“You can bet your bottom dollar, residential real estate will never go down in value!” The real estate seminar speaker exclaimed. He backed up this proclamation with slides of long-term charts and graphs to the excited wannabe-investor audience hanging on his every word.
As a natural contrarian and experienced investor, this overconfidence in the housing market struck me as a possible signal that a crash of untold devastation was in the cards.[ad#Google Adsense 336×280-IA]That was in 2005, and we all know what happened during the 2008-2009 financial crisis.
Easy money sparked an unsustainable bubble in the residential housing market.
Feeling secure that price appreciation would never end, banks were heavily pushing NINJA (no income, no job, no assets)-type loans.
There were stories of low paid retail workers purchasing $500,000-plus McMansions and other tales of incredible financial debauchery.
Economists estimate that second mortgages during the bubble years fueled $1.25 trillion in consumer spending from 2002 to 2006. When the bubble burst, consumption collapsed, triggering the Great Recession.
Huge numbers of homeowners lost their homes as the housing market was rocked by overleverage and plunging real estate prices. No longer able to sustain the payments by refinancing, many homeowners and investors just walked away from their liabilities, leaving hundreds of thousands of empty homes in their wake.
Sensing opportunity in distress, hedge funds such as Blackstone (NYSE: BX) started snapping up portfolios of formerly banked-owned properties. Giant funds speculated that the displaced homeowners with ruined credit would create an army of renters for their newly owned properties.
Rather than deploy their billions in the stock market or more esoteric-type investments, funds decided to enter the province of the individual investor, rental residential real estate. Blackstone is among many hedge funds that have entered this market in the last few years, investing $10 billion in residential real estate. Talk about confidence!
Initially, funds based their model on purchasing large pools of real estate owned (REO) properties from banks. The hedge funds would buy the loans for a fat discount and vend the homes as short sales or provide the owners loan modifications.
Next, funds shifted to the rental model as a means to earn cash flow on the properties while waiting for price appreciation.
And now there is one stock that can help the individual investor can get on the same side as the hedge fund giants in the residential real estate market.
The leader in this space, Blackstone Group, helped launch a new IPO on January 31, 2016. The IPO debuted as the largest U.S.-listed IPO in over a year. Known as Invitation Homes (NYSE: INVH), the IPO debuted at $20.00 per share and raised more than $1.5 billion.
This IPO is the first public step Blackstone has taken to eventually cash out of its $10 billion dollar bet on U.S. residential real estate. However, the company has no near-term plans to sell its 70% stake in the IPO. The latest numbers per the offering document reveal the company owns and rents out 48,431 homes in 13 distinct markets from Seattle to South Florida.
In 2016, shares of home-rental companies exploded higher despite apartment building interest dropping. One stock that did well, American Homes 4 Rent (NYSE: AMH), Invitation Homes’ closest competitor, jumped 26% higher last year. Other single family focused REITs. Colony Starwood Homes (NYSE: SFR), the third-largest fund, advanced 44%, while Silver Bay Realty Trust Corp. (NYSE: SBY), a single-family rental REIT, added 12%.
“REIT investor interest in the single-family rental sector has grown recently, thanks largely to improved operating results, particularly as apartment fundamentals weaken,” Green Street Advisors managing director Dave Bragg explained in an investor note.
What has me most excited about this REIT IPO is the fact that Fannie Mae (OTC: FNMA) has stated it will guarantee up to $1 billion of the company’s debt. The Fannie Mae guarantee should lower the company’s borrowing costs, boosting profits over time.
Homeownership will likely remain out of reach for a large number of Americans, boosting rental demand. The Great Recession, although over on economic charts, still hangs over many in the form of ruined credit and depleted cash reserves, making home ownership nothing but a dream.
Stricter lending standards, rising housing prices, climbing interest, and greater personal debt also continues to scare off first-time homeowners. The Wall Street Journal reports that homeownership fell to a 50-year low last year. Should these trends continue in this year as they did in the last one, stock prices related to housing should see a boost.
Risks To Consider: We are living in volatile economic times. Economic conditions could quickly change altering the current landscape for rental homes. Always use stops and proper risk management when investing.
Action To Take: Invitation Homes has not been on the market long enough to create a useable price chart. Go long on a breakout above $21.00 per share. My upside target is $30.00 per share, and initial stops are suggest at $18.97 per share.
— David Goodboy
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Source: Street Authority