Both institutional as well as individual investors have taken note of the potential of the REO to rental market. But what really is the potential and how long will it last? It is not easy to determine how long this market will continue.
Economist Paul Diggle had recently addressed these questions in a report authored by him in the Capital Economics.
Until now the Capital Economics observed that those who grabbed the opportunity early on have achieved the gross rental yields between eight to twelve percent. This amount is more than enough to recover the price of managing the single family rentals.
It is however important to note that these sufficient rental yields will last only until there are as many discounted properties to purchase.
It was not long ago that the National Association of Realtors had observed that pending home sales had dipped in the month in August. It was also observed that there was shortage of the lower priced inventory in most parts of the country. This was especially prominent in the West.
Statistics of the housing data indicates a decrease in supply of distressed inventory. In fact the Capital Economics had noted that “the potential supply of distressed homes” is considerable. Statistics show that almost 3.8 million owners are deeply delinquent or are already in foreclosure.
It was also noted by the Capital Economics that there are more than 375,000 REOs. Diggle added that the supply in the market has been dipping quite fast, especially in those cities that are being targeted by the numerous investors.
With the days passing by, the prices are also witnessing a rise. RealtyTrac had recently said that there was nearly 6 percent quarterly increase in average price of the foreclosure-related sales.
In Phoenix, where it was reported that prices dipped drastically and are now rising, Capital Economics said that the three-month annualized rise in the prices is presently at 25 percent. In almost a year’s time this rate will lead to the market getting overvalued. With prices rising and distressed inventory shrinking, the research firm noted that most investors will not be interested in acquiring single family homes after a couple of years.
The focus on the two exit strategies will happen only once this interest in this REO to rental market goes down. The two exit strategies would be to spin off the rental portfolio to some property manager or simply selling the property.
Most importantly it will be the Mom and Pop investors who will be providing the bulk of houses to single family rental markets. However there is scope for investors depending on how effectively these institutional investors can acquire single family homes in the coming years.