Jay's notes: This article echos what we are hearing elsewhere. Namely that big institutions like hedge funds, pensions, and university endowments are all buying single-family home as opposed to commercial and multi-family properties. More affirmation that foreclosed single-family homes are one of the shrewdest investments currently available and the big boys are catching on to it and are now trying to do it on a big scale.
By Robert Freedman, Senior Editor, REALTOR® Magazine
Well, there’s at least one big Wall Street banker that’s betting on the United States becoming a “rentership” society: Morgan Stanley.
The company released a report just a few weeks ago saying now is a great time for institutional investors to snap up distressed single-family homes and turn them into long-term rental units. The company says the properties don’t compete with the classic apartment rental property, so investors don’t have to worry about cannibalizing their multifamily rental investment portfolios to take advantage of the huge opportunities in single-family rental property ownership. What’s more, Morgan Stanley doesn’t see this shift to rentership as a temporary waypoint while the country sorts out its housing problems; it sees this as a fundamental shift in how the United States will define itself into the future.
“America is moving away from a home ownership society and towards a rentership society,” the company says in its report.
To emphasize the point, one of the report’s authors, Oliver Chang of Morgan Stanley’s Housing and Securitized Products Strategy division, said in a video interview “This is really the first time in history where there’s an opportunity for institutions to own single-family rental properties as part of a larger asset allocation strategy.”
The reason for the shift to rentals, according to the company?
- Home price declines: not only are millions of homes available to investors at deeply discounted pricing but the low prices are changing consumer attitudes on housing as an investment
- Hurdles to buying: down payment requirements, higher FICO score thresholds, and income verification are making it harder for households to even consider buying
- Costs of ownership: without home price inflation, costs like property taxes, home owner association dues, maintenance and repair make ownership less attractive
- Demographic effects: Gen Y growth is heading up while baby boomer households are downsizing
- Unemployment, labor insecurity and mobility: long unemployment durations make labor mobility (and thus renting) more important
Morgan Stanley says the U.S. home ownership rate, which has fallen to about 64 percent from close to 68 percent at its peak, is really closer to 60 percent when you factor in home owners who’ve stopped paying on their mortgage and only remain in their house because the bank hasn’t finished processing their foreclosure yet. Once these cases make it through the system, they’ll move to the renter side of the equation.
When they do move to the other side of the equation, they’ll become renters of single-family houses, not of multifamily apartment units. That’s because these households, which tend to be a little older and often with children, want a single-family house in the suburbs, not a unit in an apartment building in the city. So, these households will be providing a big share of the demand for single-family rental houses into the future without necessarily adding demand to apartment rentals in the city.
To be sure, many of these households might like to buy again rather than rent given the historically low interest rates and deeply discounted home prices, but the reality is that many of these households simply can’t pass the credit score threshold. Financing is hard to get for the most creditworthy households today, so for credit-impaired households, renting is the only option....
In any case, a survey that just came out today from Meredith Corp., one of the biggest magazine publishers in the country, finds that home ownership remains all-important to most households. Some of its findings:
- 86 % of homeowners polled still feel owning a home was a good investment.
- 85 % say they feel, “owning a home is one of their proudest accomplishments.”
- Of Americans that don’t currently own a home, 69 % agree, “No matter what happens in the U.S. housing market, owning a home is still an important goal in my life.”