las vegas - reuters - 5-6-2013

7/30/2019 Las Vegas - Reuters - 5-6-2013

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SPECIAL REPORT 1

By MATThEw GOLdSTEInLAS VEGAS, MAy 2 , 2013

Cheap money bankrollsWall Streets housing bet

Istitutioal ivestors are sappig up omes i

battere markets like Vegas, causig some to

ar o a e bubble i te makig

LAS VEGAS


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SPECIAL REPORT 2

Las Vegas Cheap money bankroLLs WaLL streets bet on housing

Michael Marchillo, a plumber,

has been trying and ailing or

months to buy a bigger home orhis amily here in Sin City. He was pre-

qualied by a bank or a $130,000 mort-

gage, which a year ago would have landed

a typical three-bedroom home in the area.

No more. Now, the 36-year-old says, its

hard to compete with greedy investors

who come to the table ush with cash or

quick deals.

Marchillo is on to something. Te once-

beleaguered Las Vegas housing market has

been on re since investment rms led by

Blackstone Group LP Colony Capital and

American Homes 4 Rent began buying

homes here some eight months ago, backed

by $8 billion in investor cash to spend

nationally.

Tese big investors and a handul o oth-

ers have bought at least 55,000 single-am-

ily homes across the U.S. in the past year. In

the Vegas area alone, they have accounted

or at least 10 percent o the homes sold

since January 2012, according to a Reuters

analysis o housing transactions.Tat added repower helps explain why

home prices in this metropolitan area o

2 million people are up 30 percent over a

year ago, ar more than the national aver-

age o 10 percent. Permits or new home

construction are up 50 percent, twice the

national average.

Local real-estate broker Fae Moore

says private-equity rms and hedge unds

have largely crowded out local buyers like

Marchillo. Tats because the investment

rms have broadened beyond their initialocus - buying homes at oreclosure auc-

tions. Now, they are also bidding or homes

listed by private owners and banks. In a sign

o how reely the money is owing, Moore

notes around 60 percent o all sales are in

cash these days.

Fellow broker rish Nash says she has

seen cases where a home gets listed and

quickly draws a dozen bids, many in cash.

Realtors are talking about a mini-bubble

orming here.

Tere is an articial appreciation in our

market, says Nash. I know (the big inves-

tors) say they arent going to be ippers, but

or them it is all about the bottom line.

BLOWING BUBBLES

Las Vegas would seem a highly unlikely lo-

cale or a new housing bubble. Tere are at

least 20,000 homes in some stage o ore-

closure, and the jobless rate hovers near 10percent, some two points above the U.S.

average. A healthy housing market depends

on people having good-paying jobs so they

can accumulate down payments and -

nance their mortgages.

But the surge here has another origin:

the Federal Reserves continuing push to

buttress growth in the wake o the 2008nancial crisis, itsel the product o the

bursting o a much larger housing bubble.

Te central bank is pumping the econo-

my ull o cash by buying assets such as U.S.

government bonds and mortgage securities.

Added demand or those assets is pushing

their prices up, and hence their yields down.

Tats encouraging people to put cheap

credit to work at riskier activities that can

spur growth - or instance, buying shares

in new companies, investing in oil wells or

renovating houses.Prodding investors urther out on the

so-called risk curve is part o what the

monetary mandarins had in mind. But in

treating the consequences o the last bub-

ble, the Fed is now spawning new, smaller

manias like the Vegas rental rush.

Why Vegas in particular? Te market

tantalized investors because the crash was

so deep here. Even ater the recent bounce,

LAnd RUSh: Real-estate aget Fafe Moore, let, sas wall Street is croig out local ome

buers. REUTERS/STEvE MaRcUS

I tik its a little late to start

ivestig i sigle-amil omes

because some o tese larger

frms are price iiscrimiate.PhilipBarach

presiet a co-ouer o doubleLie Capital

UnEASy MOnEy


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SPECIAL REPORT 3


prices today are 56 percent below where

they were beore the bust. Te thought was

that any recovery would mean easy money.

Te dry climate makes or lower mainte-nance costs, too. Similar logic applied to

other beaten-down sunbelt cities.

Not everyone is a believer. Te Vegas

housing market has only rmed because o

speculators, said Jason Ader, a New York

money manager and ormer Wall Street

casino analyst who invested in oreclosed

homes in Phoenix a year ago but bypassed

Vegas. Vegas is only doing well or now

beause o the greater-ool theory - the be-

lie that even i an investment is iy, you

can sell it at a gain to someone else. Tat

kind o thinking is typical o bubbles.

Cracks are showing in Vegas and be-

yond. Here, rents on single-amily homes

were down an average o 1.9 percent in

March rom a year ago. In other regions

targeted by institutional buyers, such as

Phoenix, Southern Caliornia, Atlanta and

Florida, rents are either alling or at, ac-

cording to online real estate service rulia.

Its also taking longer than planned

or institutional buyers to hire contrac-tors, renovate the acquired homes and get

them rented out. Industry insiders estimate

that roughly hal o the more than 55,000

homes acquired by institutions over the

past year in the U.S. have yet to be rented.

Te combination o rising acquisition

costs, prolonged rental lead times and declin-

ing rental income is disrupting the spread-

sheet analysis behind Wall Streets bet. Tat

could pose problems or what once seemed

like a slam dunk. It could also give pause to

stock-market investors as some players listtheir shares. American Homes 4 Rent, based

in Malibu, Cali., has said it expects to le

soon or an initial public oering.

I think its a little late to start investing in

single-amily homes, because some o these

larger rms are price-indiscriminate, and

pushing prices up, says Philip Barach, presi-

dent and co-ounder o DoubleLine Capital,

a xed-income mutual-und rm with $56

billion under management. DoubleLine re-

viewed the oreclosed-home trade a year ago

but passed on it. In some markets, Barachsays, they are the only bidders.

TO FLIP OR NOT TO FLIP

What excited Wall Street in late 2011 was the

prospect o getting homes at 30 to 40 percent

discounts, using a combination o investor

dollars and cheap nancing made possible by

the Feds easy-money policies. Te gross an-

nual rental return envisioned on a $100,000

home ranged rom 14 percent to 27 percent,

depending on the mix o investor dollars and

cheap nancing. Tat didnt include expectedannual returns as high as 10 percent rom the

appreciation in home values.

Tose projected returns are eye-popping,

considering that the yield on the 10-year

reasury bond is 1.70 percent and big inves-

tors can borrow at between 3 and 4 percent.

Te calculus: With millions o

Americans coming out o the housing crisis

Rolling the dice on homes in VegasWith speculators moving into the Las Vegas market to buy-up distressed properties,

there are now more homes being rented each month than sold.

0

1,000

2,000

3,000

'132012

SOLD RENTED

Purchase prices have soared, but rents remain weak in the Vegas area.

Sources: Greater Las Vegas Association of Realtors; Trulia

10

0

10

20%

A2012 2013

M J J A S O N D J F M

SALE PRICE

RENTAL PRICE

Text continues on page 5


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SPECIAL REPORT 4


Source: Clark County Assessors Office

See the interactive: http://link.reuters.com/rut67t
http://link.reuters.com/rav77thttp://link.reuters.com/rav77thttp://link.reuters.com/rav77t


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SPECIAL REPORT 5


unable to get a mortgage because o dented

credit histories, renting would be the only op-

tion. In a ew years, ater repairing their credit

scores, many o those renters would be buyers.

Tat was then. Now, some investors are

exiting the market, scaling back or dialing

down expectations.Early last year, Oaktree Capital

Management agreed to provide up to $450

million in equity to real estate investment rm

Carrington Capital Management or its ore-

closed-home acquisition program. Carrington

was projecting an internal rate o return o 25

percent over a three-year period or its porto-

lio o single-amily homes in several cities, ac-

cording to a marketing document.

Oaktree is now reluctant to commit

more money to the trade ater souring on

the buy-to-rent strategy, said people amil-iar with the rms. Oaktree saw returns on

rents compress and no longer is comort-

able with Carringtons initial heady yield

projections, they said.

In October, hedge und Och-Zi Capital

Management Group cited a narrowing in

rental income or its decision to put its book

o 300 homes in Northern Caliornia up or

sale a process it has just about completed.

Te math or investors is looking very di-

erent, said Jed Kolko, rulias chie economist.

Vegas home prices are up 30 percent

over the past year, with the median home

now selling or $161,000, according to the

Greater Las Vegas Association o Realtors.

Much o that appreciation has come sinceJune, when the institutional buyers began

to make their presence known.

Blackstone, which entered the Vegas

market in November, has bought over 400

homes at oreclosure auctions, rom banks

and private listings. Nationally, the private

equity rm has bought over 24,000 homes.

It is using a combination o $3 billion in

investor dollars and a $2.1 billion line o

credit arranged by Deutsche Bank.

In Vegas, Blackstone is making up or

a slow start. Local realtors Moore andNash said theyve begun getting calls rom

Blackstone, asking them to contact the rm

i pending sales all through. Colony is buy-

ing some newly built homes because o the

limited supply o oreclosed homes.

Representatives or Blackstone and

Colony said they are not daunted by the

slump in rents or delays in readying units or

tenants in the hal-dozen markets they are

largely buying in. Te rms said they arent

buying oreclosed homes to ip them and

are committed to building out subsidiaries

that manage and rent single-amily houses.

Tis is more o a marathon than a

sprint, said Paul Fuhrman, chie invest-

ment ofcer o Colonys single-amilyhome subsidiary, which has acquired more

than 8,000 homes.

Marcus Ridgway, the new chie op-

erating ofcer o Blackstones Invitation

Homes subsidiary, said his rms strategy

doesnt rest on the perormance o one sin-

gle market, and can rely on other markets

to balance returns.

American Homes, which has bought at

least 14,000 homes nationally, did not re-

spond to requests or comment.

Te Vegas market has unsteady legs.Statistics compiled by the University o

Nevada at Las Vegas show some 40,000

homes are largely vacant - 8 percent o the

metropolitan areas single-amily housing

stock. Housing research rm Realtyrac

estimates there are 20,000 single-amily

homes in the metro area either owned by a

bank or in some stage o oreclosure.

Some 52 percent o all homeowners still

wEAK FOUndATIOn: A sig outsie a vacat

ome i nort Las Vegas i April.

REUTERS/STEvE MaRcUS

Te most rustratig part o

all tis is o ome prices keep

goig up a up, et ou ave so

ma empt omes.KathrynKayChapman(left)

Las Vegas resiet


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LAs VegAs CheAp money bAnkRoLLs WALL sTReeTs beT on housing

SPECIAL REPORT 6

FOR MORE INFORMATION

MatthewGoldstein,WallStreet

InvestigationsEditor

[email protected]

MichaelWilliams,GlobalEnterpriseEditor

[email protected]

owe more on their mortgages than their

residences are worth, more than any other

state, according to CoreLogic. Its even

worse in some neighborhoods. An analy-sis by Realtyrac or Reuters ound that

in about hal o the zip codes in the Vegas

metropolitan area, at least 70 percent o

homeowners not in oreclosure were under

water on their mortgages.

Economists say with unemployment in

Nevada at 9.7 percent, theres not much real

growth underpinning the surge in home

prices and new construction.

A big source o the buying is the big

guys. Between them, Blackstone, Colony,

American Homes and a joint venture in-

volving Apollo Global Management and

Haven Realty Capital have acquired more

than 1,500 homes in Las Vegas. A hal-

dozen smaller investment rms are also

buying homes.

Much o the buying is in a crescent that

begins in North Las Vegas and runs along

the citys western and southern edges. Tis

is where some o the newest homes have

been built and where price appreciation has

tended to be greatest, realty records show.With Vegas largely dependent on gam-

bling, tourism and conventions or growth

- discretionary spending that tends to re-

cover last its unclear whether the city

can support broader buying.

Betting on home appreciation is not a

sure thing, said Yale University economics

proessor Robert Shiller, one o the design-

ers o the S&P Case-Shiller Index, which

tracks housing sales and prices. Right now

we have the Fed with a massive subsidy to

the housing market, but you cant have ahousing recovery without a jobs recovery.

CASINOS AND SCORPIONS

Its not all gloom. Gambling revenues are

up over last year. Boosters point to the re-

cent acquisition o the long-stalled Echelon

casino and resort complex one o several

unnished eyesores on the Las Vegas Strip

by a Malaysian gaming company or

$350 million. Many also are banking on

a plan by ony Hsieh, ounder o Zappos,

to move the online shoe retailer rom the

nearby town o Henderson, Nev., to down-

town Vegas and pour in some $350 millionto create a tech incubator.

Another selling point: Te city has a

young housing stock, and so properties re-

quire ewer renovation dollars than homes

in most other battered markets. Vacant

homes tend to are better in a desert climate

such as Nevadas, too - though some inves-

tors say scorpions nesting in empty homes

are a problem. And since most homes have

rock gardens rather than lawns, landscap-

ing costs are low.

In homes that dont need major surgery,institutional buyers are spending between

$10,000 and $15,000 on kitchen applianc-

es, granite countertops, carpets and a paint

job. In markets with older homes, renova-

tions can cost $25,000.

One spot the institutional buyers are

targeting is Enterprise, an unincorporated

town in Clark County. With a popula-

tion o 108,000, Enterprise, ormed only

in 1996, has lots o new homes. In 2000,

the town had just 15,000 residents. So ar,big investors have bought more than 150

houses there, according to county property

records, in many cases buying several places

on the same street.

Kathryn Kay Chapman, a 47-year-old

project manager, rents a two-bedroom

house here with her boyriend and has been

looking to purchase a place nearby. Neither

can qualiy or a loan because o tarnished

credit histories, so they decided to buy at a

oreclosure auction.

Te couple scraped together enough

cash to make a bid on a three-bedroom

home theyve been eyeing. Teir sweet spot:

between $120,000 and $140,000.

On April 22, the house came on the

block at one o the auctions held each day

in the parking lot o the Nevada Legal

News, a ew blocks rom the Strip. Te bid-

ding began at $97,200. But the couple had

made a beginners mistake: Teir cashiers

check was ound to be improperly drawn

and they couldnt participate.It likely wouldnt have made a dierence.

Te place sold or $155,000, above their

limit. Chapman says they may try again,

though she suspects theyll be outgunned.

We know there is a minute chance we get

anything, she says. Te most rustrating part

o all this is how home prices keep going up

and up, yet you have so many empty homes.

Edited by Michael Williams

FOR SALE: wit tousas o omes i te area

vacat, ke boxes like tis oe are a commo

sigt. REUTERS/STEvE MaRcUS

las vegas - reuters - 5-6-2013

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