The recent announcement that an earlier housing skeptic is now bullish on the U.S. housing market was stunning. The move was based on fundamentals, though—and is thus worth close review.
Ex-Goldman Exec Makes a Big Bet on Housing Market
Donald Mullen Jr., who a decade ago helped oversee the lucrative bet of Goldman Sachs Group Inc. against the U.S. housing market, is now raising $1 billion to buy single-family homes to rent out to tenants. Mullen, a co-founder of real estate investment firm Pretium Partners LLC, was once the head of Goldman’s mortgage-and-credit business.
“We believe tight credit availability is preventing new households from being able to obtain mortgages to purchase their first home,” Pretium wrote in its pitch to investors. “Households that have been unable to obtain mortgages have become renters, thus driving high occupancy rates and robust rent growth.”
Many economists expect the homeownership rate to keep declining over the next decade, due to both tougher lending standards and a mire of student debt bogging down a younger generation of potential buyers.
Positive News Extends to Other Real Estate Sectors
Some office property markets have also picked up steam, seemingly allaying concerns over the direction of the larger U.S. economy.
Los Angeles County, for example, saw increased business leases during the last quarter, sending the county’s vacancy rate down to 13.9%. Demand for new offices has been robust along a broad swath of industries, particularly in technology and creative fields, said Andrew MacDonald, executive managing director of the Greater Los Angeles region for real estate brokerage Cushman & Wakefield.
There is still lingering pessimism about the state of the economy, of course. The International Monetary Fund recently downgraded its forecast for the U.S. economy. But local players in LA, at least, tell a different story. “Whether they be defense, entertainment, real estate, finance, we are seeing a far more confident look… than would be anticipated,” said McDonald.
Are Some Foreign Markets Too Hot?
Where national economies are relatively stable, housing markets are currently in good stead. Canada, in particular, worries that things may be a little too good. Canadian household debt levels have reached record levels – mostly as a result of large mortgages.
The situation presents central banks (such as the U.S. Federal Reserve) with a quandary. Even though many developed-world central banks are looking at policies of either additional monetary easing or keeping rates low generally, it is also the case that many are reluctant to adopt a more dovish tome for fear of exacerbating existing housing imbalances. In Canada’s case, the concerns have taken shape in the form of measures to prevent foreigners from claiming a capital gains exemption on homes bought and sold in the same year – a move designed to slow the recent house price surges of 33% and 17% in Vancouver and Toronto, respectively.
Cautious Optimism May be the Best Course
After a six-year boom, the overall market for rental properties has slowed amid a construction boom in luxury apartments. Apartment rents in some big cities actually declined in Q3 2016, the first quarterly decline since 2010.
But single-family homes continue to show potential. Rents for new leases of single-family homes grew 4.25% in Q3 2016, accelerating from 4.1% from the year-ago period.
Pretium admits that it likely won’t find the bargains that once were available in the U.S. housing market. But it plans to target certain areas with favorable economics and demographic trends – it likes Houston, Atlanta, Phoenix and Indianapolis, among other markets. Pretium hopes to buy and renovate homes in such metropolitan areas for roughly 20% less than it would cost to build similar homes.
The future is always unclear. But with foreclosures returning to normal levels, Mullen and his colleagues likely will be buying more properties on the open market and fewer on the courthouse steps.
About the Author
Lawrence Fassler, an attorney and real estate investor, is Corporate Counsel of RealtyShares, a leading real estate investment marketplace that places equity investments through North Capital Private Securities Corporation; a registered Securities broker-dealer, and member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact the author at lawrence@realtyshares.com.
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