Wall Street revives foreclosed homes as rentals

A 'bank foreclosure sale' sign is posted in front of townhomes on August 12, 2010 in Los Angeles, Calif.

Housing prices are rising, in part, because Wall Street investors have been gobbling up foreclosed homes by the thousands. Now some of those big money men are courting Main Street investors.

A company named Colony American Homes said this week it’s planning a stock offering. Colony has been turning once vacant homes into rental properties. You could call it the buy low, rent high philosophy.

Companies have been snapping up single-family homes at low prices and renting them out for a healthy profit.

"It's almost like buying an investment at a discount," says Keith Gumbinger, vice president of mortgage information website, HSH.com. "Investors have been enjoying themselves with residential rental real estate over the last couple of years now."

Colony American Homes has scooped up more than 8,000 single-family homes to rent out and private equity giant Blackstone Group has purchased more than 24,000 homes. Two other companies in the buy-to-rent market went public last year.

This is an attractive market for companies, because so few individuals can buy, says Glenn Kelman. He's the CEO of real estate website Redfin.

"The tragedy of it is, right as home prices have becoming really affordable, credit has not been accessible," he says. "All the regulatory changes and the lending environment have really driven people into the rental market."

The housing crisis has sent homeownership to an 18-year low, meanwhile rents have been rising around five percent a year. Still, Kelman isn't convinced the buy-to-rent market is a growth industry.

"I think it’s a great business now, I don’t know how sustainable it is," he says.

That's because the number of houses for sale is low, says Kelman. Investors are fighting with each other over properties.

"I think it’s going to be very competitive getting the inventory to rent out and that’s going to be the gate on their growth," he says.

These companies are changing the market, says Susan Wachter, a professor of real estate and finance at The University of Pennsylvania Wharton School.

"They will create a new market for single family rentals that is a professional, institutionally backed market," she says. "That’s new and I expect it to persist." 

Renters now occupy more than one-third of all single-family homes in the U.S.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.

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