Is a bubble forming in the rental property market?
- Yes (58%, 120 Votes)
- No (42%, 86 Votes)
Total Voters: 206
As demand for rental properties increases due to falling homeownership rates and the foreclosure waves that are still washing over real estate markets, Fannie Mae and Freddie Mac (Frannie) are using this trend to their financial advantage.
Although known primarily for packaging and selling-off tranches of single family residence (SFR) mortgage-backed bonds (MBBs) to Wall Street, Frannie is now involved in structuring similar securities based on rental properties. The move towards rental property MBBs has allowed Frannie to sell these highly desirable government-backed loans thereby pumping money back into real estate markets.
Frannie sold $13.5 billion dollars worth of securities tied to rental properties in Q1 of 2012, which represents a staggering 81% increase from the same period one year earlier. Held up to a useful measuring stick for just how significant this increase is, Frannie sold a scant $5.2 billion worth of rental property MBB securities in all of 2008.
Landlords and investors are benefiting greatly from reduced loan costs on rental properties, which has led to a boomlet in multifamily unit sales nationwide. Sales of multifamily units in January 2012 came in at $3.8 billion dollars, placing multifamily residential properties at the top of the heap among all types of commercial real estate thus far. Investment goes where the cash flows, and right now Frannie and their old pals on Wall Street are making it happen in the income property market.
first tuesday take
And thus the cycle continues.
Packaging and selling rental property MBB securities seems like a great idea for Frannie. It does, after all, do everything they say it does: cleans up Frannie’s balance sheets, generates low cost loans for investors and builders of multifamily residences and ultimately serves to satisfy the current demand for government-guaranteed loans that Wall Street seems to have no problem churning over right now.
Therein lies the rub — while this setup seems to be a win-win for Frannie and for the real estate market, we mustn’t forget the indispensible middle-man that always wins the most: Wall Street. Investors’ perception of a boom in multifamily housing is first being fueled by Frannie, then by their friends on Wall Street. And we all know how adept Wall Streeters are at “satisfying market demand” for financial products backed by government (read: taxpayer) guarantees.
Let us call this what it is: bubble fueling. When a bubble forms in multifamily housing developments, there is always a tipping point where some builders (or many) are left with a glut of over-supply once the bubble bursts (which it always does).
Market indicators do reveal a genuine need for more affordable housing in the multifamily sector. Rentals are, to an extent, the wave of the future that we have written on extensively. But the market balance is delicate; SFR sales are picking up, foreclosures are abating, although at a snail’s pace, and interest rates are still essentially zero.
What we need in the multifamily market is balance: just enough supply to satisfy demand without overshooting the goal post. With the numbers that Frannie is reporting right now, well, we will just have to wait and see as it is too early to figure the duration.
re: “Multifamily Bonds Surging to Record U.S. As CMBS Fade: Mortgages” from Bloomberg News