Did Blackstone Call The Housing Turn?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bloomberg recently highlighted some amazing single family home sales statistics, including that a third of home sellers find a buyer in less than two weeks in some areas of Washington D.C. and Seattle. That's a far cry from the languishing housing market that's helped to keep the economy in neutral since 2007. It looks like Blackstone (NYSE: BX) called this one right, but you still have a chance to get in on the ground floor.
Finance Led Recession
By now it's pretty much common knowledge that a massive housing bubble, fueled by low interest rates and loose lending standards, brought the world economy to its knees in 2007. The epicenter was the United States, though similar bubbles appeared throughout the world. After the collapse, you almost couldn't give homes away.
Banks quickly found themselves the owners of homes with loans that were worth more than the assets against which they were written. The U.S. government took control of the two government sponsored lenders and their massive portfolios of mortgages. Prices continued to plummet because of all of the homes overhanging the market and, perhaps more importantly, banks that were seemingly unwilling to lend.
After getting their hands slapped by the government, few banks wanted to be seen as taking on too much risk. Moreover, many were still nursing the wounds caused by what many call the “great recession.” The only people that could get loans were those who didn't actually need loans. Blackstone, among others, saw an opportunity.
Change on the Way?
Jonathan Gray, global head of real estate for Blackstone, recently noted in a Bloomberg interview that he thinks that there is just a two year window for investors to get into this market. Subsequent to that interview, the company supposedly increased the pace at which it was buying homes because prices were moving faster than expected. If recent evidence is any indication, two years might be off the mark.
The homes finding buyers in just two weeks is just one example. A decade low in the number of homes listed for sale, buyers camping out for the chance to purchase a home, and homes going for amounts far above their asking prices are additional examples of a turnaround that Bloomberg recently highlighted. While these events are clearly taking place in select markets, that they are happening at all is a sign of an impressive change in sentiment.
An Emerging Asset Class
Historically, the nature of single family homes kept them safe from institutional buyers. No one wanted to try to manage a large collection of single family homes, since by design the portfolio would be disparate and there would be little synergy between the properties. Renting the portfolio out would be time consuming and labor intensive, especially since each home would be different. Individual investors, small mom and pops, were left to these challenges, which were manageable if one's portfolio only included a handful of houses.
Technology and the vast number of homes left unoccupied by the recession, however, have changed some of the dynamics. Large companies could, in fact, buy up enough homes in an area at a reasonable price to create synergies. And the Internet can make maintaining and renting them out less costly and time consuming. Big buyers, it seems, have done more than create an institutional market, they may have helped to tip the scale back to the growth side in the single family home market.
How to Still Get in
The most obvious and most diversified way to join the fun is to buy shares in Blackstone. The company's portfolio is reportedly more than 16,000 homes. That's huge! The plan at present is to fix the homes and then rent them out. Presumably, at some point in the future, the portfolio will be spun off as a separate company or sold. Either way, Blackstone is probably the largest non-governmental owner of single-family homes in the country right now. It is, however, much more than just a homeowner, so this isn't the most direct play in the space. That diversification could be seen as a benefit by some, though, as the housing market strength could be a spark that dies out if the economy falls back into recession.
Two more direct plays on the space are Silver Bay Realty Trust (NYSE: SBY) and Altisource Residential (NYSE: RESI). However, at this point, they are two vastly different enterprises and that makes the risks and rewards vastly different.
Silver Bay was created by Two Harbors Investment Corp. and owns, rents, and manages single family homes. The company came public in late 2012. Silver Bay used the money it got from its IPO to buy over 3,000 homes from its parent Two Harbors, with the intention of acquiring additional single family homes to grow its business.
Altisource Residential also came to market in late 2012. This company was part of a complex restructuring of Altisource Portfolio Solutions in which the REIT and Altisource Asset Management Corporation were distributed to shareholders in a taxable transaction. The REIT will, effectively, be run by Altisource Asset Management. The company doesn't currently report to actually own any properties. It is, at present, a blank check company that plans on spending its money on single family homes with the hope of profitably renting them out.
Of the two, Silver Bay clearly has a major head start, a three thousand home head start, to be exact. And since the home market appears to have heated up of late, Altisource Residential could be just late enough to the game that it won't be able to get as many good deals as it would like. Although neither REIT has yet to discuss dividends, Silver Bay is probably the safer choice right now.
New and Untested
There are plenty of risks in getting in on the ground floor of a new market, and that's exactly what these two companies are doing. The institutionalized single family home market is still a work in progress and there will be many kinks to work out.
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. What does an institutional level owner do then and what impact will its portfolio shifts have on the market? Also, managing thousands of single family homes is still an untested proposition.
Investors who still think there's room for recovery in the housing market have a couple of direct choices. Those looking for more diversification should consider Blackstone. Or, for the real diehards, there's always the option of buying, fixing, and renting a property yourself.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!