Good deals coming?

I was at the pharmacy the other day, and the clerk, who’s a sharp guy and knows I’m in real estate, asked “when these big corporations that bought huge numbers of rental homes during the downturn decide to sell, won’t there be some good deals?”

It’s a fair question, but the reasoning behind it is shaky.

First, I haven’t seen any indication that the major investors, called Single-family Real Estate Investment Trusts, are planning to sell.  In fact, recent news articles say they’re adding to inventory, buying new construction in bulk or building their own, or simply making high all-cash offers with no contingencies on resale homes.

Second, there’s some question as to how much market penetration single-family REITs have in this area.  I searched the records of five counties, from San Mateo County to San Benito County, and none of the eight major investors frequently mentioned in articles show up as owners.  That doesn’t mean that other, smaller REITs (as well as individual investors) didn’t invest in the mid-Peninsula and South Bay during the downturn, but back then corporate investors were targeting neighborhoods selling for 40, 50 or 60% below their peak valuations.  There weren’t many of those in Silicon Valley, although they did exist at the low end of the market, where subprime lending had given too much buying power to too many people who couldn’t afford it.  I didn’t check the Central Valley, where home prices cratered–Stockton earned notoriety as the “foreclosure capital of the US”–and the REITs may well be a presence there.

But the real problem with this question is that it assumes that the big investors are going to panic-sell, dumping enough inventory on the market in a short period of time to depress prices.

Although no one foresaw it–the original business model was to buy homes cheap, then sell when prices recovered–it turns out that the single-family REIT business is highly profitable and the outlook is favorable.  Homeownership rates are low, homes prices are soaring, credit remains tight, student debt and financial reverses during the downturn keep many from buying, and the REITs are banking on the idea that attitudes toward homeownership have changed.  The traditional drawback of investing in single-family rather than large multi-family–that your assets are spread over a wide area, complicating management–has been solved through technology and standardization.  And single-family renters stay longer, reducing investor turnover and vacancy costs.

So the major players aren’t motivated to sell, at least not now, and maybe not for a long time if ever.  Single-family REITs are on their way to recognition as a legitimate real estate play, although I understand that financing is more difficult to get compared to traditional REITs that invest in multi-family, commercial or retail.

What makes the idea of panic-selling even more unlikely is that back during the downturn the owners that had every incentive to panic sell–financial institutions holding thousands of foreclosed homes–never, except for a brief period in 2008, acted desperate.  Pent-up demand, sharply reduced prices in entry-level neighborhoods and rock-bottom interest rates meant multiple offers on virtually every bank-owned home I made an offer on, giving institutional sellers huge leverage which they used on buyers to the max.

I doubt the situation would be different today, especially since major investors have been buying the type of property that’s the bedrock of both the rental and resale markets, single-family homes of 1500-2000 sq.ft. with three bedrooms and two baths.  Renters and buyers can’t get enough of these.

You know what?  I lied, six paragraphs ago.  The real real problem with this question is that it assumes that there’s an easy way, or at least a less difficult way, to buy real estate in a traditionally high-demand area like Silicon Valley.

copyright © John Fyten 2017







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