While banks still resist extending credit to many borrowers, they are getting paid off for their REO (real estate owned) property in cash – even while they are extending the loans to the investment firms, so they can build the capital to purchase the homes. Banks would also participate in the proposed securitizations of rental revenue that would get sold off to another class of investors. So you see banks playing all sides of this bet. It’s not that banks are holding back a housing recovery by denying credit – they’re goosing a housing recovery through selling off properties to speculative firms. Anyway, those non-investor deals have a habit of falling through – selling off properties to hedge funds and private equity firms is easy money.
Here’s just one example of the kind of deals we’re seeing out there.
The Blackstone Group plans to buy homes impacted by the slumping housing market at a total value of $1 billion in the Tampa Bay area.
Blackstone, a private equity group, will use the homes as rental properties, the Tampa Bay Times said.
The entrance of the firm will likely tighten competition on the housing market, the Times said.
The plan is to purchase 15,000 homes over a three-year period in one city, Tampa, in one deal. Blackstone tried to roll this back the next day but acknowledged that “the Tampa Bay area is one of several metro areas it is looking at for buying properties,” and that they have already started acquiring them. They appeared more angry that someone blew the whistle on the expansiveness of their investment than anything else.
This is not isolated. A firm in San Diego recently purchased 700 homes in Florida in one shot in a Fannie Mae-directed auction. For context, consider that the current pace of existing home sales in the entire country is around 40,000 a month. This represents around 1/60th of those deals in one sale.
Hedge funds have actually found little success over the past few years, and are seeking to change their asset management strategies. This fits with that strategy.
That only leaves all the potential negative downsides to having absentee slumlords control massive housing stocks, to bid up prices, to securitize rental revenue, and to eventually re-enter the market to try and flip the properties.
What could go wrong?
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