There has been a growing chorus of industrywatchers and writers fretting that the current rebound in the housing market is little more than a bubble. While their concerns are valid, the players getting in on the market today should have more staying power than the highly leveraged individual buyers who helped fuel the industry’s last bust.
The Housing Bubble
The housing bubble that helped usher in the 2007 to 2009 recession and deep market correction was fueled by market speculation. While that’s not surprising, it is important to remember who the speculators were—small investors. Often, mom-and-pop investors were leveraging themselves to the hilt, helped along by overly lenient bank policies, in the hope of quickly selling the home to the next “sucker.”
Of course, many buyers were buying homes to live in, too. But far too many bought more home than they could afford, in the belief that the value of the home would rise. When home prices fell, both the home buyers and the flippers were left owning a home worth less than the mortgage encumbering the property. The logical move, then, was to simply get out from under the house by dumping it as quickly as possible or letting the bank take it.
Thus, at the end of the day, mortgage lenders wound up owning a lot of homes. For banks, that goes under the category of real estate owned, or REO. Its not something banks like to have a lot of on their balance sheets, for many reasons. In most cases, the banks simply aren’t designed to handle owning and managing properties, so they sit, vacant. This leads to many ills, including vandalism, theft, and general disrepair. Clearly, as a property deteriorates, its value falls even further.
Large investors rightly saw this as an opportunity. With The Blackstone Group L.P. (NYSE:BX) among the most vocal and active investors of late. The company’s portfolio is reportedly more than 16,000 homes. That’s a massive property portfolio. The plan at present is to fix the homes and then rent them out. This is the same plan that other big buyers have, too. What happens then, however, is the big question mark.
The Blackstone Group L.P. (NYSE:BX) could use the revenue from the rents to back bonds. This is what many expect to see happen in a big way. However, some early investors in the space have apparently been unimpressed with the potential. This includes hedge fund manager Och-Ziff Capital Management Group LLC (NYSE:OZM). In late 2012, this company informed its partner in a portfolio of about 300 homes that it wanted out.
As Reuters notes: “The decision by Och-Ziff to exit the market after just a year is notable since the hedge fund was one of the first institutional investors to see the large supply of foreclosed homes in the United States as a new asset class that could generate consistent income if operated as rental properties.” Essentially, Och-Ziff Capital Management Group LLC (NYSE:OZM) didn’t believe the returns would be large enough from the investment to make it worthwhile. Of course, with the housing price run up, the opportunity for capital gains could make an exit profitable and timely.