The plan would create roughly 200,000 new rental homes this year.
Though still in the works, the US government has indicated it plans to carry out the operation in “early 2012”. That’s a relatively specific guideline, all things considered.
In September, the Obama administration asked for proposals on how to sell the government’s inventory of foreclosed homes. Big financial firms that included Deutsche Bank, UBS, and Cerberus Capital Management all submitted responses to the federal request.
The opportunity for investment has attracted many companies to the “distressed housing market”.
Real estate investment firm GTIS Partners plans to invest $1 billion over the next 4 years in acquiring single-family homes to manage, according to the fund’s founder Thomas Shapiro.
The return on their investment comes from a few factors. Buying homes in bulk directly from Fannie and Freddie will give GTIS a better-than-market price. And focusing on the most distressed markets, like Nevada, Arizona, and California will ensure they have a sure and steady stream of renters.
There’s a lot of inventory being unloaded this year, and GTIS won’t be the last firm committed to distressed housing.
The most opportune part of the operation is that demand for rental units is already there. So these investments have a mitigated risk for return.
One caveat, however. While big finance firms like GTIS may be able to buy in bulk directly from other banks, or Fannie and Freddie, individual investors may have a harder time getting those deals. There are literally billions of private equity dollars being funneled into this, and small-time investors will probably get pushed out.
What would 200,000 new rent units do for the market?
For starters, the increase in rental units will satisfy the growing demand. Given the preference shift in the real estate industry from home-buying to renting, there is a large and ever-growing number of future tenants.
And they’re all currently battling for a piece of a stagnant rent market. While demand for rent units has increased, supply has been slow to follow. It’s resulted in high rent prices at a time when the unemployment rate is still near 9%.
An influx of 200,000 rental units would do much to placate that demand. The rising price of rent would be curbed as more rental properties compete with each other. And in areas where high rents have scared people off, the reduction in prices could be enough to attract more renters again.
Renters benefit from having more leverage in choosing location and negotiating rents. And local businesses benefit from the increased foot traffic.
But the biggest winners might be the investment firms that buy foreclosed properties to rent them. With the rental market still a landlord’s game, it’ll be a while before the competition is fierce enough to lower rents everywhere.
In the hardest-hit places especially, that could take a long time. It’s the reason why GTIS is choosing to focus on those markets. There is an untapped source of tenants there that have limited options for housing.
However, investment firms aren’t the only ones that stand to gain. More rental properties means there’s a demand for property management firms, realtors, attorneys, and the usual personnel that accompany a real estate deal.
But the real goal of this operation – for the Federal Government at least – is to restore the housing market. Ben Bernanke, the Federal Reserve Chairman, cites the health of the housing market as “a necessary part of a broader strategy for economic recovery”.
And while the Fed has done all it could with monetary policy – like keeping interest rates low and buying bonds – housing still has not recovered. That’s probably the biggest reason why the government has turned to fiscal policy instead.
Getting the foreclosed homes out of housing and into rent will help home prices increase again, driving more home sales. And the increased equity for existing homeowners should boost consumer confidence and spending.
It’s a good strategy in theory. All that’s left is to put it in practice.
Either way, the opportunity for property management firms and finance companies to make high returns is ready and waiting. For those with the cash, it’s a good time to consider this government-created investment opportunity for 2012 in the future rent market.
General info about US Gov’t plan, GTIS, equity firms
Ben Bernanke quote