Large institutional investors emerge in REO-to-rental market

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[Update 1: Rightfully attributes Smith Breeden source]

Large institutional investors such as private equity funds, mortgage real estate investment trusts and hedge funds are new entrants to the distressed real estate-owned market. 

The emergence of the large institutional buyer of distressed single-family homes will be an important development in the long-term recovery of the housing industry, said Jeffrey Wheeler from the Asset-Backed Securities section of January/February 2013 commentary from Smith Breeden.

"It appears these investors have driven home prices higher within some pricing points of their target cities.  Overall, large scale REO-to-Rental investors are helping accelerate the housing recovery," Wheeler said.

Similarly, President and Chief Executive Officer Dale McPherson of Field Asset Services told HousingWire that the REO asset management servicing company is witnessing a growing trend of large institutional investors in this market. 

"Based on our growth, we believe that moving management to national partners rather than regional partners is a trend that will continue into the next few years," McPherson said.

Given the scale of the housing crisis, the number of distressed homes hitting the market, as well as a transition to more renters, property managers saw the opportunity to create a new institutional asset class, Wheeler said.

Thus, big institutional buyers have an upper hand in the market because of its business model, which allows these investors to "make repairs and updates with a strategy to hold the property for three to five years with a view to maximize rental returns and specific disposition strategies," McPherson said.

As a result, investors are expected to target a handful of cities over the next 12 months including Atlanta, Las Vegas and Phoenix, according to Wheeler. 

The largest of the institutional investors are expected to buy a total of 50,000 to 100,000 distressed homes in the next two years, the analyst stated.

"With existing home sales running at a rate of roughly 400,000 units per month and the distressed portion of that in the 100,000-125,000 units per month range, it is clear that the REO-to-Rental trade will only absorb a fraction of the total number of distressed units to hit the market in the coming years," according to Smith Breeden's Wheeler.

Going forward, traditional buyers, such as first-time homeowners, will need to reemerge as the driver of housing activity to stabilize market recovery, the analyst noted.

"We think this will happen over the coming years, though perhaps not as quickly as the recent spikes in some home price indices indicate," Wheeler concluded. 

cmlynski@housingwire.com [3]