Could Wall Street Save the Housing Market?

What will solve the housing crisis? The Keynesians think it’s a government bailout and the Hayekians think it will ultimately be the invisible hand and spontaneous order of supply and demand that will ameliorate the underwater single-family home sector. Well, could it both? In other words, the government steps in to structure a private sector solution?

On the heels of Bloomberg reports that Blackstone Group, the private equity giant and the country’s biggest buyer of real estate, has spent more than $250 million this year buying foreclosed single-family houses with plans to put them up for rent, we have more indications that large, yield-hungry Wall Street firms may provide the answer (or one of them) to the housing crisis.

The National Association of Realtors’ Investment and Vacation Home Buyers Survey reports that investment-home sales soared a whopping 64.5% in 2011, with investors purchasing 1.23 million homes compared to 749,000 in 2010.

“In the next five to 10 years, you’ll see tens of billions, if not hundreds of billions, of dollars of private equity” pouring into the single-family rental business,” says Justin Chang, principal of investment firm Colony Capital. In the past six months, Colony has bought more than 1,000 homes to turn into rentals. Most are in Arizona, California and Nevada, though Colony expects to expand into Texas, Georgia and Florida. In the next year, it will invest at least $1.5 billion in single-family rentals, Chang says.  According to Forbes, “the concept is catching fire on Wall Street and with good reason: While a 10-year Treasury note yields little more than 2%, economists at Goldman Sachs calculate that rental property investments yield more than 6% on average, nationwide.”

Blogging on the real estate website,, Ernst & Young’s Howard Roth stresses the importance of geography: “The places attracting the most attention from rent-to-buy investors are all cities that, although hard hit, have good long-term fundamentals and strong rental demand, such as: Las Vegas, Miami, Phoenix and, in California, the Inland Empire and Sacramento. Homes in Phoenix, for example, have appreciated 15% to 20% since the start of the recovery, a trend that is expected to carry on if investors there continue to absorb supply from the market. Already, there is less than a two-month supply of homes to be sold in Phoenix, compared to a one-year backlog a year ago.”

The most coveted investment play today for the high-cap private equity player is to bulk buy REO (bank-owned) homes. As Forbes explains it, “the largest holders of distressed assets are the Government-Sponsored Enterprises Fannie Mae and Freddie Mac. Together the two mortgage giants own roughly 180,000 foreclosed homes.” In February, the Federal Housing Finance Agency announced the launching of a pilot program that puts 2,500 of Fannie Mae’s homes in eight locations, valued at $320 million, up for sale. On July 3, the FHFA announced that the winning bidders in the REO to Rental initiative had been chosen and transactions were expected to close early in the third quarter.

Investors were were evaluated on the basis of several factors, including financial strength, asset management experience, property management expertise and experience in the geographic area..

Even with big investors entering the space however, the housing problem remains outsized: Nearly 650,000 REO properties sit on the books of the nation’s banks and 710,000 more are pushing through the foreclosure process, according to RealtyTrac. Still, the entry of institutional and private investors into the housing space does raise several promising notions: a higher professionalism in the management and operation of the assets; a portfolio strategy that can raise the value of more challenged assets; and ultimately a way for renters to re-enter the home ownership by saving and re-building their equity while they rent. Could it be that Keynes and Hayek are both right?