Home › Forums › Housing › As predicted, Fannie is beginning to sell blocks of assets in bulk to REITs
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October 10, 2012 at 12:09 AM #20181October 10, 2012 at 6:27 AM #752375EconProfParticipant
Two observations:
1. This is another sign the housing market has hit bottom, and
2. This is an “efficient” market-clearing development that has more good results than bad.
It appears that large players, REITS, are discovering the profitability of buying distressed homes in bulk from government entities, fixing them up to be rental grade, renting them for 3 years, then selling them with half the cap. gain to go to the government.
I’d call that mostly good because it gets distressed and deteriorating houses fixed up and put to use, helping neighborhoods and renters seeking housing. The REITs can be far more efficient at fixup than many amature “flippers” since they have enormous economies of scale in knowing how and what to fix up, buying supplies in bulk, using the same knowledgeable contractors repeatedly, etc.
Instead of the inept government owning and (mis)managing these assets, a profit-motivated, cost-conscious private sector actor will take over, make (taxable) profits, and eventually put these fixed-up houses to better use. I’d call that mostly good.
The fact that REITs are doing this is an indicator the housing market, at least in Florida, has hit bottom, and also that large-scale landlording is a good place to be.October 10, 2012 at 7:43 AM #752376scaredyclassicParticipantit doesnt feel right.
October 10, 2012 at 8:01 AM #752378livinincaliParticipantI personally view this as hot money chasing yield. The fed is giving money away at 0 interest and everybody is looking for a place to put that money. Investment real estate has become the primary choice due to fears of inflation and the expectation that real estate will perform well in that expected inflationary environment.
I think those assumptions will eventually turn out to be wrong. Housing will probably look good for the next couple of years as this hot money chase continues, but it’s going to end at some point and hot money liquidation tends to produce really bad volatility. These investors are inexperienced in tenant management and are going to get hammered by tenant friendly laws. My guess is that by the end these hot money investors will wish they never got involved in the first place. Most are going to end up with a bunch a illiquid assets and it will be difficult to liquidate those assets to their tenants just scrapping by. Ultimately that’s their buyer for higher prices later but they don’t seem to realize it.
October 10, 2012 at 8:02 AM #752377no_such_realityParticipantNo Econprof, those deals are dirty dirty dirty. They are ultimately insider gravyboat deals.
There is more to the story than efficient market clearing. The taxpayer is still holding the bag on some of those deals through funding. In some cases, the ‘buyers’ are bringing very little if any capital.
October 10, 2012 at 8:22 AM #752382EconProfParticipantTo both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That’s what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey…that’s capitalism. At least its the private sector, not the taxpayer as at present, who loses.October 10, 2012 at 8:22 AM #752381spdrunParticipantThis has been talked about since at least last summer. I’m not convinced about EconProf’s assertion that large REITs will be more efficient at managing the properties than local investors.
Local investors are often contractors or businesspeople who already have a network of tradesmen in their community. These tradesmen often give them work at a good price.
Anyway, I suspect that there will be enough properties for everyone to go around. From what I understand, the bulk sales haven’t been such slick deals for the REITs: going at 75-80% of value on average, with condition unknown.
$78MM/660 = ~$118k per property. Not such a hot deal for REOs anywhere in Florida.
October 10, 2012 at 8:24 AM #752383ocrenterParticipant[quote=EconProf]To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That’s what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey…that’s capitalism. At least its the private sector, not the taxpayer as at present, who loses.[/quote]+1
October 10, 2012 at 8:28 AM #752384spdrunParticipantNo need for bulk sales or MLS for that. Each asset could be auctioned off electronically individually, with a certain amount of financing guaranteed. Investors could bid individually or in bulk as they wished.
Fortunately for the moment, there are enough foreclosures on MLS to go around in my home state of NJ. A beautiful thing indeed.
October 10, 2012 at 1:30 PM #752406VeritasParticipant[quote=ocrenter][quote=EconProf]To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That’s what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey…that’s capitalism. At least its the private sector, not the taxpayer as at present, who loses.[/quote]+1[/quote]
ditto Really great info. from all posters.October 11, 2012 at 4:01 AM #752441CA renterParticipant[quote=EconProf]To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That’s what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey…that’s capitalism. At least its the private sector, not the taxpayer as at present, who loses.[/quote]Though there might be some loss-sharing agreements, which would NOT be good for taxpayers.
Personally, I think the govt should have been auctioning these houses off to the public via a public auction site run by Fannie/Freddie. A fully transparent system where each and every transaction is visible to all, and where everyone gets a chance to bid.
That’s the best way for the govt to get the best deal for taxpayers, and it’s the best way for end-users to get the best deal on a home to live in (foreign concept, I know).
October 11, 2012 at 7:53 AM #752444spdrunParticipantThey’re doing both. I suspect that they’re throwing a lot of bad inventory that’s useless to man or beast in with the good in the bulk sales.
October 11, 2012 at 8:08 AM #752445livinincaliParticipant[quote=EconProf]To both the above posters, I was careful to say (like any CYA economist) that the positives outweigh the negatives, for a net benefit to society. While the scenario portrayed is not perfect, lets remember the horrendus job the government does at holding assets like boarded-up houses. That’s what we need to get away from, and it takes a private-sector, profit-motivated investor to do it.
And, livinincali, if they get burned going this route, as you suggest they will, hey…that’s capitalism. At least its the private sector, not the taxpayer as at present, who loses.[/quote]The tax payer already lost. And selling these properties in bulk to investors at volume discount pricing means the taxpayers lost even more versus an open market auction.
October 11, 2012 at 8:13 AM #752446spdrunParticipantI’m not seeing much of a discount in the Florida deal.
October 11, 2012 at 8:19 AM #752447no_such_realityParticipant[quote=spdrun]I’m not seeing much of a discount in the Florida deal.[/quote]
How big is the discount if you don’t need to use your capital to buy it and I give you near zero financing and hand back terms if the deal does go bad?
In other words: I’ll give you the down payment, I’ll give you the points to get a near zero loan and you can give it back if it’s a boat anchor.
For this, I get to ‘sell’ it for market rate, now my balance sheet looks good!, and if you make boatloads of money on rentals, I get a small slice of the profits.
That’s what previous analysis I’ve seen shows. Can’t vouch for the accuracy of their data though.
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