VOL. 132 | NO. 67 | Tuesday, April 4, 2017
Investor Dominance in Residential Real Estate Shows Signs of Change
By Bill Dries
Investors buying single-family homes to rent them out or have a management firm rent them out may be giving way to banks more willing to make loans on lower-priced homes to owner-occupants.
“I would say the most interesting and big dynamic is folks who come in and buy a house for $20,000 these days, fix it up – sometimes well, sometimes poorly – sell it to a person in California for $64,000 – keep the rental management. And sometimes that helps a street and a neighborhood and sometimes it’s destructive,” said Steve Lockwood, executive director of the Frayser Community Development Corp. on the WKNO/Channel 10 program “Behind The Headlines.”
“The reason why this was happening is that the banks were not able or not willing to lend within the $30,000 to $50,000 range and this is in a neighborhood where the average price is now up to a $33,000 sale price,” he said of Frayser. “And by the way, that’s a great improvement from 2009. What we’re finding in the last year is the banks have really changed their tune and are totally willing and actually scrambling to make these loans. So we think there’s a real opportunity for the owner-occupant market to come back in.”
Of all of the single-family home sales in Shelby County in 2016, 25 percent were sold to investors or non-occupants, according to Wendy Greenlaw, business development manager of Chandler Reports, a division of The Daily News Publishing Co. Inc., who was also a guest on the program.
“Behind The Headlines,” hosted by Eric Barnes, publisher of The Daily News, can be seen on The Daily News Video page, video.memphisdailynews.com.
Gary Thompson, a vice president of Boyle Investment Co., says the dominance of real estate investors in single-family residential development is tied to the bursting of the housing bubble a decade ago.
“In past recessions, what we would see is builders that could not sell their houses would rent them. And then you would have recovery, prices would come back and they could sell them,” Thompson said. “What we’ve seen in this extended downturn is we’ve become a target for the world because we do have people who can get in those, but they really can’t afford a permanent mortgage or they don’t qualify because their credit is not good.”
Multi-family developers and investors are competing against what is being called a “shadow rental inventory.”
“They are not competing necessarily against big apartment complex competitors,” Thompson said. “They are really competing with a hedge fund or an investor from California. It’s everywhere.”
But Lockwood is tracking a 35 percent rise in home sales prices in Frayser over the last five months.
“Credit is still an issue, but it is easing,” he said. “Banks, thanks in part to the regulators, are much more avid to loan in the marginal neighborhoods than they were a year ago. Things have really changed.”
In an effort to combat predatory lending practices that came to the surface during the housing bubble, lenders now face much more disclosure, more paperwork and more regulatory oversight.
“I think there is money available and I think we are seeing credit standards ease a little bit,” Thompson said. “The process has changed with the new banking regulations. I think it’s more the overwhelming factor of what was meant to be transparent in the lending process. We got rid of these predatory lenders. It’s now an overwhelming avalanche of just paperwork and disclosure. … It’s scary.”
That goes for homebuyers as well as the effort to restore value to neighborhoods devastated by the foreclosure crisis.
“I had a call this week from a guy would put $50,000 in a house and he got a $23,000 appraisal. He was crying on the phone. I get it,” Lockwood said. “It is harder to restore value when neighborhoods get knocked down than it is to knock them down.”
Thompson says another enduring impact can be seen in the ranks of homebuilders and the constructions crafts.
“Because of the length of the recession, the homebuilders association has lost half its membership. And we’re not seeing that come back,” he said. “We didn’t slow down in Memphis. We stopped. It wasn’t the normal boom-recession. It was boom-bust.”
Thompson said it is the flip side of selling anything developed at any price.
“It was sort of ridiculous. We all knew it was ridiculous. But we didn’t see it bursting and staying burst for almost a decade,” he said. “What we are seeing now is encouraging, but we still are a third of normal pre-bubble housing starts.”
Building costs are higher and lots are scarce. And the map of school systems as well as attendance zones for specific schools have changed dramatically with more competition among seven public school districts where once there were only two.
“With the school changes, that’s sort of pushed everybody into certain areas where they are developing,” Lockwood said. “So there may be areas that you can develop or there are lots. But they are not in school districts. So there’s a lot of dynamics that are still going on in the market.”