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Hedge funds, equity firms pour money into metro Detroit’s real estate
Posted June 26, 2013
After spending years convincing hedge fund managers and private equity firms in Asia to invest in housing projects in Africa, Ron Mackie, CEO of Right Buy Properties, has now turned his focus on metro Detroit and other metropolitan areas hit hard by the collapse of the housing industry, according to the company's website.
While two attempts to interview Mackie or someone else from his company were not successful, data collected by the website RealtyTrac shows his company has become the industry leader in the bulk buying of single-family homes in metro Detroit.
Right Buy Properties is one of many companies leading global investors to pour money into the U.S. housing market. Hedge funds and other investment firms have been establishing limited liability corporations across the country and buying up swaths of properties, beginning largely in 2010 in the west and southwest and now the east coast. Fitch Ratings, out of New York, estimates that such investors have spent up to $10 billion in the real estate sector.
“Investor behavior has really ramped up across the board,” said Stefan Hilts, a director at Fitch Ratings, in an interview from his New York office.
Statistics collected by RealtyTrac back that claim.
Nationally, investor bulk buying has increased 34 percent in the first quarter of 2013, compared to the first quarter of 2012, according to the website. RealtyTrac defines bulk buying as the purchasing of at least 10 homes within a 12-month period.
Daren Blomquist, RealtyTrac’s vice president, said investors began buying up large chunks of single-family homes in metro areas like Phoenix. Purchases of homes there increased from 1,688 in 2011 to 2,427 in 2012, but they have softened in the last year. As availability there shrank, investors have turned their attention eastward. Largely, Blomquist said, they are focusing on places with a large number of foreclosures, like Detroit, and where the 2010 census showed population growth, like the Southeast.
Investor buying increased 200 percent in Orlando, 232 percent in Atlanta and 121 percent in Miami so far in 2013, when compared to this time last year, according to RealtyTrac data.
In metro Detroit, investor buying increased 47 percent, and Right Buy Properties was at the top of the list of homebuyers. Mackie’s company purchased 209 homes in 2012 and 99 homes as of the first quarter in 2013, according to RealtyTrac.
Some analysts, like Fitch Ratings, are concerned that the increased investment activity has artificially depleted the housing stock and caused housing prices to soar in the last year.
Fitch issued a warning in May that the U.S. residential recovery is outpacing local economies. While Hilts noted several possible factors, including low interest rates and a sudden increase in people entering the housing market, he said that much of it has to do with institutional investors snatching up available houses.
“I think we are in watch-mode,” said Hilts. “We aren’t ready to call it a bubble.”
Blomquist doesn’t foresee investors in the real estate sector causing a second housing crisis. Instead, he said they are bolstering housing prices that, for the last few years, have been stagnant.
“It’s certainly a red flag when you have these investors buying large chunks of the real estate market, but we certainly don’t think it will cause another crisis,” Blomquist said.
Metro Detroit’s housing market an exception
Southeast Michigan has seen house prices jump 20 percent in the last year. Yet, Hilts said, Detroit’s growth is “completely justifiable.”
The difference, he said, is that Detroit’s home values took such a hit dating back to even before the nationwide housing crisis that they are just now reaching sustainable levels.
“In effect, the crash in Detroit was overly extreme, and pushed prices well below their sustainable values,” he said. “With the recent growth we’ve seen, prices seem now to be appropriately valued.”
He said if Detroit’s housing prices continue to grow exponentially, then that will be a different situation.
“If prices continue to grow at their current pace, Detroit will likely start to be flagged for excessive growth,” Hilts said.
It also doesn’t appear that businesses like Right Buy Properties are inflating the housing market here. Unlike most regions that saw an increase in investor activity, the homes that investors are buying here have decreased in value on average by 8 percent since their purchase, according to RealtyTrac data. But Blomquist says that doesn’t matter to the institutional investor.
“It’s going to be pretty easy to get a strong return on your investment by just renting (the houses) out,” he said.
Basically, investors are not interested in buying up properties, sitting on them and selling them when the home appreciates. Blomquist said they may eventually do that, but for right now, they are in it for the monthly cash flow that will come from playing landlord.
“Appreciation is certainly icing on the cake, but that’s not what they are counting on in a market like Detroit,” Blomquist said.
Thanks to the foreclosure crisis that followed the collapse of the housing market, there are millions of families who now have the money to make monthly mortgage-level payments and want to live in a home, but don’t have good enough credit to get a mortgage.
“That’s where the single-family rentals come into play,” Blomquist said.
And that’s where companies like Right Buy Properties step in.
Mackie, in that same online interview, said that his company is seeking out families booted from homes and now searching for a single-family residence to live in again — even if they are just renting.
“Yes, we want to give our investors good returns,” Mackie said, “but also close to our heart is that we would like to help people get back into houses again, and not be humiliated like they have been.”
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