other week discussing his company's moves. The latest tidbit is that home prices are moving faster than expected, leading Blackstone to up its purchases. The company's spending hundreds of millions of dollars a week on homes, with an inventory of over 16,000, according to Bloomberg.

That's a lot of houses. There are other big players moving into the space, too, so it’s no surprise that home prices are moving rapidly. It seems that the big players think single family homes are finally ready for prime time.

Small No More
With the big players moving in, small investors may find it harder to compete. Finding a gem in good condition is likely to become increasingly difficult, leaving fix it uppers to the small player. That's unfortunate for an asset class that has helped so many create wealth over the years. However, newly public Silver Bay Realty may offer investors a way to participate without having to compete for individual homes.

Silver Bay was created by Two Harbors Investment and owns, rents, and manages single family homes. The company came public in late 2012 and has traded from $18 a share up to the $22 range. That's a nice advance in a short period of time, especially for a real estate investment trust that hasn't yet paid a dividend. In fact, there isn't much information available about the company.

Who is Silver Bay?
A quick read of the prospectus for the IPO will basically tell you that Silver Bay got a lot of cash from the IPO that it used to buy over 3,000 homes from its parent Two Harbors. From there, it plans to spend money on acquiring additional single family homes. While the potential is huge, a fact highlighted in the prospectus, there's no guarantee that Silver Bay will live up to that potential, even though 3,000 homes is a good starting point.

Management intends to use a top-down approach to its home purchases, picking out the markets it believes offer the best opportunities. This makes complete sense. It also hopes that this will allow it to focus its efforts on the management side, by having economies of scale in key markets. Again, a logical plan.

For right now, this sounds like a company going after the right market with the right approach. Investors looking to ride single family home prices higher, without having to buy any single family homes, would do well to consider Silver Bay. Since there is no indication of the dividend right now, this is truly a growth and momentum investment.

What About the Long Term?
How the institutionalization of single family homes plays out will be interesting to watch. There are signs that home ownership in the United States is set to stagnate or fall over the long term as a changing job market makes home ownership more difficult to achieve and more complicated to deal with if one changes jobs. That would be good for landlords.

That said, 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. What does an institutional level owner do then and what impact will its portfolio shifts have on the market? How will managing so many individual homes actually work?

There are a lot of questions that need to be answered and only time will reveal the results of this foray. For investors looking to take advantage of the current institutional push into the market, Silver Bay is worth consideration.

For other investors, like those who want income from rental homes, this may not be the best idea around. In fact, the head of Fannie Mae, which owns over 100,000 homes, recently told Bloomberg that it plans on selling most of its homes one by one, not in bulk transactions. So a little guy willing to put in sweat equity may still have a shot.


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