One market indicator I frequently use – as subjective as it might be – is the level of media attention given an asset class. I'm particularly interested in an asset class's “entertainment value.”
Residential real estate has been resurrected to capture viewers and sell ad time on cable television. A number of shows, across various outlets, are predicated on a repetitive theme: buy a house, rehab it and then flip it for big bucks. Drama is injected through personality conflicts, surmountable setbacks and unanticipated windfalls.
The message? Big money can be made on the quick for anyone willing to enter the real estate game.
My media indicator is a sign that the unsophisticated neophyte wants to keep the momentum going, for the unsophisticated neophyte is also the marginal buyer. He’s the last man to enter the game, which is why the popularity of these shows frequently correlates with market tops.
Of course, media attention isn't the only indicator the residential real estate market is effervescing.
In the good ole days – say 2010 and before – the single-family residential rental market was the domain of small partnerships and the ambitious individual. But today, institutional investors have crashed the party in a big way.
Blackstone Group (NSYE: BX) has spent $4.5 billion to acquire 26,000 single-family homes. American Homes 4 Rent, the brainchild of Public Storage (NYSE: PSA) founder B. Wayne Hughes, has spent $2.5 billion to amass 14,000 single-family homes. Both firms are buying and rehabbing to rent.
This institutional-investor money has helped re-inflate home prices in many metropolises – most notably Phoenix, San Francisco and Las Vegas.
A few institutional investors are keen to share their good fortune with you and me (though a cynic might view it as an attempt to cash out at a top). Blackstone is publicly traded, and American Homes 4 Rent hopes to be, having recently filed for a $1.25-billion initial public offering (IPO).
That said, American Homes faces a contentious reception. Colony American Homes, a REIT focused on leasing single-family homes and managed by Colony Capital, postponed an IPO, citing poor market conditions. Carrington, an early entrant to the REO-to-rental market that's backed by OakTree Capital (NYSE: OAK), also recently withdrew an IPO.
As for those that have floated, response has been tepid. American Residential Properties Inc. (NYSE: ARPI) - a REIT that renovates, leases and manages single-family properties – persevered and went public last month. But ARPI shares are down 7% from the offer price.
As for the multi-family rental market, apartment REITs have been one of the more popular investment classes. But popularity leads to lower yield: Post Properties (NYSE: PPS) – 2.1% yield; Essex Property Trust (NYSE: ESS) - 3.1% yield; AvalonBay Communities (NYSE: AVB) - 3.2% yield. For many of these REITs, risk no longer jibes with reward.
(At the other end of the yield spectrum reside mortgage REITs, but don't get suckered by the high yield. We explained a couple months ago why mortgage REITS are riskier than many investors think.)
Rent growth also gives reason to pause.
Axiometrics – an apartment data and research firm – reports rent growth slowed to a 3.1% rate in April, the slowest pace of the past 32 months. Falling rent growth is nothing new, though. Axiometrics reports rent growth has been moderating since July 2011.
Rising property prices coupled with falling rent growth is hardly a recipe for real-estate investing success. Unfortunately, any fallout in the investment market won't be contained to investors. Innocents are at risk as well.
In many markets, investors are involved in up to 30% of residential real estate transactions, thus helping to elevate home prices – rental and owner-occupied alike. If the latter buys into an unsustainable trend, he could find himself underwater a few years later should investors start exiting en masse if the numbers no longer work.
It's dangerous to assume the numbers will always work. Och-Ziff Capital Management (NYSE: OZM) – one of the original institutional entrants in the single-family rental business – recently exited the business, noting that rental income was "less than expected."
So if you are a denizen of reality cable television, watch for the entertainment, not for the investment ideas. And if you are treading into the equities market to invest in residential real estate, tread carefully, especially in the newer offerings.
After all, institutions don't float new issues to benefit you and me. They float them to benefit themselves. Our financial success, if there is any, is secondary.