Foreclosures to Rentals: The $100 Billion Market

Here at RentPost, we’ve been tracking the movement of capital towards rental investments for a long time now. There have been many signs that the rent industry is the next booming sector in real estate (and with some luck, that boom won’t turn into a bubble). But this month, some new insight has come out on just how strong this market can ride. Data tracker CoreLogic released a report that, among other things, points to a $100 billion valuation of the market for foreclosed homes turned into rentals. Yeah, $100 billion. And that’s for this year alone. The market for turning foreclosures into rentals opened up this year when Fannie Mae began marketing foreclosed properties to investors as rental units in February. And this month, the Fed has released guidelines to ease the conversion of properties into rentals. Having those entities support the process has resulted in a confidence shift for many investors. Couple that confidence with the lowest prices for properties we’ve seen in years, and you end up with a flock of soon-to-be landowners ready to sign checks. Hence the $100 billion valuation. A Los Angeles real estate agent recently told the LA Times, “I’ve never seen it like this before…There are so many investors buying right now it’s insane. The top 1% is buying up all the real estate.” That 1% is betting big money that the middle class will become the renting class. It’s taken some years for big banks to get involved, but with the Fed’s recent guidelines, big names like Bank of America and other Wall Street hedge funds have positioned themselves to grab what they can of rental units. BofA in particular is operating in its interest by providing a pilot program for 1,000 homeowners about to foreclose. The troubled mortgages can be eliminated if the borrowers agree to a “deed in lieu of foreclosure” and commit to a rental contract with the bank. BofA can then sell those rental properties to investors. It might seem tough renting out the home you once thought you’d leave to your children. And it is. But the last few years have seen no confidence brewed for fresh homeowners, and banks have finally taken the hint. Instead of waiting for the buyer that will never come, they’re opting to supply a hungry rental market with properties that almost made it. Facing this reality is a smart move for banks. And the new supply of rental units is a relief for a market that’s seeing rents rise all over the country. But it’s tough seeing middle class America go from working hard for themselves, to working hard to pay the rent. Fortunately, actually investing in this market will help the middle class. Rents are high right now because of the enormous quantity of demand for rent units and the low quantity of supply. But with more suppliers in the market, property owners will have to lower rents to compete. That lower rent can be the catalyst for middle class America to start saving again, and hopefully turn those savings into a down payment some years later. That’s the altruistic aspect. But financially, those with money are moving it to the one sector of real estate that has any chance of a positive return. That $100 billion valuation may seem exaggerated, but given the low action happening in homeownership, it looks pretty spot on.