Cheap foreclosed homes across the nation have attracted droves of investors to the recovering housing market. The traditional mom-and-pop investors who have always depended on real estate investing to fund their retirements no longer have this landscape to themselves. The chance to earn huge profits has gained the attention of big-time investors.
Big investors see significant profit opportunities after five years of real estate values plummeting. Between 2007 and 2012, residential home prices plunged an average of 34% nationwide, based on the S&P Case-Shiller Home Price Index. In some areas like Las Vegas and Miami, home prices dropped 50% to 60%.
Institutional investors dominating market
With more than 4 million Americans losing their homes to foreclosure, the demand for single-family rental homes has surged. Purchasing homes at deep discounts in a time of rising rents has created a windfall profit opportunity for investors. As a matter of fact, hedge funds and private equity companies are investing considerable resources into every segment of the real estate market, including vacant land, foreclosures, and homebuilding companies and building component manufacturers.
Paulson & Co real estate investment division has bought enough land to build 25,000 homes in Arizona, California and Nevada. According to Michael Barr, who heads Paulson’s real estate investment division. "Land is the accordion in the home building equation. It falls the most in a downturn, but also rises the most in an upturn," said Barr, Principal John Paulson made billions betting that many borrowers would default on subprime mortgage in 2006 and 2007.
In 2012, the private equity firm Blackstone Group invested $2.7 billion to purchase 17,000 single-family homes from the inventory of foreclosures. The firm intends to continue its buying momentum in 2013. The Silver Bay Realty Trust, which went public late last year, has bought over 2, 500 homes in communities hot hard by the foreclosure crisis. Silver Bay specializes in renovating, leasing and managing single-family homes. The real estate investment trust recently reveal in a SEC filing that it has plans to buy 3,100 more houses.
Homebuilders’ stock rising
Even the stocks of homebuilders have soared in recent weeks. The equities of Lennar, KB Home and Pulte Group have reached 52-week highs. At a minimum, all of the stocks have nearly doubled over the past year. The IPO of Tri Pointe Homes—a single-family-builder with developments in California and Colorado, pulled in $232 million and was up 20% on its first day of trading.
Now that the housing sector has returned to a favorable status, any investment banks predict that more homebuilders will take their companies public. "As the sector rotates back into favor again, it makes sense for housing companies to monetize," said Deutsche Bank executive Brad Miller.
Individual investors competing with institutions
According to Foreclosure.com CEO Brad Geisen, more wealthy individual investors have shown an interest in buying up a large number of foreclosure homes over the past 90 days. These investors believe the window of opportunity to find foreclosed homes at low prices is quickly closing. "No one knows how long it will last, so these investors are trying to buy as much as they can right now,” said Geisen.
The downside to having wealthy individuals and institutional firms investing in foreclosures concerns the power of their all-cash transactions. These cash buyers compete with the smaller investors and potential home for the same inventory of homes. Even if large investors bid lower prices for foreclosure homes, they have an advantage with the ability to offer cash and close quickly.