My Mortgage Blog

US housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. "This recovery is different," notes Nick Timiraos, the estimable real estate/economic reporter for The Wall Street Journal.

"Investors including some big Wall Street players are leading the way," say industry executives and analysts. "Today's investors are mostly buying with the intention of holding on to the homes and renting them out."

So consider with me for a moment. The usual rising tide of renters and owners who, pushed along by pent-up demand, start buying homes and bringing recovery to the real estate market and, very often, contributing to the recovery of the overall economy is not exactly absent today, but the key players have been investors.

Seeing a rather standard sort of real estate investing as one of the few ways of pulling in fairly certain (and large) profits, investors have found what seem to be likely candidates (like Phoenix) and have bought up distressed properties in remarkable quantities. And what is truly "different this time" as the frequently-abused expression goes, is that the investors are very often large institutions that have raised millions of dollars to spend on a huge portfolio of single-family homes, often in all-cash transactions.

What are some of the questions and ramifications here?

*Single-family rental homes are hard to manage. They aren’t like an apartment complex with four or five unit designs. They vary more, are spread out further, are generally heterogeneous, even if they are in the same neighborhood (which they usually aren’t). New computer programs are being developed to follow the dwellings and their renters; more hands-on, face-to-face managerial work is often involved; and simple errors can compound into huge problems and expenses. Will these investors want to stay with such complex holdings?

*And if the firm that owns a few thousand homes in one area runs into financial problems and needs to sell off some of its units, what will that do to the local market for single-family residences?

*And at a very simple level, will those who manage hundreds of SFRs prove enlightened enough to put money and effort into helping to keep the neighborhoods in good shape? Clearly, doing so will pay off well whenever the investors choose to sell some of their properties, but important upkeep and upgrades could seem less important if the economy turns sour.

I'm not seeing any analyses that consider these and related questions. Here's another, therefore.

If this recovery has resulted primarily from investor activity, often that of institutional investors, what can we reasonably expect the outcome to be? Are we moving toward a normal real estate market again? Or are there further changes ahead? Have we given the keys to the house to a very different sort of owner, different even from the mom-and-pop who own and manage one or two single-family rentals? Will we need a new set of regulations for the operation of such rental units by large investor ownerships?

Remember that we have never before seen publicly-owned entities like partnerships and REITs involved in large-scale ownership of rental SFRs...So we don’t really know what problems and opportunities are being created here. Yes, we'll be watching closely. But I can't help but feel that we'll need to be proactive, insofar as possible, rather than simply reactive to the problems and opportunities that arise.

One last point: A large number of these dwellings are owned by the large investment entities with no mortgage encumbrances. What effect will this have on lending practices in the future?