Thursday, June 11, 2015

Why the Housing Market is About to Get 'Way Shittier

This announcement from Cerberus Capital Management really caught my eye. The gazillion-dollar private equity firm, named after the three-headed dog guarding the entrance to Hades in Greek mythology, is buying up 4,200 single-family homes, pretty much in the Midwest. In this play, they're joining other private equity firms, such as Blackstone Group, who bought tens of thousands of homes at deep discounts. The difference for Cerberus is that theirs is a long-term scheme for rentals, unlike the others, who did it for a value investment.

And then, let's not forget other big players such as Invitation Homes, who just announced a whopping $1.2 billion mortgage securitization backed by its rental homes. Investors can, in effect, buy shares and receive interest checks backed by the homes' renters. And did I say it received a AAA rating from Morningstar and Kroy Bond Rating Agency?

What could possibly go wrong?

At the same time, CNBC and others are reporting a coming default on home equity loans (HELOC). Most HELOCs are written for 10-tear terms, so those that funded 10 years ago in 2005 are now coming due, with those written later coming due soon. In other words, borrowers took out the loans near the end of the housing boom but before the big bust, either as the back end of a piggyback loan or as a straightforward equity loan.

Will they be renewed? I don't know, but I do know that many, many homes are either still underwater or have very thin equity, according to Realtytrac and other sources. That being the case, I doubt many or these HELOCs will be renewed. Maybe that's what the hedge funds are looking at.

The scenario could negatively impact housing in a couple of ways. First, if the loans come due and the borrowers walk, there's a good chance their homes will be snapped up pre- or post-foreclosure, not just by Cerberus and Blackstone and their ilk, but by other investors for cash, effectively keeping them off the market for first-time and traditional buyers. Home purchase, thy name is bidding war.

Second, while we love gasping why Millennials won't buy and Baby Boomers won't sell, the Gen X'rs are the ones who need attention. They bought their homes during the go-go days with piggyback and other goosey-ish Alt-A loan products, only to see their home values tank. A not-insignificant number of Boomers own HELOCs coming due, but Gen X is the most impacted.

Even if these borrowers somehow avoid foreclosure, and I hope they do, they won't be buying or selling very much. If they do, cash buyers are first in line.