A Herd Mentality
The San Francisco Examiner reports from California. “Potential homeowners in San Francisco are not waiting around. This current mentality in the housing market characterized much of 2013: ‘If I don’t buy this house now, then next month it’s going to be more expensive,’ according to real estate agent Ruth Krishnan. A large component of 2013’s real estate market was driven by luxury home sales. ‘A lot of my clients are tech clients and a lot of my clients have cash,’ she said. ‘Because of how they came by it, they — I don’t want to say they didn’t work for it, but all of a sudden they had a lot of cash. They say, ‘What do I need to spend?’ They say that all the time.’”
Fox 5 San Diego. “Crowned by the sale of a Malibu estate for $74.5 million, the number of houses sold last year at $1 million and above statewide jumped to a six-year high, according to DataQuick. Appreciation-fueled gains in home equity allowed others who had been waiting on the sidelines to move up to bigger and better digs, releasing pent-up demand from recent years. ‘It’s a herd mentality,’ said Westside Estate Agency co-founder Stephen Shapiro, who last year saw well-priced homes drawing multiple bidders. ‘When people start paying more for houses, other people don’t mind paying more.’”
The Santa Monica Mirror. “As we began 2014, the number of homes available for sale in Santa Monica was as low as it has been in many years. There are only 33 homes on the market. Due to the high demand for Santa Monica houses especially under $2 million, the median $3,250,000 list price is almost unbelievably 50 percent higher than it was 12 months ago.”
“There are a few reasons for inventory being so low at this time. One factor is that the level of purchasing by investors has continued to increase through 2013. Additionally, banks own 25 Santa Monica homes, which have not yet been listed for sale. Also, 24 local homes are either in pre-foreclosure stages or already have had bank auction dates scheduled.”
The Desert Sun. “The asking price of the iconic Palm Springs estate of Bob and Dolores Hope, initially offered privately for $50 million, has been dropped to $34 million. The 249-acre estate of Porcupine Creek sold in 2011 to billionaire Larry Ellison for $42.9 million.”
“The Hope estate is not the only high-profile desert property to have its price cut. Originally listed for $27.5 million in 2008, the 73-acre Palm Springs home of actress Suzanne Somers and husband Alan Hamel, went on and off market for years. It dropped to $12.9 million in 2009, rose to $14.5 million in 2013 and is still available for sale.”
The Record Searchlight. “Skip Murphy of The Address Realty in Redding told me a couple of weeks ago that his phone wasn’t ringing this January like a year ago. And the numbers are backing that up. Pending home sales in Shasta County - a forward indicator of future sales activity - are down dramatically from a year ago. Statewide, 2014 also is off to a slow start. The California Association of Realtors reported last week that its Pending Home Sales Index dropped 25 percent in December to 68.8 from a revised index of 92 in November. Pending sales in California last month were down 17 percent from December 2012.”
“Brad Garbutt of Real Living Real Estate Professionals in Redding said there are just over 800 homes (more than twice the number of pendings) for sale in Shasta County and he expects the inventory to go up. ‘The pendings bottomed out two weeks ago at 328, the lowest it’s been the last few years,’ Garbutt said. ‘So we have more inventory and less pendings and it’s a significant percentage, so we are definitely getting off to a slower start than last year.’”
“An Inland Empire congressman said that rental housing in Riverside County is becoming less and less affordable because of real estate investment activity the lawmaker believes should be the subject of congressional hearings. U.S. Rep. Mark Takano, D-Riverside, pointed to his just-released report ‘Rent on the Rise in Riverside’ as a compelling illustration of how people are being priced out of single-family homes.”
“Citing U.S. Census data, Takano’s report indicated that despite many workers’ wages being bogged down at pre-recession levels, housing rents have kept up with or exceeded the annual rate of inflation, with one in three renters in the county forking over more than 50 percent of their household income to keep a roof over their head. The report stated median rents have climbed $756 from 2007 to 2013.”
“Takano said the Inland Empire has been a favorite of real estate investment trusts and private equity firms. He expressed concern about the number of investor-owned rental properties and the growing popularity of ‘rental-backed securities’ issued by firms such as the New York-based Blackstone Group. The congressman quoted a Federal Reserve report that warned of ‘risks to local housing markets if investors have difficulties managing such large stocks of rental properties.’”
“‘If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make investors whole,’ Takano said. ‘Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.’”
“He suggested another housing ‘bubble’ similar to the sub-prime market bubble that burst in 2008.”
From Bloomberg. “For Mark Takano, a first-term Democratic Congressman representing a district east of Los Angeles, it’s all too reminiscent of last decade’s financing binge. Rental bonds are one of the first new types of securitization since the 2008 credit crisis. ‘The Street is looking for another product to sell,’ said James Grady, head of structured finance at Deutsche Asset & Wealth Management. ‘Back in the day we had the CDO machine and I think they’re looking to replicate something along those lines.’”
“Takano isn’t the only voice expressing concern about the potential growth of rental-home bonds, with Federal Reserve economists Raven Molloy and Rebecca Zarutskie writing last month on the subject. ‘Financial stability concerns may become more significant should debt financing become more prevalent or if the share of homes owned by investors in certain markets rises significantly further,’ they wrote in a Dec. 5 note. ‘Greater use of leverage makes financial distress of the investors more likely, which may force them to liquidate their asset holdings at suboptimal values.’”
“Neighborhoods built for owner-occupied homes are now dominated by rentals, a change that led to more police calls, lower student performance and poorer property maintenance, said Husing, who lives in Redlands, California, across the street from a vacant foreclosed house. ‘You’ve got this lemon sitting in the middle of the neighborhood that’s not well cared for,’ said John Husing, an economist whose firm focuses on the Inland Empire, in a telephone interview. ‘I’m looking at a dead lawn because there’s nobody in it right now.’”
“There are a few reasons for inventory being so low at this time. One factor is that the level of purchasing by investors has continued to increase through 2013. Additionally, banks own 25 Santa Monica homes, which have not yet been listed for sale. Also, 24 local homes are either in pre-foreclosure stages or already have had bank auction dates scheduled.”
And any of the other of the homes that would normally be up for sale are so far underwater that the owners can’t afford to sell them at a huge loss.
‘There are only 33 homes on the market. Due to the high demand for Santa Monica houses especially under $2 million, the median $3,250,000 list price is almost unbelievably 50 percent higher than it was 12 months ago.’
33 houses on the market and 25 REO’s not listed. Hmmm, maybe Rental watch can explain why these houses are being held back?
CA has been one of the toughest states to get foreclosures to market. Their AG Kamala Harris wants to be gov after Jerry Brown and has done everything possible to obstruct. Someone should double-check this, but I think she was one of the only holdouts (perhaps THE sole holdout) in the agreement reached btwn Bank of America and numerous state Attorney Generals.
Maryland is another state that had a lot of obstruction against moving foreclosures. However, most of that is expiring now so I’m seeing more auction listings (in the print publications around the state) and I really do think we’ll see a lot more lower priced sales that will drive down avg sale price. (sorry oxy)
Please Lib….. It’s called a moratorium. And they’re holding back tens of millions of excess empty houses.
Ya know…. It’s best to tell the truth about it and inform the public that it’s this way because they want it this way instead of, “it’s tough!”.
Could you source the 10m number? I read a Forbes article (below) that found that while the vacancy rate was well higher than average at over 10%, the basal level in 2000 (prebubble) was still over 8%. Although there may well be tens of millions of unused homes, it seems that only a minority are due to banks holding them off the books.
http://www.forbes.com/sites/trulia/2013/11/06/vacant-homes/
No. TENS of millions.
I’m on the local water board in my Town. We pull the meter when the water bill goes month after month without a payment. Over the last three months we have reattached the meters to four homes. All 4 houses had a NOD.
The Banks that held the notes on three of these homes payed to reinstall (paid the late fees and meter reinstall fee) the meter and to get current on payments. An ex-homeowner paid for the other one.
It’s a small town so I know the details on the debtor side of the story. Not one of these individuals paid back the late monies due on their loans. In two cases the individuals are making a minor payment ($200.00) per month.
The word on the other two is that no payment is being made at all. One of these couples stripped the inside of the house (thinking that after 4 years of non-payment the house was going back to the Bank).
So they are living in a house for free that doesn’t have kitchen cabinets or sinks. They also sold the air conditioner to a neighbor.
It appears that the Banks aren’t the least bit interested in getting the properties back anytime soon for resale which seems odd considering “the housing market is back and booming!” here locally.
‘one of the toughest states to get foreclosures to market’
IMO the lenders use these laws to provide cover for manipulating the market. What’s stopping them from selling these 25 houses? The foreclosure is complete, I suspect. Could it be that as prices are zooming up, they are wanting an even higher price? Maybe they realize that if they put them on the market, prices might go down?
“Maybe they realize that if they put them on the market, prices might go down?”
And if prices go down then the illusion of value goes right down with it. And this illusion of declining value doesn’t stop at affecting the values of the entire market - the comps - it also affects the values of the mortgages that are backed by these values - backed by these prices.
Bankers have an interest in keeping prices up because keeping prices up keeps up the values of the mortgages that are represented by these prices.
I never meant that it’s actually difficult to set up an auction. It really can’t be done in _days_ in most states. You have to give notice in at least x number of publications over a period of y weeks. But sure, it shouldn’t take more than a month after the bank is granted the foreclosure.
No need to be sorry, Joey. On HBB I’ve been focusing on the deterioration angle. True foreclosures are in bad condition. If a house had been in any kind of end-user condition, e.g. habitable but not HGTV “move-in,” the bank would have accepted a short sale by now. The forclosures leftover are dregs and fixer-uppers, where a $40K price drop is canceled out by a $40K reno job. So, sure, the average price of houses will drop temporarily, but once the low end is bought and rehabbed and re-listed, the average will go right back up.
This, of course, is on a local basis. I’m sure there are plenty of 10-year old foreclosed McMansions in the outer burbs that need less money to repair than the price drop from a foreclosure. But since I’m not interested in commuting that far, those figures are as much use to me as numbers from Phoenix or Tampa or Inland Empire.
Now Debt-Donkey…… the gross lot of excess empty housing inventory are being maintained by bank service companies. The tags with inspection dates are on the door.
I’m sure you’ll believe anything at this point considering the magnitude of your underwater condition though.
Not in my hood. This isn’t overbuilt Phoenix. Few houses here are abandoned. More likely they are occupied by multifamily renters (now squatters) who may not even know that the house was foreclosed.
Yes in your hood too.
I didn’t say “it’s tough”. I called it straight out obstruction. And it went beyond the moratorium, man. She actually walked away from an agreement with Bank of America that virtually every other state AG signed. It’s a political football for her.
I also somehow doubt that there are tenS (plural) of millions of empty homes in just CA.
I didn’t either.
First off, you can never expect REO in any market to get to 0…it takes time to evict, take possession, prepare for sale, etc.
That said, I wonder where the author (a RE agent) gets his REO data?
Zillow shows 0 foreclosed, 5 pre-foreclosure
Movoto shows 2 foreclosures/short sales
RealtyTrac shows 39…but you can’t see any addresses without a subscription…some were entered into the system as early as 2010
Redfin shows 3 REO
Trulia shows 20 REO for sale…most appear to be condo/coop
Foreclosure Radar shows 44 REO, and VERY long times to resolve REO
The numbers are all over the board…
What would a “normal” number of listings be in a population of 92,000? A hundred? More?
There are about 46k households in Santa Monica, and about a 30% homeownership rate (per the Census), which means there are about there are 13,000 owner occupied homes in Santa Monica…if 6% sell per year (a “normal-ish” number), then there would be about 800 sales per year, call it 65 per month. To sell 65 per month, and if you want 3 months supply, there should be about 200 homes on the market at any given time…300 if you want a healthier market (more sellers, several months of inventory).
Let’s just say that his 25 is correct. If all 25 were dumped onto the market immediately, would it be enough additional supply?
Based on the article…no. With 33, he says it’s 1.5 months of supply, and I’m willing to bet that the number of sales currently is limited by the amount of supply, so 1.5 months of inventory OVERSTATES the amount of supply. Add 25 more homes, and you are still less than 3 months of supply. Add 44 (if Foreclosure Radar is right), and you are just over 3 months based on today’s sales pace, but still probably less than half of what it should be for a balanced market based on the size of the market.
I know people like to theorize that if just the banks would put all their REO on the market, everything would be peachy. And in some places that may be true. However, in Santa Monica, that wouldn’t solve the supply problem.
It takes a few days at most to get an REO on the market. So why don’t they list them?
Short answer to your question, I don’t know.
Long answer to your question:
If the prior owner has some resources, they might fight (file bogus BK, lawsuits, etc.). We’ve also seen some situations where banks have leased-back property to the prior owner (don’t see their justification for this, but I have seen it on a limited basis).
The AVERAGE length of time from foreclosure to resale per Property Radar was about 1,000 days, and for all of 2013, only 9 homes went back to the bank. That’s a long time.
In other words, of the 44 REO that banks have on their books according to Foreclosure Radar, 35 have been on the books for over a year, and on average, they are on the books for 3-years before reselling.
I’m willing to wager that at least SOME of these are subject to fights from the prior owner, maybe even a lot of them.
We have passed on a number of buy-to-flip strategies. The main reason was that for the numbers to work, you needed to be able to have a high degree of certainty that homes could be foreclosed and resold in a pretty regular process.
What we found when looking into it (in addition to the tax inefficient nature of the income), is that for most of the homes, you could deal with the issues quickly and resell. However, for some of the homes, there were fights going on, and the resolution of those homes could take much longer than expected (a long tail of resolution for a small percentage of the foreclosures).
The other question I have is about the nature of the “bank” who owns the homes. Is it actually a bank? Or is it a servicer on behalf of a securitized loan pool? There have been massive amounts of disfunction with respect to the relationships between the servicer and different tranches of debt holders–their motivations can be very different than banks.
Last piece of data to consider.
At the beginning of the year, Property Radar noted 53 REO, banks took back 9 during the year. If there were no REO resales, then the 53 should have become 62. However, we are now at 44, so 18 must have resolved throughout the year.
In other words, they are working down the REO numbers, but slowly. Either this is on purpose, or they are dealing with the long-tail of fights on the remaining foreclosures.
In any event, putting them all on the market at once doesn’t solve the supply problem.
You’ve got more excuses and BS than 10 realtors combined.
Ben,
Playing off of my last question of who holds the REO, I just checked the FDIC, which tracks composite information for all FDIC insured institutions.
One of the line items that they report quarterly is their assets on the books as “REO” for 1-4 unit housing units.
The total of all 1-4 unit REO at FDIC insured institutions was $6.8 Billion as of the end of Q3 (6,891 depository institutions nationally).
This number is down from $8.8B as of 9/30/12, $11.9B as of 9/30/11 and $14.8B as of 9/30/10.
The current $6.8B represents 0.05% of assets.
In September 2002, this number was at 0.03% of assets. In other words, a “normal” level as a percentage of assets might be $4B, NOT $6.8B…there is further to go for FDIC institutions to work through their backlog, but not a lot further given where they came from.
However, what I was focused on was the magnitude of the number. At $6.8 Billion worth of real estate, at $100k per home (a relatively conservative number), this represents 68,000 homes (28k too many), at 5 million home sales per year, this is less than 1 week of inventory as REO on the books of FDIC insured institutions nationwide.
We ALL know that there is more than 68k of homes that have been foreclosed and not resold. A lot more.
Where is it?
My guess is that the bulk of the REO is owned by the loan pools that were created during the bubble, with the servicers managing the disposition process. Remember, the hallmark of the bubble were originators (Countrywide, etc.) making loans and selling them ASAP, NOT portfolio bank lenders. CDOs, CDO squared’s, etc.
If you want to know who holds this REO, follow the money to who purchased the mortgage debt during the bubble. Once you see who actually owns the REO, answering the question of why they aren’t reselling more quickly may be easier.
“In any event, putting them all on the market at once doesn’t solve the supply problem.”
Nor does indefinitely holding large amounts of latent inventory off the market…
What about tiny amounts of latent inventory?
The supply problem IS NOT REO.
I’d say 25 million REO’s, defaults and otherwise empty houses is a “problem”.
“You’ve got more excuses and BS than 10 realtors combined.”
Well, Ben did ask him specifically, so he did his best to come up with something. You came up with what I just quoted.
Ok BusyBody.
“Ok BusyBody.”
Careful, I might start correcting your syntax too.
Have at it.
OK, so the inventory of homes for sale in Santa Monica is really low, except when you count the shadow inventory. Shadow inventory doesn’t count because it’s a conspiracy theory, even though the exact number of shadow homes can actually be counted, and is, in fact, counted in the article referenced by this here blog.
Got it!
Except that even when you count the shadow inventory, the inventory of homes for sale or potentially for sale is still very low.
You aren’t counting correctly.
So, how should I be counting?
With integrity.
The Daily Truth: San Diego Housing Prices 8% Lower on Ballooning Inventory
http://www.movoto.com/san-diego-ca/market-trends/
San Diego Median List Prices
March 31, 2013 = $579,000
February 4, 2014 = $479,000
Annualized rate of percentage decline =
((479/579)^(12/10)-1)*100% = -20%.
How long will it be until the MSM picks up on the big price declines?
‘initially offered privately for $50 million, has been dropped to $34 million. The 249-acre estate of Porcupine Creek sold in 2011 to billionaire Larry Ellison for $42.9 million.’
I wonder if he could resell the Hawaiian island of Lanai for what he paid in today’s market? My guess would be “no,”…
“‘It’s a herd mentality … when people start paying more for houses, other people don’t mind paying more.’”
And this herd mentality is made possible and is fueled by …
(drum roll)
… borrowed money.
If you can’t afford to buy it then borrow the money and somehow it’ll end up being yours (or maybe not actually yours; maybe ownership will remain with somebody else, maybe the lender).
People are smart (in a very stupid way).
‘Because of how they came by it, they — I don’t want to say they didn’t work for it, but all of a sudden they had a lot of cash. They say, ‘What do I need to spend?’ They say that all the time.’
And with such wisdom I’m sure they realize windfalls like this happen over and over, forever.
This bay arean tech-goober fest makes no sense to me. It just another screwed up city. Why insist on living in a place where people hate you for driving up prices? Get a nice little office a few miles down the road or something.
If I understand this correctly …
The sale of a house goes to the highest bidder.
The highest bidder is going to be the person who:
1. Is the most enthusasic about buying the house and
2. Has access to money. (He doesn’t actually have to have own the money, he only needs to have access to the money.)
So if a real nutcase has access to the money to bid up the price of a house then the house will end up being sold to this nutcase.
And the purchasing of the house by this nutcase at some outrageous price will act to increase the (choke) VALUE (cough) of the comps. And the increasing value of the comps acts to draw into the market other nutcases who also have access to money.
And so away we go: The rising prices suck in buyers who believe that price equals value - which means rising prices transalates to rising values - and so - presto! - a boom is created.
‘The bombastic talk in San Francisco of “surging” rents and “skyrocketing” demand looks like it will be sticking around in 2014.’
“The high-tech boom is supercharging San Francisco residential and commercial rental markets with ferocious demand,” reads the Paragon Real Estate Group’s recently released first-quarter market update, which specifically highlighted the multifamily sector as the most popular.’
‘The average sale price for such properties was a cool $3 million. This, evidently, is a sign that apartments in The City are in demand as investment properties.’
‘A snapshot of profits, or the return a buyer gets on a purchase, shows that apartment buildings in more expensive neighborhoods such as Pacific Heights and both Russian and Nob hills have lower profits than the Sunset or Richmond districts, where sale prices are lower and rents have more room to rise. That’s no surprise, since investors pay more for properties in nicer areas where rents are already at their peak.’
Of course, investors always pay more for a lower return.
There are a lot of drivers at work here….One, that is much bigger than many realize is the out-of area, state & country money thats flowing into the valley…Its not just money being earned here..Its the outside influences….
Company HQ is in Santa Clara last year i went up there often and was surprised at all the big construction cranes everywhere.
Big Football stadium going next to the river ( creek ) must be done by now?
But DataQuick contradicts itself. First the article says that appreciation is releasing pent-up demand, and then it quotes Shapiro saying that it’s a herd mentality. There is a big difference between “pent-up demand” and “herd mentality”.
I also don’t understand why the pent-up supply has always been laughed off as a paranoid and stupid conspiracy theory, while pent-up demand is stated as an incontrovertible fact. I mean, I understand the theory of it. People feel better when they hold biases that lead them to believe in their own future well-being, even if those biases are bound to ruin their lives. I get the psychology. I just can’t imagine being a person who embraces that psychology, and refers to it as “positive thinking”, and believes that the positive thinking itself will actually change the outcome of the bias-based behavior.
‘Twitter Inc reported its slowest pace of user growth during the fourth quarter, dimming hopes that the social media phenomenon can sustain its torrid pace of expansion and wiping out more than 10 percent of its value on Wednesday.’
‘The San Francisco company posted better-than-expected quarterly revenue of $243 million in its first results as a public company. But investors focused on the anemic user growth, as well as a severe decline in timeline views, a measure of user engagement.’
‘Twitter had a net loss of $511.5 million in the fourth quarter, widening significantly from a year earlier as it shelled out on its sales force, research and marketing.’
Boy, I hope all these twitter people saved some money in case things get bad!
“This current mentality in the housing market characterized much of 2013: ‘If I don’t buy this house now, then next month it’s going to be more expensive,’…”
Forward to the past (2006)…
‘Back in the day we had the CDO machine and I think they’re looking to replicate something along those lines.’
I’ve said before that this makes no sense on the face of it. So I’ve got a rent house. It generates rent. What is the advantage to doing anything other than put the money in the bank? And don’t say to raise more money and buy more houses. There is plenty of cash out there to do that without resorting to weird securities. That is, if you are actually making money. If it’s all a big scam, then I can see why Goldman Sachs would want in on it.
Lock in the profits and offload the risk.
How do you lock in the profits and offload the risk when you are only borrowing a small fraction of your investment? To make a profit, you need to SELL, not borrow.
The Blackstone effective loan to value was approximately 43%.
They sold securities. If no profits come in, then Blackstone doesn’t have to repay the money.
No.
They sold debt backed by their real estate. As long as the value of the real estate doesn’t fall by more than 57%, the owners of the securities will be made whole.
Blackstone is in the first loss position up the the first 57% of loss of value from today.
http://www.bloomberg.com/news/2013-11-06/blackstone-lures-investors-to-home-rental-bonds-credit-markets.html
“A top-rated $278.7 million class yields 115 basis points, or 1.15 percentage points, more than the London interbank offered rate, according to people with knowledge of the transaction. It was earlier offered at about 120 basis points. A $41.5 million portion rated BB by Kroll priced at 365 basis points, down from about 400.”
Their borrowing from these bonds is a blended 3% or less.
They securitized the rent.
They issued bonds with the rental stream as the primary source of servicing the bonds. If Blackstone wants to sell a home, they can, but they need to retire a piece of the bond at greater than par (I think I read 105% to 120% of par).
In other words, while structured differently than a traditional loan (that is secured by the real estate–i.e. on title), Blackstone cannot sell a home without giving a portion of that payment to the bondholders pursuant to the agreements.
Leveraged returns to make your investors happy (and to meet your return targets to get a share of the upside).
If your yield on purchase price is 7%, and you can borrow 50% of the purchase price of the home for 4%, then your leveraged equity yield is going to be 10%.
In a world where pension funds are struggling to meet their actuarial goals, 10% is a lot better than 7%. And pension funds are investors in Blackstone, etc.
I spoke with an adviser to a major pension fund a couple of years ago. He was calling as a reference to one of our partners on a “buy-to-rent” strategy (make sure the guy wasn’t a crook), and we talked a bit about why the pension fund wanted to enter into the strategy. Big picture, he said they weren’t even looking at appreciation as part of their math…they wanted somewhere to park some money to get cash flow of 7%-9%.
If you are buying at 6% yields (which I understand is a common target), you need to employ SOME leverage in order to get that number up a bit.
Initially, I was questioning why they wanted to securitize the rental stream as opposed to simply put a loan on a bunch of houses in a more traditional sense. I think the answer is that if they securitize the rental stream, it’s probably easier to add/subtract homes from that pool (you would just need to replace the income pursuant to the documents, you don’t need to worry about recording documents, encumbering property, etc.).
‘If your yield on purchase price is 7%, and you can borrow 50% of the purchase price of the home for 4%, then your leveraged equity yield is going to be 10%.’
‘In a world where pension funds are struggling to meet their actuarial goals, 10% is a lot better than 7%. And pension funds are investors in Blackstone, etc.’
But Blackstone doesn’t need to borrow the money. Why cut someone in on your profit? Plus there’s the cost of securitizing.
Read this:
http://www.ft.com/intl/cms/s/0/74447996-8cf2-11e3-ad57-00144feab7de.html#axzz2sTIgMLJP
Blackstone is not managing their own money. They have investors. Those investors care about the rate of return on their equity. If Blackstone can get positive leverage through borrowing money (ie. the yield on the real estate is greater than the cost of the debt), then they will.
Think of it this way (because this is how Blackstone thinks of it).
They invest $4B of equity in SFH rentals, earning 7% per annum (excluding any appreciation assumption).
They can stay there, and not “cut anyone in on their profits”, and utilize no leverage. In a “pure” 80/20 split of profits, the carried interest might then be $56 Million per year (20% of 7%)–assuming no preferred return to the equity investor, and Blackstone also gets 20% of the upside on $4B worth of single family housing.
OR
They can match that $4B of equity with $4B of debt over time (ending up at 50% leverage), and the $4B of equity earns 10% per year, not 7% due to the magic of leverage.
Now, instead of $56MM per year, they will earn $80MM per year, and get 20% of the upside on $8B worth of single family housing.
The ONLY case in which Blackstone as a Manager (and their investors) wouldn’t be better off by leveraging, is if they don’t think they can redeploy the borrowed money into investments at more than the cost of the borrowing. And if they don’t think they can do that, they should shut down the organization.
Here is an example of where their money is coming from:
http://www.reuters.com/article/2012/05/10/us-financial-calpers-blackstone-idUSBRE84902H20120510
If they don’t return good rates of returns to investors through use of leverage (among other things), they will get less of CalPERs money next time around, and CalPERs will invest with people willing/able to provide them higher rates of return.
I can’t get to the securitization article (FT block). But think about the cost of that securitization as essentially an increase in the interest cost spread out over the life of the financing. The equivalent for us would be paying the extra costs for a conduit loan vs. a traditional bank loan. Usually the extra cost is worth it given the lower interest rates you can get as opposed to traditional financing.
How much is the cost as a percentage of the offering?
Securitizing means you sell your company in pieces to other people. It only makes sense when you need to borrow money in order to grow. Blackstone does not need to increase its share of the real estate market. It does not need to borrow money in order to grow. They already overdid it by driving the prices up to unprofitable levels. If Blackstone never makes a rental profit again, then it will not lose money, but its investors will.
Securitizing can also mean that you borrow money and sell the debt in pieces to other people.
This was the entire source of the credit/housing bubble. Entities lent money to people for them to buy homes, created large pools of this debt, structured securities with this debt as the source of repayment, got credit ratings agencies to opine on the quality of each security, and sold it.
The buyer of these securities DID NOT OWN THE REAL ESTATE. They owned debt that was secured by real estate. There is a difference.
Bowie Bonds are a good example. He issued securities with the source of repayment being royalties from his music. He still owned the music. If it went up in value, he got the benefit, if it went down in value, well the bond holders might have a hard time getting paid. It was leverage.
Securitizing the rental stream is akin to Bowie Bonds, NOT akin to taking a company public (issuing common stock to the public market). They did not sell pieces of their business, they sold pieces of debt secured by their business.
Blackstone is essentially selling bonds with the source of repayment being the rental stream from the homes that they own. By borrowing this money, they can get back close to a half a billion of equity that they can then invest in other property–if they can invest is at rates higher than the interest rate paid on the bonds, then it is a win for them.
In the same way you can own your home subject to a 43% LTV mortgage, Blackstone owns homes subject to a 43% LTV bond issuance.
If the properties fall in value by 25%, Blackstone loses that money, NOT the investors.
This comment thread from the article answers the questions that are being raised here on the HBB. Bondholders have no recourse, and the securities are not backed by deeds.
knys13
• 3 months ago
This article is so badly written it is almost unintelligible.
Why don’t you just focus on the debt issue telling readers, in one paragraph, who is raising the finance (Blackstone, or, Invitation Homes); how much is being raised; why it is being raised (who is receiving the proceeds); the type of Bond (FRN?); what is the duration of the issue is (one year, or, two years?); what the actual yield is compared to Treasuries of a similar maturity (??); and, what happens in the event of default - does Blackstone come riding to the rescue, or does Invitation Homes management stand around wringing their hands?
Then try and discuss the implications of the deal.
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Cicero33 knys13
• 3 months ago
Speaking of unintelligible, why are you looking for yield to Treasuries on a Libor based FRN?? Read up on securitized finance and you´ll know that the bondholders have no recourse to Invitation Homes in an EOD. Its a discrete pool of assets. That´s the whole point of the entire structured products market. All of the terms of the deal, away from the tenors and full capital structure are in the article, but nice try showing off your remedial corporate bond market knowledge. Your response to this article is proof that you can lead a horse to water…
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knys13 Cicero33
• 3 months ago
No sh&t, Einstein? If the Bloomberg editor were doing his job, I wouldn’t comment, or have to read a response from a pretentious prat who seems well versed in Wall St bull.
And, since you appear to be a little thick, the reason I suggested that they spell out the terms of the deal, is that even a simpleton should be able to understand that this garbage is designed for Muppets.
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Cicero33 knys13
• 3 months ago
Seems pretty clearly spelled out to me. All of the details are in there. Its not the bloomberg editors job to teach you the basics of fixed income. Reading comprehension is a tough skill to come by these days though, what with everything shortened so it can fit in the twitterverse. But still, let´s just admit that you tried to sound smart and sophisticated here and wound up revealing yourself to be a fraud. Did you ever find out what the yield was on those magical floating rate treasuries you´re after??
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knys13 Cicero33
• 3 months ago
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I see you’ve come back for more.
Bloomberg’s editorial guidelines are to craft copy so that it is understandable to any reader. This article fails to do that, despite your snide remarks.
As for trying to appear smart and sophisticated, I’ll leave that preening to you. What I actually want is some detailed information on this securitisation, because it is a pig with lipstick.
The terms and structure of this issue are not detailed in the article. What information is there, is scattered throughout the text, but since you are so smart, why don’t you try spelling the terms out in a single, understandable paragraph, without having to resort to using mnemonics?
When you’ve done that, try and grow up, you sound like an arrogant, snotty-nosed Wall St prat.
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Argh. I posted the above comment-thread in the wrong place. They are comments from the Bloomberg article that Rental Watch posted a few rectangles up. The Bloomberg article is confusing enough, and now here I go confusing people even more by posting the comments in the wrong place.
So, in conclusion, Blackstone is selling tranched securities in the form of bonds, and using that money to repay their original bank loan. Once done, Blackstone will no longer have any bank debt. They will owe on bonds and shares. The details of the bond covenants allow (do not require) Blackstone to sell a house, but only if they can get more than normal market value for that house. In other words, the deal is set up to prevent Blackstone from selling the houses during the term of the bond, and Blackstone’s investors can only rely on rental income to get paid. The problem is that Blackstone overpaid for a lot of their houses, and their vacancy rate is high, and we’ve heard that they didn’t set aside enough money for property management, so the rental income is gonna s.u.c.k. When the bonds come due in 5 years, everyone is gonna want their principal back, and that’s when Blackstone will have to sell.
The purpose of the securities is to extend Blackstone’s repayment date by four years, and also to make money from a convoluted web of transactions.
Does this mean that the recrash won’t happen for another 5 years, or does it mean that the deal is so obviously bad, that Blackstone won’t be able to hook enough fish, and they will have to repay their bank loan next year? They haven’t raised the $5bill they would need to repay the bank loan. They only raised $0.5bill.
In my immediate sphere - everyone who used the term “leverage” like a magical euphemism is now bankrupt or has lost over $100,000.
In my immediate sphere, I know people who borrowed a lot of money and have gone bankrupt, people who borrowed a lot and ALMOST went bankrupt in the past, but are now worth hundreds of millions, and people who borrowed small amounts very selectively and are doing just fine, but not worth $100’s of millions.
With enough leverage, you can lift the world…or be crushed by it.
If you borrow money without a healthy respect for the risks involved in doing so, you will either flame out spectacularly, or shoot the moon.
Puggs, I bought a house for $296,000 in 2010 and sold it 37 months later for $420,000. I used leverage with 25% down ($74,000) and financed the balance at 4%. After selling costs, I got back my cash, plus $90,000 in 2013. I also received $200/mon in cash flow and reduced the loan principal about $300/mon. So my return on $74,000 over three years was over $100,000 or 30%/year compounded.
Without leverage, it would have been a 30% return on $296,000 or about 9%/year compounded.
So leverage worked positively for me. Of course HA will tell you how stupid I was, how much of a debt donkey I am, and what a failure I am.
HA likes to argue with success. He can’t win. The money is in the bank.
And you haven’t substantiate one iota of your claim.
I posted the address and the Zillow confirmation for the 2010 buy and the 2013 sell. In fact, I did it twice, because you keep denying it…….
Keep arguing with success HA. That’s what you’re good at doing!
Anyone can post a link my friend.
Keep arguing a fallacy. It’s what you’re known for .
Beating the odds does not prove skill or wisdom. What’s your next play?
I could sit here and post Zillow houses until kingdome come, but it substantiates nothing. Next…
Blue, my next “play” is to continue collecting cash flow, banking it and wait for the next investment opportunity, probably equities.
Janet, what kind of “substantiation” would you like to see?
The same substantiation conveniently missing from your claim.
I think it’s the people who “leverage” and been methodical about it that have done well. They use it as a means to an end early on. When they have built enough wealth they grown out of the need to “leverage”.
Many of the ones in my sphere ( 38 & younger) were gold rush mentalists. They thought this magical leverage thing was the potion that would make them millionaires. They never get out from under the idea that in order to “get rich” you HAVE to borrow to infiniti. Getting rich and building wealth are two separate trains of thought.
There are two mentalities with leverage (broadly):
1. I just borrowed $x at y% rate…it’s great, where can I borrow more!; and
2. I just borrowed $x at y% rate…I did so to make a thoughtful acquisition, and I have a plan to pay it off…before I pay it off, or add more and more ways to pay it off, I won’t sleep quite so well.
#2 is the way to go if you are to employ leverage.
#1 is a way to disaster in a volatile world.
…I should also mention my sphere has migrated. Many have moved and my current sphere has shrunk considerably.
What does this mean….are you living in a small town now?
Mortgage Purchase Applications Crumble(again)
http://www.cnbc.com/id/101390300
With housing prices massively inflated 250% above long term trend, is it any wonder why housing demand continues to crater?
“A lot of my clients are tech clients, and a lot of my clients have cash.”
Yeah, when I lived in the Bay Area, I got a nice little payout from a startup company that was purchased by a bigger company, and I didn’t work for it. I mean, I worked for a paycheck, and suddenly I got a year’s salary on one day. It’s true that lots of folks get a windfall now and then. The business culture around there is much more focused on compensating employees when the company does well.
On the other side of the coin, there are many more people who work for startups that go nowhere, and they work for lower salaries, and then they become unemployed for a while. I definitely don’t think that housing bubbles can be explained by the tiny minority of overnight millionaires in the Bay Area, especially when said housing bubbles are national (or even international). A few rich people are not going to cause all of the houses in an entire multicounty area to become more expensive.
BTW, I didn’t become an overnight millionaire when I got my little payout. I became an overnight thousandaire, and that’s not enough for a real down payment in those parts.
Yes, but when it’s a nice place to live, and Prop 13 allows you to stay in your house even though the prices are rising, it slows the OUTFLOW of people.
And when Google/Apple/LinkedIn/Facebook hire thousands of people and gives them stock grants that vest over time, and the stock price goes up a lot, those grants become worth a lot of money.
And when the tech companies compete with one another for talent, salaries go up.
And when existing residents fight new development…housing stock doesn’t go up nearly enough to keep up.
Prices are made up on the margin…it’s all about the last sales…if all current owners in the Bay Area were kicked out of their house, and given a down payment equivalent to 2 years’ salary (a big number), and forced to repurchase a home in the same market, the overall prices would be MUCH, MUCH, MUCH lower.
During the first bubble, thousands upon thousands of people fled California, moving to lower-costs states and taking their equity with them. California house prices switched overnight from a seemingly boundless increase, to a sudden, sharp, fall that went on for a very long time. The decrease was temporarily halted by delusional people who trusted Blackstone with their money. As it turns out, Blackstone doesn’t care what happens to the OPM, since they securitized it already. Californians should prepare themselves for a second crash that will dwarf the first one.
Does Blackstone have a big presence in CA? Of their 40k homes, how many are in CA?
The fact that you note that Blackstone doesn’t care about OPM, since they “securitized it already” tells me that you have no idea what you are talking about.
Blackstone is only recovering a portion of their original investment through the securitization process. In other words, by leveraging their investment, they are moving their equity up the risk spectrum to enhance returns, but they still have OPM in the housing portfolio.
In order for Blackstone to make any significant money at all, they need to pay back the new securitized rental stream $, AS WELL as the remaining OPM, which means selling the homes for more money than they have spent on them.
Of course they care about what happens to OPM.
And they’re running 50%+ vacancy rates on tens of thousands of houses.
American Homes 4 Rent have a vacancy rate about 38% across their portfolio.
However, this rate falls to 10% for homes available to rent for more than 30 days, and about 4% for homes that have been available to rent for more than 90 days.
Whatever the vacancy rate is of Blackstone’s portfolio currently, it will trend downward as they make their more recently acquired homes available for rent.
Oh it will eh? LOL
Well, AMH will likely announce later this week, so we’ll see where vacancy goes. I suspect down again…maybe even below 20%, since their acquisition activity in Q3 was pretty light.
And you’re gullible enough to believe it.
The rental vacancy in the Sacramento foothills has dropped by 50% over the last quarter of 2013. American Homes 4 Rent purchased quite a few homes in this market and have nothing available for rent within 30 miles of capitol.
How do you think that correlates to housing demand collapsing for 5 years straight in Sacramento?
http://www.zillow.com/local-info/CA-Sacramento-home-value/r_20288/#metric=mt%3D30%26dt%3D1%26tp%3D5%26rt%3D8%26r%3D20288%26el%3D0
According to your link, there is enough demand to drive prices up 32% last year, and a forecast of 13% for this year.
So the answer: It correlates quite nicely.
Apparently not considering there buyers have been disappearing for 5 year straight.
Herndon, VA(DC area) Housing Prices Slide 11%; Inventory Rises 29%
http://www.movoto.com/herndon-va/market-trends/
Didn’t 2008 teach you ANYTHING!!?!? DEBT IS DUMB.
They bottomed out two weeks ago? So they should start increasing now, right? Whatever. No one can say that something bottomed out two weeks ago. There hasn’t been enough time between then and now to say whether or not the number went lower.
Can’t allow that to happen. That would be the free market at work, which is unacceptable. Or maybe it would all be OK because Blackstone would sell the houses to people, and those people would either live in the houses or rent them out, thereby resulting in no net change of overall houses available, or overall residents available, and the investors of Blackstone would not be made whole because they would pop their own bubble by selling into it.
And the house-price freefall would be the solution to the problem of people paying 50% of their income on housing. Duh.
‘the house-price freefall would be the solution to the problem of people paying 50% of their income on housing’
Very good point.
The entire situation shows these companies paid too much.
I’m confused. Is this guy complaining about rentals or foreclosures? How does one differentiate between a neighborhood that was “built for a rental”, and one built for owner-occupied housing? Do they stamp the houses with a red X or something? And why in the world does Husing think that renters of single-family houses are more likely to cause police calls and poor student performance? They have the money to pay for a house (not an apartment), so surely he is not implying a lack of applicable life skills.
I can see why he’s whining about the lack of maintenance, but the fact is that he doesn’t own that unmaintained house. When you buy a house, you do not gain the right to dictate the maintenance standards of the houses that surround you. This is only one of the many reasons that a home-buyer should THINK about what they’re doing. They’re locking themselves into a situation that they can’t necessarily control.
In the real estate world, there’s no difference between a house occupied by tenants and a house occupied by no one. And you have to be a reader of real-estate sponsored studies to understand that the police are called more often to rentals, the children of tenants do less well in school and tenants don’t put up garden gnomes in the yard. The problem with all of these studies is that they don’t control for all other variables, so when other variables are controlled, the differences between homeowners and renters becomes marginal to non-existent.
“In the real estate world, there’s no difference between a house occupied by tenants and a house occupied by no one.”
And then you go on to explain all the differences…
I have a mild request that anyone who wants to ram BS political propaganda down others’ throats kindly post on RealtorBSHousingBlog.com.
I think you misunderstood. I work on tenants’ rights issues, and the studies are written by the real estate interests.
China: real estate engine sputters in January
http://blogs.ft.com/beyond-brics/2014/02/04/china-real-estate-engine-sputters-in-january/#axzz2sRicY88V
It’ll come back now that the Souper Bowl is over.
If you take on mortgage debt at current massively inflated housing prices, you’ll enslave yourself for the rest of your life.
“Debt is bondage.”~ Suze Orman, May 11, 2013
Don’t Be A Debt Donkey®
Bellevue, WA Housing Prices Crumble 6% Year Over Year
http://www.movoto.com/bellevue-wa/market-trends/
California- “Ramona Realtor to Serve Prison Time for Fraudulent Real Estate Sales”
http://www.loansafe.org/ramona-fraudulent-real-estate-sales
There seems to be alot of housing fraud in California
“7 Markets Ripe for Technology Disruption”
http://www.foxbusiness.com/technology/2014/01/22/7-markets-ripe-for-technology-disruption/
“Buying and selling real estate. If you happen to be a Realtor, you might want to close your eyes. I have one question: why do we still have Realtors? The entire process of buying and selling homes is either flawed or wrought with fraud. I sold a house myself once (they call that a FSBO) and, after being berated and extorted by dozens of Realtors, it turned out to be the smoothest home sale I’ve ever made.”
I bought my current home FSBO, and I obtained financing on-line, albeit Countrywide, and it was indeed very easy; less than two weeks from earnest money to the keys. But since financing was involved I had to buy title insurance, so we performed the closing at their office, just me, the seller and the title officer.
I bought in an area that is basically comatose compared to a metro RE market, and I had $50k for a down payment. Countrywide did their best to push me toward an alternative mortgage, but I cut them short by saying that I would walk away from the closing table if the mortgage was anything other than a 30-yr fixed conforming. Lastly, I paid my mortgage completely within 9-yrs; nobody got shafted.