“Rental Bubble” on the way?

Perhaps coincidentally, this article in the New York Times was published the day before the Daily Herald’s article about Round Lake Beach village leadership being concerned by the relative lack of sales of single-family homes to actual homeowners, and more-so to investors:

Wall Street’s New Housing Bonanza: Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world.”

For familiarization with the current markets, here are screen-captures from Zillow.com taken today showing publicly-listed properties for sale and for rent in Round Lake Beach (click images for full-size): 

Jan 2014 Residential Properties for sale (regular and "distressed") in RLB according to Zillow.com

Jan 2014 Residential Properties for sale (regular and “distressed”) in RLB according to Zillow.com

Jan 2014 Residential Rentals in RLB according to Zillow.com

Jan 2014 Residential Rentals in RLB according to Zillow.com

Turns out that there’s a new income opportunity to be had by corporate investors buying-up homes which aren’t moving, packaging them into a type of “bond”, and offering the properties to landlords to rent, repair and manage.

This is very reminiscent of the mortgage-backed securities which caused the recent real-estate bubble (and housing melt-down) from which we are still recovering. A lot of people are looking for investments which will recoup their previous losses, and this could be very tempting to many of them:

“While this securitization market is still in its infancy, a recent Wall Street estimate put potential financing opportunities for the single-family rental industry as high as $1.5 trillion. Already some members of Congress and economists are worried about another credit bubble.”

It is also disturbingly similar to a major part of the economic model in our village, where so much of the commercial/retail property is owned by out-of-town “property management companies”, which then lease units to (mostly) franchisees. At each level, some of the profits end up leaving the village instead of being re-invested here as would be much-more likely to occur with greater local property and business ownership.    

About the potential “landlords”:

“Investment bankers and lawyers are now lining up to finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out.”

You know, it takes a LOT of work, often “hands-on”, to be a good landlord, even with a “small package” of only a few properties. Rentals have been called “money machines”, but the often previously-distressed, gone-through-foreclosure properties which are prime candidates for this scheme often come with unseen problems which can eat up profit.

For Rent

So, in addition to our “absentee business property owners”, if this new model were deployed in RLB, we would also have an increased number of “absentee residential property owners”… all of which would continue to suck money out of the village while not needing to be concerned about the long-term “best interests” of the area residents.

In light of the existing concern about short-term investors-versus-long-term homeowners, we strongly encourage that the RLB Village Staff keep a close watch on this new development to ensure that it doesn’t negatively impact us.  

Just so you know, we are strongly supportive of at least a modest increase in rental properties, since a big factor in the previous housing bubble was WAY too many people trying to be homeowners before they were ready and able to meet the committment.

Our area is economically attractive to those trying to start-up (or start over), and a good supply of responsibly-managed rental properties can attract new families as well as maintaining a needed critical-mass of young professionals (like teachers, police officers, etc.) who still need to save up BEFORE purchasing a home. 

BTW… this new investment model described in the article requires LESS buy-in ability by prospective landlords (only 25% equity instead of the normal 40%)… which could have its own negative ripple-effect by them taking on more than they can handle!

Let’s keep an eye on this one!

Article: “Wall Street’s New Housing Bonanza – New York Times
Article: “Lack of single-family home investment concerns Round Lake Beach officials – Chicago Daily Herald

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