Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group LP flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.
Monthly payments for properties in Phoenix rose 1.3% in February from a year earlier, compared with a 25% jump in for-sale asking prices, according to Trulia Inc., which operates an online listing service. In Atlanta, asking prices climbed 14% as single-family rents gained 0.5%, and in Las Vegas rents dropped 1.7% even as asking prices soared 18%.
While private-equity firms are helping real estate values recover from the worst slump since the 1930s by cutting the supply of foreclosures for sale, they’re also crowding the market with rentals. Leases for U.S. apartments rose 3.9% in February from a year earlier, more than quadruple the 0.9% increase for single-family homes, Trulia said.
“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”
Blackstone, based in New York and the world’s largest private-equity firm, has spent more than $3.5 billion to buy 20,000 single-family rentals, while Tom Barrack’s Santa Monica, Calif.-based Colony Capital LLC has raised $2.2 billion. They rushed to buy houses after prices fell by a third from their July 2006 peak as more families opted to rent after failing to qualify for a mortgage or deciding not to own.
“Prices have increased off a very low base, and it’s growing increasingly competitive, but we are still finding opportunities to buy,” Devin Peterson, a Blackstone real estate associate overseeing the company’s housing initiative said in a telephone interview from New York. “We recognized that prices were moving faster than people expected. We’d rather be a few weeks behind in completing a rental process than missing out on a few points in home price appreciation.”
The firm last week expanded a credit line led by Deutsche Bank AG to $2.1 billion from $600 million to buy homes.
While large funds accounted for a small fraction of the almost 5 million homes sold last year, their buying spree had an impact on the market, said Kirk McGary, chief executive officer of Real Property Management, a Layton, Utah-based rental company whose franchises in 85 metropolitan areas manage more than $5 billion of single-family homes.
“The institutional people have definitely changed the game,” McGary said in a telephone interview.
Investors flocked to Phoenix after home prices plunged 56% from their June 2006 peak to a September 2011 low, according to the S&P/Case-Shiller index of home values. Last year, Phoenix rose the most in the 20-city index, making it harder for investors to find bargains then profit from renting.
Prices paid by the largest buyers probably rose more than the broader market because they’re competing to buy similar homes—typically three-bedroom houses built since 1990, said Oliver Chang, co-founder and managing director of Sylvan Road Capital LLC, an Atlanta-based single-family rental investor.
“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.
The median purchase price for a single-family home in Phoenix jumped 35% to $163,000 in January from a year earlier, according to a March 8 report by Center for Real Estate Theory at Arizona State University’s W.P. Carey School of Business. Median rents on a per-square-foot basis, meanwhile, dropped 3% in February from a year earlier after climbing 1.5% in the 12 months through February 2012 and 3% a year earlier, according to Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency in Phoenix.
Investors seeking deals in other cities also face shrinking yields after a jump in prices. Atlanta resale prices climbed 9.9 percent in the 12 months through December, the city’s biggest gain in Case-Shiller data going back to 1991, and Las Vegas prices jumped 13%.