Is the REO/Rental market about to collapse?

Question

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months (2012), has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties.

http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business

It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.

http://www.zerohedge.com/news/2013-05-16/multifamily-starts-suffer-biggest-monthly-plunge-2006-reo-rent-recovery-dead

In addition to the money-laundering aspect (confirmed previously) and the REO-To-Rent scramble by PE firms and hedge funds (which is now over as PE become active sellers of apartment rental properties), we highlighted the third implicit subsidy to the housing non-recovery:Foreclosure stuffing. We explained this scheme by banks to limit the amount of available for sale inventory as follows: "since the properties not entering the foreclosure pipeline are effectively kept out of inventory, even shadow inventory, and thus the distressed end market, the monthly drop in foreclosures has acted as a form of subsidy to the housing market, as month after month less inventory than otherwise should, enters the market.... What this has resulted in is a logical increase in prices of the properties that are on the market." Today, the mainstream has finally caught on, and courtesy of RealtyTrac has come up with its own name for this subsidy: Vampire REOs.

http://www.zerohedge.com/news/2013-10-03/meet-monster-housing-market-presenting-vampire-reos-which-65-americans-live-mortgage

Sorry for the length, but would it be frivolous to invest in rentals or REO's seeing as this bubble's about to pop?

Is there a way to mitigate the risks whether its buying and holding or flipping?

Hoping @JonHoldman, @JScott, @BenLeybovich, and @BrianGibbons responds to this thread.

Robert Taylor · Answer

@Justin B. -I was going to write a reply going into all sorts of details, but the more I thought about what I'd be writing, it would end up being more like a short book than a forum reply, so I'm going to try a different approach, which I hope still makes sense. You can read articles like these (and I did read your links, I'm not just dismissing them) until you are blue in the face and still not have a solid conclusion, you'll just have a blue face! I can look back to 2007/2008 and now with the benefit of hindsight (which is of course always 20/20!) it seems so hard to believe that anyone didn't see the real estate correction or crash coming like a speeding freight train! Prices kept going up, up, up and up and we were building new houses and condos all over the place, many built to sell mostly to speculators, not people who were actually going to live there and on top of all of that, much of it was being paid for by these INSANE mortgages where someone with rotten credit could just claim they made whatever amount of income and/or owned whatever amount of assets, didn't even have to show any proof of it and would walk out with a mortgage, assuming of course they'd pay a higher interest rate! (thus making default even MORE likely!) I mean, how could ANYONE with half of a brain not have seen that crash coming, especially these pundits and predictors that write articles like these??!! Yet, only a few of them really called it out before it happened! Whether its real estate or stocks or commodities or whatever, you can always find the doom and gloom guys and the endless sunshine guys as well. I prefer to focus on the individual investments and make my decisions that way.

John Rooster · Answer

Does the fact that this nonsense about shadow inventory is over a year old, and national real estate market values are up more than 10% since it was written, tell you something about the soberness of the person that wrote it?

Robert Taylor · Answer

@Justin B. I will agree with you fully that the fed's money printing policies are troubling to say the least and I am certainly somewhat nervous about interest rates going up, which nearly inevitably will come at some point, likely sooner than later. Also, while I try to avoid discussing politics on this forum as much as possible, I normally agree with @Joe Gore that the Democrats have put our economy in trouble more so than Republicans, although lately I'm getting tired of both parties, at least at the national level. The tea-partiers sure talk a good game but when Rep. Paul Ryan (who represents my parents district where I grew up in suburban Milwaukee) attempts to come up with an actual budget for the first time in 20 years that tries to bring at least the start of some fiscal sanity to Washington, he's blasted by the Tea Party types. Ryan knows budget numbers and details like no one else, the guy's like a giant walking Econ textbook and knows that in a two-party system where the Dems control the Senate and the White House that compromise is the only way to get things done. Yet, even during the depths of the Jimmy Carter years, when not only our national economy was stagnant but people were losing faith in the US as being the greatest country in the world, one which could rebound from anything, a time at which people thought getting a mortgage for 15% was a SCREAMING DEAL, people were still buying and selling real estate and everything else! People were still becoming rich or at least making it through life, the sky did not fall. Sure, things took a while to really turn around and it wasn't until the early 80's that things really got moving again, but even in the late 70's, if you worked hard and worked smart and made the right moves, you could still make a good living and even grow wealthy! That's what I think of when I occasionally read articles like these or start to obsess about the future and the various economic obstacles we face in the near and far future! Yes, there are some troubling signs out there but I still have a lot of hope that we live in a great place where anyone can make it, assuming they really try! Having said that, I'm done on this topic, we could all go back and forth for eternity on this stuff and I'd rather spend my limited time on BP talking about actual deals, offering advice based on what I've learned (or think I've learned!) and so on!

J. Martin · Answer

@Justin B. , I knew it! Like any system, you have to participate in it to make it work though! Set up a wallet and I'll send you some bitcoin. Not enough to put a downpayment, for sure! But enough to have some and send it around to friends if you want.. Go here for the easier, quick, more anonymous method to set up a bitcoin wallet (I assume that's what you prefer). https://blockchain.info/wallet Or go here if you may want to buy a few bucks worth in the future.. (have to connect bank account/confirm identity) https://coinbase.com/ PM me your bitcoin address (the public one) or just post it on here! It can't access your coins! For example, one my public addresses is below. (Feel free to send over bitcoins anyone! lol) 132Fb5GzEpQqKgv7GuK9YcQVjKHt785bMS

J. Martin · Answer

@Justin B. , I'm with you on the Fed, which is why I like 30yr fixed rate loans! lol We'll see how they do on tapering,.. But if the shadow inventory comes to fruition, more buying opportunities. I don't think it will be the end of the world. Even with the PE and hedge fund buyers gone.. There are plenty of investors out there to sop it up, although I''m sure some localized areas will have their ups and downs.. So how much Bitcoin do you own Justin? lol I have some myself, but mostly just for wild speculation rather than the distrust of government aspect. I already distrusted them.. lol

Justin B. · Answer

I endorse bitcoin, and competing currencies in general. I own three precious metals; gold, silver, and lead;-)

Account Closed · Answer

Democratic have put this economy in bad shape. Joe Gore

Justin B. · Answer

I think when you have the FED printing like Weimar making us the next banana republic, then its hard to pinpoint when the tip-over will happen, but common sense dictates that you can't print and hide the 300+ trillion in derivatives debt. This is the time bomb that will implode the system leading to either an Amero currency (think Trans Pacific Partnership) or the Bancor (one world currency ssdrs) It's painfully obvious that real estate valuations are once again at asset-bubble extremes. Correspondent Mark G. submitted a chart of the Wilshire REIT (real estate investment trusts) index that sums up the current real estate market in one image: it's painfully obvious that real estate valuations are once again at asset-bubble extremes, one that's even bigger than the last RE bubble that popped in 2008 with devastating consequences to the global economy. http://www.zerohedge.com/news/2013-10-30/what-real-estate-bubble-oh-you-mean-one-thats-bigger-2007-bubble This is important for the housing market, because mortgage rates tend to follow the yield on 10 year U.S. Treasuries. And if mortgage rates keep rising like this, another great real estate crash is inevitable. This wasn't supposed to happen. Federal Reserve Chairman Ben Bernanke said that he could use quantitative easing to control long-term interest rates. He assured us that he could force mortgage rates down for an extended period of time and that this would lead to a housing recovery. But now the Fed is losing control of long-term interest rates. If this continues, either the Federal Reserve will have to substantially increase the rate of quantitative easing or else watch mortgage rates rise to absolutely crippling levels. But of much greater importance to most Americans is what is happening to mortgage rates. As mortgage rates rise, it becomes much more difficult to sell a house and much more expensive to buy a house. According to CNBC, there is an increasing amount of concern that the rise in mortgage rates that we are witnessing could throw the real estate market into absolute turmoil...

Robert Taylor · Answer

@Sam Leon -I should add that I wouldn't be surprised one bit if things like what you're saying could be correct, that certain areas of the USA could hit downturns, even mini-crashes in the REO market, or even the overall markets as well. I would be surprised to see another nationwide crash like we had around 2008 anytime soon, but it seems like certain areas (such as certain parts of Florida and SoCal for instance) are much more susceptible to booms and crashes than other areas like the upper midwest for instance, where prices never seem to skyrocket and also rarely seem to crash either. Miami I'd say is certainly a unique case, due to all of the foreign investment that goes on there as well as the fact that a lot of the sales are to people based in other parts of the US buying 2nd homes.

Account Closed · Answer

There is no proof that REO's market will collapse. Joe Gore