The flood of cash helped spark a steep rise in prices, drawing criticism for pushing families out of the market.
But now the firms themselves have all but stopped buying in Southern California, the latest evidence that home prices have hit a ceiling. The professional investors no longer see bargains here.
The real estate arm of Blackstone Group, the largest buyer, has cut its California purchases 90% over the last year, a spokesman said. Santa Monica company Colony Capital reports a similar retreat. Oaktree Capital of Los Angeles, meanwhile, is looking to cash out by selling its portfolio of more than 500 homes, many of them in Southern California.
“Private capital made a lot of money early, and now they’re starting to pull back,” said Dave Bragg, who heads residential research at Green Street Advisors, a real estate research firm in Newport Beach. “Home prices are up significantly, and houses are definitely less attractive.”
The shift is giving regular buyers more homes to choose from, at least those who can still afford them. Experts say an expanding supply should help usher in a healthier housing market, with a better balance between buyers and sellers.
That’s a stark change from last year, when buyers faced bidding wars. All the activity drove the region’s median home price up to $385,000 by last June, a record 28% increase over the same month a year earlier, according to San Diego research firm DataQuick.
But prices have since been flat in Southern California. Many families are taking a pass on the more expensive homes. And the math doesn’t work on Wall Street either.
“Prices have gotten to the stage where we cannot buy a house, renovate it, rent it and still make a reasonable return,” said Peter Rose, a spokesman for Blackstone, which owns roughly 41,000 rental houses nationwide. “There was a moment in time where it made sense.”
Among the 20 firms buying the most California real estate since January 2012, purchases are down more than 70% compared with last year in each of the last four months, according to DataQuick. At the 20 biggest foreclosure buyers, including arms of Blackstone and Colony American Holdings, purchases have fallen at about the same rate.
Absentee buyers of all kinds bought 21% fewer Southland homes in February than they did the same month last year, according to DataQuick, which tracks housing market figures.
That’s not to say the big money is exiting the business entirely.
Many of the biggest players are adopting a buy-and-hold strategy, bundling their properties into giant rental companies, such as Colony American Homes and Blackstone’s Invitation Homes. They bought thousands of homes at or near the bottom of the market, setting up big profits from long-term price appreciation.
In the meantime, they can make money collecting rent.
“These are income properties for us,” Rose said. “Eventually we’ll exit, whether it’s an IPO or selling them off. But that’s years down the road.”
Indeed, the fledgling mass rental industry is taking on an air of permanence. Blackstone in October sold $479 million in bonds backed by the rent paid on some of its homes, a move other firms are also planning. On Wednesday, some of the bigger players launched a trade group, the National Rental Home Council, to advocate for their interests in Washington.
And most are still adding to their portfolios of rental homes — just not in pricey California.
In the second half of 2013, Colony Financial Inc. added nearly 1,000 homes to its rolls in Florida, according to regulatory filings, but just 210 in the Golden State. The firm declined to comment on its plans.
The next wave of buying, industry watchers predict, will be in second-tier markets such as Indianapolis and Cincinnati.
“They’re looking for $150,000 three-bedrooms that they can rent for $1,000 to $1,500 a month,” said Rick Sharga, executive vice president at Auction.com and former executive at Carrington Mortgage Holdings, which partnered with Oaktree in the rental business. “That doesn’t sound like Laguna Beach.”
In theory, the migration of big-money investors from the Southland should make more room for regular buyers. But it’s not quite working out that way, said John Husing, a housing consultant who studies the Inland Empire, where the buy-to-rent sector has been the busiest in the region.
Home buyers still face tight credit and a soft job market. And those who have been renting for the last year have already lost out on big gains in home equity.
“They missed the upside,” Husing said. “And now they’re priced out of the market.”
Those would-be buyers make ideal renters for the homes the big firms own in Southern California.
“People want to live here, whether they buy or rent,” said Gary Beasley, chief executive of Oakland company Starwood Waypoint Residential Trust.
That’s why Starwood, unlike most of its competitors, plans to keep buying in Southern California. This month, the company paid $144 million for a portfolio of 707 houses, about half of them in the Golden State.
The company is also still picking up houses here one by one, a sign that ordinary home buyers might still find bargains if they look hard enough.
“Most of the low fruit has been harvested, but there’s still plenty of fruit in the tree,” Beasley said. “And we’ve got fruit pickers.“” ( End of Tim’s article.)
From Bob Phillips: Here in South Orange County, the disappearance of investors has really been obvious. I had such buyers paying cash for good buys a year ago, but the “good buys” are few and far between, these days.
There ARE occasional good buys, but most of those are distressed properties, either short sales, or bank owned homes. Even those, though, are increasingly rare opportunities, and more likely attractive to cash buyers, who are well poised to swoop down on them.
Most properties now on the market are sellers wanting to take advantage of last year’s 20%+ rise in prices, and the majority of those new listings are spending a lot more time on the market, trying to compete for the lower number of buyers who can qualify for, and/or afford today’s higher prices. ( Many of which are the same price levels we saw last August and September – the top of the 2013 housing market.)
There are occasional sales at higher prices, but the majority of those sales are homes that are extremely unique, in one or more ways. ( Outstanding decor, exceptional location, features such as those.)
Too many potential sellers – thinking of putting their house on the market – unrealistically think that their house is one of the “unique” variety, but they’re usually not. So, they frequently list their houses too high – with a listing agent salivating for a listing, even if they think it’s overpriced – and then they join a crowd of other listings already languishing on the market.
If a home seller is serious, or for some reason ( Divorce, relocation, etc.) compelled to sell, they will sooner or later start to reduce their price, to become more competitive than other nearby listings. Those are the types of properties that should be the primary focus of today’s buyers, and those properties ARE selling, just not like hotcakes, like we saw early last year.
So yes, sellers are selling, and buyers are buying, but just at more reasonable, or more competitive prices – kind of a balanced market, which is a good thing.
Thinking of investing, buying, or selling local real estate? I have more than 37 years of local experience, in helping buyers, sellers, and investors, meet their real estate goals. Give me a call – 949-887-5305 – or shoot me an email – BobPhillipsRE@gmail.com – and let’s talk about real estate.