I’ve been describing the slowing down of the hedge funds (Wall Street) and large foreign investors purchasing Los Angeles real estate for several months now.
Among the 20 firms buying the most California real estate as January 2012, purchases are declining more than 70 % compared with last year in each of the last four months.
This time last year, investment company raced to buy dozens of single-family house in neighborhoods from Fontana to South Los Angeles to lease them out, transforming the mom-and-pop rental business into a Wall Street juggernaut.
The flood of cash helped spark an escalation in prices, driving local families and mom and pop investors from the market. Now the firms themselves have all but stopped purchasing in Southern California, the most recent evidence that home prices have hit a ceiling. The professional investors no longer see good deals here. Not unlike a stock. When a price gets to high relative to the expected return, they buy a different stock…
The real estate arm of Blackstone Group, the largest buyer, has cut its California purchases 90 % over the last year, a spokesman said. Santa Monica company Colony Capital mentions a comparable retreat. Oaktree Capital of Los Angeles, subsequently, is wanting to cash out by selling its portfolio of more than 500 homes, many of them in Southern California.
“Private capital made a great deal of money early, and now they’re beginning to pull back,” said Dave Bragg, who heads residential research at Green Street Advisors, a real estate research firm in Newport Beach. “Home prices are up significantly, and houses are definitely less attractive.”. The shift is granting regular buyers more homes to pick from, at least those who can still afford them. Professionals say an expanding supply should help usher in a healthier housing market, with a far better balance between buyers and sellers.
That’s a stark change from last year, when buyers encountered bidding wars. All the activity drove the region’s median home price approximately $385,000 by last June, a record 28 % increase over the same month a year earlier, basing on San Diego study firm DataQuick.
But prices have since been flat in Southern California. Many households are taking a pass on the more expensive homes. And the math does not work on Wall Street either. “Prices have gotten to the stage where we can not buy a house, remodel it, rent it and still make a realistic return,” said Peter Rose, a spokesman for Blackstone, which owns approximately 41,000 rental houses across the country. “There was a moment in time where it made sense.”. Among the 20 firms buying the most California real estate since January 2012, purchases are down more than 70 % compared with last year in each of the last four months, according to DataQuick. At the 20 greatest foreclosure buyers, including arms of Blackstone and Colony American Holdings, purchases have dropped at about the same rate.
Absentee buyers of all kinds got 21 % fewer Southland homes in February than they did the same month last year, according to DataQuick, that monitor housing market figures. That’s not to say the big money is leaving the business entirely. Several of the biggest players are embracing a buy-and-hold strategy, bundling their properties into giant rental companies, like Colony American Homes and Blackstone’s Invitation Homes. They purchased thousands of homes at or close to the bottom of the market, setting up big profits from overall price appreciation.
Meanwhile, they can make money collecting rent. “These are income properties for us,” Rose said. “Eventually we’ll exit, whether it’s an IPO or selling them off. But that’s years down the road.”.
Certainly, the fledgling mass rental industry is taking on an air of durability. Blackstone in October sold $479 million in bonds backed by the rent paid on several of its homes, a move other firms are also planning. On Wednesday, some of the bigger players began a trade group, the National Rental Home Council, to promote for their interests in Washington. And most are still adding to their portfolios of rental homes– just not in costly California. In the second half of 2013, Colony Financial Inc. added approximately 1,000 homes to its rolls in Florida, according to regulatory filings, but simply 210 in the Golden State. The firm declined to comment on its plans.
The next wave of buying, industry watchers forecast, will be in second-tier markets such as Indianapolis and Cincinnati. “They’re searching for $150,000 three-bedrooms that they can rent for $1,000 to $1,500 a month,” said Rick Sharga, executive vice president at Auction.com and former executive at Carrington Mortgage Holdings, which partnered with Oaktree in the rental business. “That does not sound like Laguna Beach.”.
The easy money in equity appreciation has been made in the Los Angeles region for this cycle.