The 'big money' is flocking to real estate...
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We wish the citizens of the Big Apple – and all affected areas – good luck. And we get on with the subject of making money... in a sector that was previously deep underwater just a few years ago...
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"This is the kind of thing that happens every once in a while... and we're loading the boat."
That's what Stephen Schwartzman, chairman and CEO of private-equity firm The Blackstone Group (BX), just said about his company's latest real-estate investments. The Blackstone Group has $165 billion under management. The firm has already invested $42.9 billion in real estate... but now Blackstone is "loading the boat."
Bloomberg financial news service reports private-equity firms like Blackstone, Colony Capital, Starwood Capital, and Waypoint Real Estate Group are all piling into "a new class of real estate investment" – single-family homes.
Private-equity firms have raised $8 billion to purchase up to 80,000 distressed single-family homes and manage them as rental properties. Blackstone is buying $100 million of houses every week. Waypoint plans to spend $1.5 billion by the end of next year. Colony Capital has acquired 5,500 homes since April and plans to hold 20,000 by the end of 2013.
Colony's founder, Tom Barrack, knows a little something about the distressed property market... In the early 1990s, he created one of the first real estate investment trusts (REITs) focused on multifamily dwellings (apartments, condos, etc.). In 1990, the entire REIT sector had a combined market value of $5.6 billion, the Bloomberg article noted. Today, multifamily trusts alone are a $71 billion industry. Colony manages $25 billion in assets. Barrack is considered one of the best real estate investors on the planet. He says, "You want to know how [single-family] is going to do, look at the multifamily REIT situation."
Private-equity firms like Blackstone and Colony Capital understand two important fundamentals about the single-family housing market. First, U.S. banks have repossessed 4.5 million single-family homes since the real-estate bust began in 2007. Of this number, 1.8 million aren't yet listed for sale.
Add to that, some 6.6 million current owners are still expected to default in the coming years. This will allow private-equity firms to acquire huge numbers of single-family homes at steep discounts to their replacement costs.
Second, these private-equity firms know the Federal Reserve plans to keep interest rates at historic lows through at least mid-2015. This has allowed them to snatch up properties for cash now, then refinance at low rates in the future, to boost their returns. Colony's single-family investments are producing net rental yields of 7%-8%. As the firms refinance more houses in their portfolios, these yields will extend well into the double digits.
Regular Digest readers shouldn't be surprised to learn the private-equity firms' "playbook." For several years now, Steve Sjuggerud has urged readers to invest in real estate. He's done everything but go to readers' homes and force them to buy. Steve put it this way in the March 2011 issue of True Wealth…
Now is the best time in American history to buy a house.
Home prices have crashed more than at any time in our lifetimes. And mortgage rates recently hit all-time lows. Houses are more affordable than ever.
Things are getting Less Bad. The recession is over. Housing starts bottomed, and the supply of new homes on the market peaked. Homebuilders like Toll Brothers are "back to growing," and my home inspector friend is "swamped" with business.
If you can buy a house, now is the time – the best time in history. While prices may not soar immediately, I believe we're seeing the lows RIGHT NOW.
Readers who have taken Steve up have been able to get great deals on investment properties. They've also made huge gains in homebuilders and other real estate plays.
As for folks looking to buy now, if you happen to live in one of the markets where these private-equity firms are buying – places like Arizona, California, Colorado, Florida, Georgia, Nevada, and Texas – you have little chance of competing with them. Most people buy property using conventional (bank) financing. This makes for a "clunky" closing process that can take several weeks, as all the financing and other details are secured. Deals often break down during this process, and the seller must put the property back on the market to try again.
Cash buyers, on the other hand, can close on a deal within days. They inspect, cut the owner a check, transfer the title, and it's done. Banks that hold unproductive assets (like foreclosed properties) on their books want to liquidate them as soon as possible. Who do you think the banks would rather sell to... the "iffy" small-time buyer or the cash-flush private-equity juggernaut?
This may be a case where the old adage rings true: "If you can't beat 'em, join 'em." One of Steve's favorite mortgage REITs – Two Harbors (TWO) – is spinning off a new subsidiary along the lines of the private-equity model. Here's what he wrote about it in the October issue of True Wealth...
TWO is taking advantage of the best investment deal around right now... U.S. residential housing. Here's what company president and CEO Thomas Siering said during a recent conference call:
"Two Harbors has invested approximately $150 million in its portfolio of single-family residential properties of roughly 1,370 homes. We continue to acquire properties in Arizona, California, Florida, Georgia, and Nevada, and have recently expanded our target markets to include North Carolina."
Subscribers who bought TWO when Steve first recommended it are up 36% in a little more than a year. Steve sees similar opportunities in publicly traded real estate stocks. He's so excited about this opportunity, he created a new resource that evaluates the high rental income opportunities in America. The website shows you how you can profit alongside the private-equity REIT players, instead of trying to compete against them. To watch a video Steve recorded to describe the details of this one-of-a-kind resource, click here.
For real-estate investors, the data continue to pile up in their favor...
CNN Money reports foreclosure filings dropped in 62% of the nation's 212 largest cities during the third quarter of this year. During September, foreclosure activity dropped below September 2007 levels in 58% of the major U.S. markets. Out of every 10,000 homes, 5.7 went into foreclosure. This is down from a high of around 10.3 homes out of 10,000 in late 2010. While the foreclosure number has come down, it is still about three times higher than the pre-bubble norm.
The National Association of Home Builders reports the Remodeling Market Index rose to 50 in the third quarter of 2012. This is up from 45 in the second quarter of the year. A score above 50 indicates more remodelers increased business over the previous quarter than those who saw business slow down. In the subset of owner-occupied housing, remodeling is surging even more. Third-quarter numbers ranged between 55 and 60.
The American Institute of Architects (AIA) reports billings at U.S. architecture firms increased at the fastest pace since late 2010. Architecture billings are a leading economic indicator of construction activity. Actual construction spending occurs nine to 12 months after billings. The AIA report also notes the multifamily-residential sector has been the best-performing segment of the construction field.
Finally, real estate mega-site Zillow just released its third-quarter housing report. It claims 72% of U.S. housing markets have already hit a bottom.
It goes on to say almost all the remaining markets that have not yet bottomed will do so by the end of 2013. Out of the 310 metropolitan areas Zillow surveys for home statistics, 50% have experienced annual home value increases. But here's what's even more telling... 67% of these areas saw an increase in rents. Rents increased an average of 6% over one year ago. You can see the bottoming process and the slight uptick in the chart below...
Again, if you'd like to secure a steady stream of income from the housing recovery, we encourage you to become familiar with Steve's exhaustive research on the situation. We guarantee, it's unlike anything available in the industry. You can learn more about how to check it out, totally risk-free, right here.
New 52-week highs (as of 10/29/2012): Markets were closed due to Hurricane Sandy.
In today's mailbag… one subscriber describes his personal path to education, and another chimes in on "sociopaths" in government. Send your e-mail to feedback@stansberryresearch.com.
"Seems the topic on the 20-something year old was a big one this month. I must say that your Oct. 19 S&A Digest comment was just about right in my own opinion. I believe as you said that wealth to people comes in many forms depending on what you consider as wealth. For myself, wealth is knowledge, family, health, travel, and life experiences much of which you mentioned. If I truly had it set in my mind to become a millionaire, I am sure I would figure out how to accomplish that as most great millionaires have, by trial and error with sometime a lot of error.
"I joined the Marine Infantry at 18 in 2005 to help fight in a war I knew little about. My only thoughts at the time were that my countrymen were fighting and dying, and what was I doing with my life? I had never enjoyed school and can say I still do not enjoy college. Both to me are more of a social gathering than a place of education, not to mention a money pit in my opinion. In High School, I worked a lot during the afternoons and nights in a grocery store called Food Lion for my junior and senior year. Which, let's be honest, was not exactly an epic challenge to what I was getting ready for.
"Four and a half years later with three deployments to OIF/OEF, I left the Marines with my Honorable Discharge because by then I figured out the politics behind my involvement and, of course, the many 'smart' college graduates who became officers that lead Non-Commissioned Officers (NCOs), such as myself, into combat. Which I may offend some, but those men were idiots. They can type, sure thing; push the paperwork, good to go. However, leave the fighting and common sense to us dumb grunts, if that makes any sense. I saw more lives at risk and lives lost to things that could have been prevented.
"Sorry, so I left in 2010. Moved to Colorado and started my college through my 9/11 GI BILL. Finally, a great opportunity for all my hard work. No reason for me not to go to college with a free ride basically right? Wrong. I did nine months of it. Switched majors from Construction Management to Criminal Justice in that time because I am lost in the sauce as to what I want to be still.
"Then comes a birdie to my ear. Whispers to me Private Contracting. The pay is amazing and training starts soon. I was never so worried going through training in my life Porter. Passing this and getting downrange would open many doors for me. And it has.
"So much I knew I needed to start educating myself about money. The only thing I wish I could have learned more about from my folks. What is money? What really can you do with it once you have it besides turning around and spending it? I picked up Rich Dad, Poor Dad the first one. Easy read for a dumb grunt. Then, I read Dave Ramsey's Total Money Makeover. Not that I needed a total money makeover. As a matter of fact I am quite good at saving money and not going into debt. I personally don't like owing people money. People owe me money. Something I never really thought being a serious issue until reading Dave Ramsey's book. Then it all makes sense.
"Least I not forget. You Porter. Since 2010 I followed your S&A Digest. I became a Flex Alliance member last year. An have been getting schooled by all your great Publishers since, like Frank Curzio, Dan Ferris, an Doc to name but a few. I am trying to educate myself now about money. So when this contracting work ends, which it will one day I am sure. I can go back to college and figure out my next moves.
"I have been fortunate to travel this year. For 30 days I spent in Ireland, Scotland, and Munich, Germany. Wish I would have met you in the Hippodrom tent Porter!! Unfortunately, I never stepped foot in that tent. I know I am blessed to have gone as far as I have in life without injury or death, but I know too that I have chosen each step I have taken. I have sacrificed my time with family. People back in my old town are all married at my age, many with kids. And I feel alone sometimes. However, I am a positive guy, and I know there is no rush in anything. So long as I am able to travel when I want to meet amazing new people as I did this year, then all else is but a brief thought. For all good things come to those who wait. And also to those who can think ahead. To fight and risk all for what you want in life.
"I'm going to steal this here Doc. Here's to our Health, Wealth, and Happiness." – Paid-up subscriber Gilmore
"I enjoyed Mr. Casey's article part one but he is way off base in part two by not specifically naming Obama as one of America's political elite sociopaths. How could he bash Republicans and Republican presidents without also naming Obama?
"Obama has vastly increased the police state over America's citizens while pushing an open borders policy for everyone else, he drops drone bombs on sovereign countries throughout the world, he works from an overseas 'kill list' without the right to a trial even for American citizens, he allows true evil to spread throughout the Middle East in the of form of Islamo-fascist terrorism-supporting leaders like Eqypt's Morsi, he has presided over the largest debt and deficits the world has ever seen, he runs the dollar printing press 24/7, and he has badly mismanaged the economy and 'recovery' in general.
"I could go on and on but the really true evil in the world is humanity's inability to call out someone like Obama for what he is: a narcissistic, know-it-all, above-it-all, self-important Ivy League asshole, political elite sociopath.
"Mr. Casey is also dead wrong when he trivializes the threat of a nuclear Iranian state. I honestly can't think of anything more dangerous than Islamist fascists with a nuclear weapon – one bomb and millions killed in seconds – something that took Hitler years to accomplish." – Paid-up subscriber Greg T.
Regards,
Brian Hunt
Delray Beach, Florida
October 30, 2012