by Calculated Risk on 3/23/2009 12:08:00 PM

The evidence suggests there has been a surge in rental units in the U.S. - far exceeding the number of new rental units being built (see: The Residential Rental Market Update). I've argued that the key factors in this surge in supply are "REO sales to cash flow investors, and frustrated sellers putting their homes up for lease".

Here is some evidence of investors buying REOs to rent.

From Jim Wasserman at the Sacramento Bee: Novice investors turn repos into rentals

... Preliminary estimates from researcher MDA DataQuick indicate that 28.4 percent of February buyers in Sacramento County were investors aiming to buy, repair and rent out their new acquisitions.

The numbers confirm a huge shift in the Sacramento housing market in recent months, one that has consumed thousands of foreclosure properties and helped prevent a once-feared pileup of for-sale signs.

Alongside an army of first-time buyers, these investors – many doing cash deals with banks – have fueled growth in home sales for nearly a year. ...

Investor market share in Sacramento County last hit 25 percent in mid-2004, the most frenzied sales year of the region's housing boom. Then it declined by half as the housing market cooled in 2006 and 2007, according to DataQuick.
...
Sacramento County couple Oscar Vargas and Gladys Flores ... bought five houses last year priced between $50,000 and $100,000.

"We buy the repos, and the prices are about what it was 15 years ago," Flores said. "We fix what's wrong with them. We spend a little money and put in new carpets and remodel. We do it ourselves and rent them."

The plan is to hold them for several years to see gains, she said. Flores said it's the same drill as the 1990s downturn. Then, the pair bought houses low and sold them high during the boom that followed. They now own and manage 15 rental homes, she said.

In 2004 the "investors" (really speculators) were betting on appreciation. The current breed of investor is buying for cash flow.

by Calculated Risk on 2/04/2009 04:32:00 PM

Here are some comments from BRE, an apartment REIT (hat tip Brian):

You know there really may not be an adequate description to frame what occurred during the fourth quarter with jobs and the nation's economy.

Our Enterprise priorities, like that of many real estate companies, lead with capital preservation and enhanced liquidity. And our tactical decisions are tied to the four key risks that we believe face our industry. First, the depth and duration of this recession, or depression, and the impact on operations and EBITDA; second, the availability and the cost of public capital both near and long term; third, the availability of secured debt from the GSEs; and finally transaction risks, or the ability to sell properties to source capital.

Did he she really just say "depression"?

Existing home sales have picked up and standing inventories have declined, but in most markets the level of inventory ranges between five and ten months. There does remain a favorable rent-to-own gap in most of our markets, but it is being challenged.

With jobs, we expect the first quarter to rival the fourth quarter with respect to job losses. We then expect to see a deceleration in the layoff momentum with job losses continuing early into 2010 before stabilizing. With respect to housing we expect to see a continued clearing of inventories and the possibility of a bottom in home prices identified in the second half of the year. And finally we believe foreclosures will continue into 2010, but become less of a factor once the market identifies the bottom for prices. We believe we are looking at a negative rent curve for the next two years.

We believe on a composite basis, market rents in 2009 could fall between 3 and 6% from peak levels in 2008. And the rent cuts in 2010 could be deeper, depending on how this next phase of the economy plays out.

Note that apartments typically compete with lower priced homes. So when he is talking about a price bottom, he is talking about pricing in some lower priced neighborhoods with significant foreclosure activity.

On New Development:

In early January, we announced the deceleration of our development program. We recorded a 5.1 million, non-routine charge to abandon three sites we had under control, two in the Inland Empire and one in San Jose.
...
The past quarter was an inflection point. The level of economic deterioration was strong enough to render certain [development] sites across the industry infeasible.

So they are cutting back on new development. And they are being hit by job cuts in retail:

Operationally we are facing the toughest conditions in decades. As planned, since October, we have cut market rents more than 3% across the portfolio, with the deepest cuts in Southern California. We are seeing decent traffic and focusing on resident renewals and aggressive leasing to solve for occupancy.
...
the job numbers for the fourth quarter and year end go beyond bleak. ... The headline is the retail impact. Retail job losses are at the top of most of our core markets. Many retail workers' rent, and these layoffs trigger higher move-outs and terminations; and we don't get the feeling the retail industry is finished with their job cuts.

And on the Seattle market:

Seattle is no longer immune to the economic fallout. During the fourth quarter Seattle shed 16,000 jobs or a drop of 1% in 90 days as market dropped all the job growth experienced in the first nine months of the year, bringing employment back to December '07 levels. During the fourth quarter the Washington Mutual job cuts kicked off, and in January Microsoft laid of 1,000 workers. Boeing announced it will cut 10,000 jobs, half of those in Seattle, and Starbucks announced another round of layoffs, estimated at 1,000 jobs.

Certain sub-markets have already been impacted. Downtown rents have fallen almost 9% in the fourth quarter and are continuing to drop.

And on households "doubling up":

Q: Can you just address with the drop in occupancy and the employment losses ... what's your sense in terms of where are people moving? Are they going to lower quality units, are they doubling up, going with parents, I mean, where are people going?

A: ... I think it's pretty similar to past cycles. ... while there's some exodus of households out of California the numbers aren't that great, so it would indicate that people are doubling up, tripling up, moving back to couches, moving back with mom and dad.

They also noted that there will probably be few apartment transactions this year:

I don't think anybody feels a real sense of urgency to jump in and buy at the beginning of a two year declining rent curve. I think we'll probably see transactions begin to move up in the first half of '10 as you get closer to the end of that declining rent curve.

by Calculated Risk on 2/03/2009 03:01:00 PM

Last month I provided an overview of the Residential Rental Market. Here is an update based on the Q4 2008 housing data from the Census Bureau.

See this earlier post for graphs of the homeownership rate, and homeowner and rental vacancy rates.

The supply of rental units has been surging:

Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been almost 4.1 million units added to the rental inventory. Note: please see caution on using this data - this number is probably too high, but the concepts are the same even with a lower increase.

This increase in units almost offset the recent strong migration from ownership to renting, so the rental vacancy rate has only declined slightly (from a peak of 10.4% in 2004 to 10.1% in the most recent quarter).

Where did these approximately 4.1 rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.05 million units completed as 'built for rent' since Q2 2004. Although we don't have the Q4 2008 data yet, we know completions were pretty low in Q4, so this means that another 3.0 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

Although there are several factors increasing the supply, I believe the main factors are a surge in REO sales to cash flow investors, and frustrated sellers putting their homes up for lease. This is increasing the supply of rental properties, and is finally pushing down rents in many areas.

by Calculated Risk on 1/31/2009 07:06:00 PM

From the NY Times: A Month Free? Rents Are Falling Fast (hat tip Brian)

IN this painful economic climate of layoffs and shrinking investments, there is a sliver of positive news: it’s a good time to be a renter in New York City. Prices are falling, primarily in Manhattan, and concessions like a month of free rent are widespread.
...
The steepest drop was in one-bedrooms, down 5.7 percent in buildings with doormen and 6.53 percent in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61 percent. But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20 percent lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.

I live in a California beach community and there are usually very few rental units available. I went for a walk this morning, and I was amazed at all the "For Rent" and "For Lease" signs. The market is changing rapidly here too.

On the rental market: Earlier this month I wrote about some of the supply and demand issues, see The Residential Rental Market

And not included in my summary post of January economic activity was this apartment data from the National Multi Housing Council (NMHC):

The stunning job losses and economic deterioration recorded over the past four months have eroded demand for apartments, putting the sector—like other real estate sectors and the economy itself—in a clearly "down" phase of the cycle, according to the National Multi Housing Council's (NMHC) latest Quarterly Survey of Apartment Market Conditions.

Click on graph for larger image in new window.

This graph shows the quarterly Apartment Tightness Index.

"The Market Tightness Index, which measures changes in occupancy rates and/or rents, declined sharply this quarter to 11 from 24. This is the third-lowest result on record, and the sixth straight quarter in which the index has been below 50."

It's a good time to be a renter.

by Calculated Risk on 11/17/2008 07:40:00 PM

From The Times: House rents fall as unsold properties flood market (hat tip James)

Rents fell for the first time in five years between July and October as home-movers flooded the rental market with properties that they could not sell.
...
It is the first time since 2003 that the gauge of rental yields has turned negative. James Scott-Lee, of RICS, said: “Many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents.”

Usually in a recession some people double up with friends or family - and that puts downward pressure on rents. This time there is also a huge number of "amateur landlords" renting out their unsold properties, and that is additional downward pressure on rents.

This is also happening in the U.S., see: Apartment Market Weakens

by Calculated Risk on 8/19/2008 08:41:00 PM

Here are a couple of articles on apartments (hat tip Les):

From Tammy Joyner at the The Atlanta Journal-Constitution: As more share space, apartments take a hit

In these tough economic times, some metro Atlantans are bunking with family and friends, doubling up in rental apartments, homes or condos.
...
The anemic housing market should be a boost to Atlanta’s apartment market. But the emerging shift in living arrangements is creating an unusual set of challenges for the industry.

Leasing agents are having to contend more with the “shadow market,” an industry term that refers to the glut of unsold homes, condos and townhomes that have become rental property.

And from Kerry Fehr-Snyder at The Arizona Republic: Apartments offering freebies, other deals

Renters can thank the struggling real-estate market and its deflated housing prices, increased foreclosure rates and depressed rents on single-family homes, condominiums and apartments. Add to that the condominium-conversion flop, which has led to condos reverting to rental apartments.
...
With a glut of cheap rental homes on the market, apartments are facing more competition than ever and many are sitting with empty units as vacancy rates soar.

That has prompted 68 percent of apartment landlords to offer concessions worth several months of rent, [Pete TeKampke, vice president of investments for Marcus & Millichap] said.
...
During the Valleywide condo craze, 30,616 apartment units were converted or sold to investors who planned to convert them to condos, TeKampke said. By the middle of last year, 18,000 units had reverted to apartment rental units and many investors had scrapped their conversion projects.

Even though the homeownership rate has fallen sharply, the rental vacancy rate is still at 10.0%, just below the all time record of 10.4% in 2004.

A combination of people doubling up (happens in every recession), condo reversions, more apartment construction (the lone bright spot for housing starts), and some homeowners renting their homes instead of selling, has kept the rental vacancy rate high even while the homeownership rate has fallen.

by Tanta on 8/08/2008 08:34:00 AM

The Washington Post reports on tenants caught up in the "foreclosure crisis":

Thousands of unsuspecting renters who have been paying their rent on time are getting enmeshed in the foreclosure crisis that is plaguing the housing market.

In many cases, their landlords, often individual real estate investors, bought properties during the boom days, rented them out, then failed to keep up with their mortgages. The homes went into foreclosure, often unbeknownst to the tenants, who face disrupted lives and even homelessness. . . .

The Mortgage Bankers Association, which tracks foreclosures, does not know how many tenants have been uprooted this way. But one in five foreclosures initiated in the third quarter last year were not occupied by the properties' owners, the group said. Some of those nearly 70,000 properties may have been vacation homes. Others may have been vacant. But a large chunk were probably rentals, and as the foreclosure rate has climbed this year, those numbers have probably climbed.

This isn't the first story we've seen, by any means, about the plight of tenants in foreclosure. As far as it goes, there's nothing particularly wrong with the focus of the article--on the effects on the tenants themselves.

But I am as usual struck by the apparent lack of curiosity displayed here about how you can have so many foreclosures of cash-flowing rental properties. It makes perfect sense that vacant "investment" properties get foreclosed a lot: the owner has to carry the mortgage payment without any income from the property. But a foreclosure of a property with a paying tenant is, historically speaking, rather unusual. It means one of several things:

1. The purchase price of the property was simply nonsensical for an investment property, given market rents. Even though the tenants are paying, the rental payment is significantly less than the carrying costs of the property and the owner's other income is in no way adequate to make up the difference. This was a dumb loan for the owner to take and a dumb loan for the lender to make. The odds that it involved appraisal fraud--either an inflated value of the property based on the comparable approach or inflated market rents used to inflate the value on an income approach--are excellent.

2. The property was never intended to be a rental property in the first place. This would be the old "If I can't keep making the payment on this expensive house, I'll just move into mom's basement and rent it out" thing that some people told themselves during the boom. This loan wasn't made with inflated market rents in mind only because no one actually gave a moment's worth of serious thought to what market rents--and normal vacancy rates and so on--actually were likely to be.

3. The tenant is paying rent, but nowhere near what the market would support. This may be a "non-arm's-length" deal between landlord and tenant, or a desperate amateur landlord, or a naive tenant who doesn't recognize "too good to be true" or some combination thereof.

4. The owner is simply skimming rents. That is, the cash flow from tenants could cover all or nearly all of the mortgage payment, but the owner is either a classic fraudster or an idiot trying to juggle a "real estate empire" who simply never intended to apply rental payments to the mortgage.

If there are "thousands" of loans like this, then I posit that it might be more helpful to see these tenants as caught up not in a "foreclosure crisis," but in either a real estate swindle or an insane lending boom that finally had to end. That may not mean much to the tenants involved, but it would help for public policy reasons to stop thinking of foreclosure as the "cause" of these disruptions rather than the inevitable result of such "malinvestment."

by Calculated Risk on 6/28/2008 09:00:00 AM

From the NY Times: Luring Affluent Renters in Manhattan

ONE month’s free rent. Two months’ free rent. No security deposit.

How about a year’s worth of storage at Manhattan Mini Storage or an appointment at a doggie day spa for Rover on moving day?

As the rental market in Manhattan has softened in recent months, these are some of the incentives that owners of high-end buildings are offering to lure tenants.

Note that this is for some high-end buildings only. It looks like the layoffs in the financial industry are starting to bite ... and it's about to get worse:

... many of the people laid off by Wall Street firms will not officially become unemployed until their severance pay runs out. For the entire metropolitan area, she said, Moody’s economy.com is projecting a loss of 60,000 jobs by the beginning of 2009, with about 45,000 of those jobs in financial services.

by Tanta on 3/23/2008 10:07:00 AM

Since it's Easter Sunday, and you don't have anything better to do than munch on Peeps and read about relitter perfidy, another in our continuing series on real estate fraud.

Via Mish, this story of renters in a bind:

When the Hays found their rental home last June they were pleased. Not only could they move in right away, the landlord asked them what they could afford for a deposit. There was even the chance to buy the home at some point in the future.

But that would all change in less than seven months. There's no forgetting the day Jennifer and Travis learned something wasn't right with their rental home. Their landlord called January 15, a memorable day. It was the same day Jennifer was headed into surgery.

"She called to tell me I should start looking for another place, that she could sell me a house," Jennifer explains. "And that's when I figured out that not only am I going through a miscarriage, but I was also going to lose my house."

You really want to read the whole thing, including the unbelievable text messages the relitter-landlord sent to the renters, trying to get them to pay February rent (after the bank took the house at the foreclosure sale in the end of January).

What I don't think is necessarily clear in the story as reported is the timeline. A "perfect" foreclosure in Nevada--that is, one without unusual delays, that uses basically standard servicer approaches for when to start FC proceedings--takes around 270 days from the last payment made. Nevada has a 90-day reinstatement period in the statutes, meaning that once the initial Notice of Default is filed, the borrower has the next 90 days to bring the loan current and avoid FC. After the 90 days, if the loan isn't reinstated, the notice of sale must be published three times over three consecutive weeks. Including time for processing the original FC referral (before the NOD is filed), it takes about 120 days to get through the process to the sale of the property. If the servicer does not initiate the FC process until the 120th day of delinquency (the 150th day since a payment was made), the whole thing is 270 days.

In our case at hand, that means that the owner of the property probably made her last mortgage payment on May 1, or possibly June 1 if the servicer started FC after the 90th day of delinquency. (This is assuming she ever made a payment; the article doesn't tell us when she bought the property.) She rented the place to the Hays in June. In other words, we don't have a case here of a landlord who gets into financial difficulties at some point in time after renting the place to tenants. We have someone who appears to have intended from the start to "skim off" rents without paying the mortgage.

I really don't know how the Hays could have spotted this up front; there are no public records that will tell you if your landlord is delinquent the day you sign your lease, or is going to be delinquent thereafter. Tenants can check public records to see if a landlord is in foreclosure--if that Notice of Default or whatever it is in a specific state has been filed--but there's nothing to see until that document is filed. In the case at hand, it appears that nasty letters from the servicer were actually coming to the property address, but these tenants were apparently unwilling to open mail not addressed to them, and fell for the landlord's "explanation" of what that flurry of certified mail was all about. I'm sure it never occurred to the Hays that while some legitimate landlords will have servicer mail directed to the property address, that can also be a good indication that the property was obtained under occupancy fraud (that is, that the landlord claimed to the lender that the property would be the landlord's principal residence). Sadly, there's no sure-fire way for people who rent single-family homes from an individual to really verify whether or not they're getting caught up in a rent-skimming scam.

There is also no sure-fire way for servicers to know that this is going on, although there are steps that can be taken. A while ago we were confronted with a rant from our favorite Gretchen Morgenson, railing about servicers hitting delinquent borrowers with "unnecessary" property inspection fees. I have no way of knowing if the servicer in the Hays' case did inspections at all, if the inspector saw signs of occupancy and assumed the occupants were the owners, or if the inspector did catch on and the FC was actually accelerated because the servicer feared that rent-skimming was, indeed, transpiring. I do always fear, when the delinquent owner is a member of the local RE establishment, that the "inspector" might have eyes wide shut. I do actually claim to know that this is why delinquent borrowers find themselves with a bill for periodic inspections.

I make no claims that scams like the one perpetrated against the Hays--and it is a scam to enter a rental agreement with someone while not disclosing that you're about to lose the property to FC, that's kind of a material fact--are common or usual or an "epidemic." I am, however, convinced that a lot of "speculators" are suddenly trying to convert themselves into "landlords," and that the results aren't going to be good for anyone--not for the tenants, and not for the lenders. There's a problem with market-comparable rents not being high enough to satisfy the mortgage payment, and then there's the problem that it may not be anyone's intention to satisfy the mortgage payment anyway.

Nonetheless, I've seen some people lately encouraging renters to "take advantage" of the ability to rent nice big houses on the cheap from an amateur landlord these days, given the distress in the RE market. I'm merely observing that there is some room for caution, yet again, when the deal sounds "too good to be true." I am also observing that folks who have no experience with being landlords, and who are tempted to buy properties "on the cheap" in a foreclosure or short sale and rent them out, might want to stop and consider that they might have to "compete" with "distressed" landlords who can offer prospective tenants a "better deal"--no or minimal deposit, short-term or flexible lease terms, low rent--since they have no intention of making mortgage payments. In the current environment, you had better make sure you can carry the PITI and maintenance on a rental property you buy with a very high "vacancy factor." Any "RE guru" who is telling you different may well have, shall we say, ulterior motives.

by Calculated Risk on 2/13/2008 11:09:00 AM

From David Lazarus at the LA Times: Shadow victims of the mortgage crisis: renters

Salgado, 40, is one of many renters who have found themselves homeless after their cash-strapped landlords stopped making mortgage payments and their houses or apartment buildings were foreclosed upon.

The California Apartment Assn., the state's largest organization of rental property owners, estimates that as much as a quarter of all foreclosed single-family residences are occupied by renters. The number of renters ensnared in the foreclosure fiasco is even larger when duplexes and other multi-unit buildings are factored in.
...
State officials said that under California law, existing rental agreements are essentially wiped out when a property is foreclosed upon. All that's required is that a tenant be given at least 30 days' notice that he or she is being evicted.

Lenders are not in the business of being landlords, and they typically want a house vacant so they can sell it as quickly as possible.

The article also touches on the impact on rents:

... this can mean even steeper rents because the wave of foreclosures has spurred greater demand for rental housing

In the short term, the housing bust has probably helped push rents up in many areas.

by Calculated Risk on 2/06/2008 11:00:00 AM

BRE is an apartment REIT in the West. Here are some comments from their conference call (hat tip Brian):

“Essentially we have two distinct operational dynamics going on. Two-thirds of our operations, San Francisco, Seattle, Los Angeles, San Diego, are operating a fairly high level. Revenue growth is ranging 4.5 to 9%, occupancy levels are at or about 95%. We have a pretty tight 30-day available levels running between 6 and 7%. It is a little early in the year to start talking about rent growth, but in these markets we have pricing power and we're not being shy about exercising it where we can.

There is another slice of the operations with a single-family housing recession is playing out in full as we expected. Sacramento , inland Empire in Phoenix which represented about 21% of the same store net operating income, operations are struggling, and we expect the struggle to continue throughout the year. We seem to be able to maintain about 92, 93% occupancy but rents are flat year-over-year. We certainly are not expecting rent growth this year. There may be modest revenue growth from these markets, but it will be occupancy driven over our '06 levels.

For the moment Orange County lies somewhere in between with a stronger operating profile than we and maybe others expected at this point. Orange County represents about 14% of same store net operating income, currently 95% occupied, 30 day available stands at less than 7%. Our market rent growth in '07 was just over 3%, about half normal growth levels. Some of this was of our own making. It took almost six months to get our occupancy in a position to grow rents. The loss of jobs certainly triggered a deceleration in traffic and rent growth in the second half of the year. Orange County remains unaffordable from a housing standpoint. Median home prices for existing stock are more than 620,000, and new home prices average more than 850,000. Information on jobs that came out at the end of the year indicated a year-over-year drop of about half a point. Certainly not great, but probably not enough to shake the home prices materially. This market is holding up very well and could generate maybe 2 to 4% revenue growth in rent growth in 2008 which could be a really great performance.”

Q: My second question pertains to single-family moveouts. How is it trending and can you quantify what impact it may be having on your occupancy overall?

BRE CFO: Well, I think coastal California is really a tale of two markets. In coastal California the numbers really haven't budged. Moveouts when we look at our resident turnover and to the extent that the exit interviews or the exit data is correct, moveouts in coastal California are for purchasing a home remain very sticky around that 15 to 20% number. It is like typically 15 to 17%. When you get to an Inland Empire, Sacramento , Phoenix , that number will jump up to 25 and 30%. Look, in Phoenix right now you can rent a 2 to 3 bedroom home for $900 a month. That competes with an apartment every day of the week. We're getting a much higher level -- and that number is probably where historically hugged right around 25% is now in the 30, 35% range, and it is not just move out for home purchases. We have move outs for people going to go rent a single-family house.”
emphasis added