Institutional demand for national residential properties is dramatically overstated, says a report from the W.P. Carey School of Business at Arizona State University. This is particularly true of realty market harbinger Phoenix, Ariz. Unfortunately, this mantra of institutions affecting the market is repeated ad nauseum by three constituencies: real estate agents, regional investors and their media. Then, it is re-hyped by self-styled education gurus and given as reason to buy their overpriced house-finding tricks. PHOENIX AS NATIONAL MARKET WISDOM The May market report from the W.P. Carey School of Business at Arizona State University breaks down what’s happening in the Phoenix Metro Statistical area that includes Maricopa and Pinal counties. This housing market data as of April is ahead in most measures, except investor flipping, as individual and investor institutional demand has been tempered by rising home prices. This trend is moving from Phoenix and other Sunbelt markets to a city near you as market conditions improve — and now Realtors®, investors and compliant media are complaining? Those Realtors® and investors who began buying two and three years ago are reaping the rewards of buying early in depressed markets, capturing interim rental income and capital appreciation on sale. Is this not what investors are meant to do? NO NEW HOUSING BUBBLE? Despite dramatic home-price boosts, don’t expect another housing bubble anytime soon in the Phoenix area. ASU’s real estate expert Michael Orr reports that “in recent months we have seen many commentators dramatically overstate the impact that institutional investors are having on (our) market. These investors were still active during April with The Blackstone Group still the largest single buyer. Other companies include ARP, AH4R, THPI, Colony and FREO. However, the institutional buying spree peaked in the summer of 2012 and has now subsided. In total, these companies now own between 10,000 and 11,000 homes in Phoenix. They typically focus on the lower-end homes in less expensive areas.” “The commentators often talk ominously of a bubble bursting when these homes come back on the market,” says Orr. “Such talk gets a lot of attention because we are oversensitized to bubble-talk after the disruptive events of the last bubble between 2004 and 2006. However, this idea falls flat when we examine the actual numbers of homes involved. The entire institutional inventory of rental homes represents a tiny fraction, less than 1 percent of our housing stock,” says Orr. “If every single one were to be placed on sale on our local MLS next month, we would still have less supply than in a normal balanced market. This is because the active listing count is down by about 15,000. We would also need to find homes for the tenant families displaced. In the real world, these rental homes are likely to be held as investment properties for several years and then come back on the market relatively slowly.” WHAT IS THE IMPORTANCE TO INVESTING IN YOUR TOWN? Most towns are smaller than Greater Phoenix. Phoenix is ranked as America’s sixth-largest city and provides a good example of typical city and market behavior. This is mostly good news for wise investors. As these institutions succeed, this success begins to limit their buying power, they tend to overpay and underestimate the difficulty of managing residential rental assets. Their returns and time horizon expectations mean they have to hold and then exit to get the returns promised to their investors. This means getting the best rental rates at the lowest costs and selling at the optimal price. This is a juggling act that they theoretically understand and will play the best they can, given investment cycles and “the relationships” with the asset, tenants, property managers and market. This means they won’t do anything disruptive that will reduce their returns. Commissioned Realtors® and opportunistic flippers both are by nature transactional. Institutions have been the 800-pound gorillas in many markets and have picked much of the low-hanging fruit at their expense. Real estate is a dynamic market and the influence of institutions will pass as surely as night to day as they move on to buying in other cities or other asset classes. “REAL ESTATE GOOD” The big message is that buying rental housing has now been endorsed by Wall Street as a viable investment. Indeed this class of investment is being packaged and pitched as the next class of REITs. Our next question is, why would an investor need a Wall Street middleman when direct investment in residential rentals can be had with just a little research and with far greater returns? Our magazine desires to fulfill this purpose.
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