Fix-and-Flippers Face Stiffer Competition in the Housing Market
Mom-and-pop residential real estate investors are seeing more competition from citizens looking to buy homes than from their traditional competitors, large public institutional investors, according to a new survey from real estate data firm RealtyTrac. The smaller investors typically vie with the Wall Street-backed firms, which bundle the loans into pools and sell bonds to investment funds, to buy homes to either fix up or rent out.
“Mom-and-pop investors make up a huge percentage of the real estate investment market - owning nearly 90% of the single-family units being rented across the country,” said RealtyTrac executive vice president Rick Sharga. “It’s interesting that they’re having a harder time competing with traditional homebuyers than bigger investors, considering that typically those homeowners are at a disadvantage compared to investors, who can often transact more quickly using cash or non-traditional financing.”
The 150 investors surveyed are located across the U.S., and are almost evenly split between fix-and-flip investors, and those who buy properties to hold and rent. The group is representative of the mom-and-pop investor segment, planning to buy one to five properties in the next year.
SFR Bond Pushback
The capital that’s been flooding into the single-family rental industry as a result of the exodus to the suburbs following the pandemic - as well as rising rents - has also driven demand for bonds backed by single-family rentals.
Earlier this year, spreads on some asset-backed securities backed by single-family rental properties reached historical low levels on strong investor demand, according to Caroline Chen, a senior research analyst at Income Research + Management in Boston.
AAA tranche levels pre-pandemic were typically in the range of 90 basis points to 100 basis points over a swaps benchmark, but a February transaction from Progress Residential landed at 45, a historical low, Chen said in an interview this week. The BBB was at 120 basis points, compared to the 180 basis-point range before the pandemic.
“Since then, investors have started pushing back,” Chen said, widening AAA SFR paper back into the 65 basis points range, and BBB slices to the 140 range. Because of narrowing spreads this year, SFR ABS has lost some of its relative-value allure.
“Moreover, the structures are more issuer-friendly these days,” Chen said, noting that in some recent deals issuers have been allowed to sell property collateral from the transactions in order to monetize the positive housing price appreciation (HPA).
That may be OK with today’s upwards HPA trends, but if prices turn downward, fewer homes backing a loan with negative HPA would change the dynamic of the deal and make it riskier for investors, Chen said.
The two biggest challenges the investors cited were lack of inventory and rising home prices, followed by competition from traditional homebuyers and rising materials costs, the survey showed. Their outlook is that these four items will remain the biggest barriers in the next six months.
Interestingly, access to capital wasn’t considered to be a problem, despite the impression that large institutional investors gobble up housing stock to rent out. Instead, regular homebuyers were the bigger threat.
“It just shows how wildly out of balance supply and demand is in today’s residential real estate market,” Sharga said.
The surveyed group overwhelmingly expects home prices to continue to rise, and doesn’t expect to see a huge number of foreclosures hit the market when the government moratorium and forbearance programs expire. About 45% of the investors believe the real estate investment market is worse or much worse today compared to a year ago, but about 40% believe it will be better or much better six months from now.
Relative Value: Non-QM Versus SFR
- Non-QM RMBS is currently wider and cheaper than SFR ABS, Chen said, but the investor base is not as deep as it is for SFR, which concerns her
- SFR tends to bring larger deals, whereas non-QM RMBS transactions are in the $200 million to $300 million range. “You don’t have lots of investors play in that area,” she said
- These days, AAA tranches of non-QM price at about 75 to 85 basis points over a benchmark. That’s about a 10 to 15 basis point pickup versus SFR deals
- For buy-to-hold accounts, non-QM may be a good relative-value play
“The concern for non-QM is not the credit fundamentals, it’s the liquidity,” Chen said. “How much investor base do you actually have? How much liquidity if I buy the M1 or A3 tranches? Compare that to single-family rental ABS, where there are lots of investors trading that level. For SFR, you see more secondary trading down the capital stack.”
ABS deals in the queue include Wisconsin Electric (rate recovery bonds) and Willis (aircraft ABS).
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