A different set of private-equity firms, at the peak of the market, as brokers constantly blame low inventories of single-family houses for sky-high prices.

The first wave came during the housing bust when large private-equity firms acquired tens of thousands of single-family homes out of foreclosure for cents on the dollar. The biggest players have since been sold off to the public as REITs, such as Blackstone’s Invitation Homes which owns about 48,000 rental houses.

Blackstone was the trailblazer in financializing rents. It issued the first rent-backed structured securities in November 2013. This has become a common funding mechanism. And shortly before the Invitation Homes IPO, it obtained Fannie Mae guarantees for $1 billion in rental-home mortgage-backed securities.

This second wave is different. PE firms are paying prices at the peak of the market, amid ceaseless complaints that there isn’t enough inventory of homes for sale, for folks who actually want to live in the homes they buy.

And these are just the biggest players. There are thousands of smaller players. And all but mom-and-pop investors pay cash and then fund the purchases with leverage at the institutional level.

Here’s the new wave of Big Money:

August 22: Amherst Holdings, which bills itself as a “financial services holding company with expertise in the real estate, mortgage and related structured finance markets,” is planning to raise $1 billion to buy single-family homes and rent them out.

The new fund has a term of over 10 years to allow it to stay in this business over the longer term, the sources told Bloomberg. A fund with a shorter term, which are typical, would exit the investments after a few years via an IPO or sale and return funds to investors. This term of over 10 years could also be an indication that the next housing downturn is being figured into the plan, and the duration of the fund is designed to extend past it in order to avoid having to exit at a bad moment.

The fund may be in addition to the $600 million Amherst raised for a single-family rental fund that recently closed after fundraising goals had been reached.

According to its website, Amherst has already raised “more than $2.5 billion” since 2012 to invest in single-family rental homes and related activities. According to Bloomberg, its subsidiary, Main Street Renewal, already operates over 20,000 rental houses.

August 20: Cerberus Capital Management is said to be raising over $500 million to buy single-family rental homes. This fund doesn’t have a term date at all, perhaps for similar reasons as above, such as getting through the next housing bust without having to exit possibly at the worst time.

A subsidiary of Cerberus, FirstKey Homes, already operated 11,000 rental homes at the end of 2017. In February, FirstKey CEO Martin Esteverena said the company wants to build a portfolio of over 40,000 single-family rental homes.

Most recently, Cerberus also bought about 200 homes in Miami-Dade, Broward and Palm Beach in July from Property Investment Advisors Group, a Miami-based PE firm, for $47 million. Property Investment Advisors, incidentally, will use the proceeds to buy multifamily properties.

August 9: Front Yard Residential Corp., a publicly traded REIT (RESI), announced that it acquired HavenBrook Partners LLC and its portfolio of 3,236 homes from PIMCO. These kinds of deals are heavily concentrated in some areas. For example, this deal includes 325 single-family rental homes in Broward County, Florida.

The deal was facilitated by a $509 million loan that Berkadia, a joint venture of Berkshire Hathaway and Jefferies Financial Group, originated and subsequently sold to Freddie Mac, a GSE.

“We’re growing the size of the company… and one of the GSEs gave us the money. That’s a good day,” explained Front Yard CEO George Ellison.

Front Yard was tangled up in the investigation by the New York Department of Financial Services of Ocwen Financial, the largest servicer of subprime loans in the US. At the time, Front Yard was called Altisource Residential. Ocwen’s founder, William Erbey, was also chairman of Altisource. In 2014, Ocwen entered into a consent decree with the New York Department of Financial Services that named Altisource as “related party.” Erbey was forced to resign as chairman of Altisource. As part of the consent decree, Ocwen agreed to pay $100 million in fines and $50 million in restitution.

July 9: Pretium Partners – a PE firm founded in 2012 that now has $10 billion in assets – announced that it had closed its new fund after reaching its fundraising goal of over $1 billion. The new fund will acquire, renovate, and rent high-quality single-family homes. It said that over 5,000 homes have already been acquired by this fund.

A prior fund, which had raised $1.2 billion in 2013, is also in this business. Pretium says it’s the largest private landlord of single-family rental homes in the US, operating over 26,000 homes in15 markets. The largest landlords are publicly traded REITs.

June 28: Tricon Capital Group announced a $2-billion joint venture with the Teacher Retirement System of Texas and Singapore’s sovereign wealth fund, GIC, consisting of $750 million in equity ($250 million from each) and $1.25 billion in leverage, to buy 10,000 to 12,000 single-family rental homes over the next three years, to be managed by Tricon’s American Homes platform.

Bernanke started it.

This big business of buying massive numbers of single-family homes and financializing rents got started in late 2011, initiated and supported by the Federal Reserve as part of its efforts to “heal” the housing market. Then-chairman Ben Bernanke pitched this in various talks. The Atlanta Fed, while lamenting soaring eviction rates at some of the mega-landlords, summarized this beautifully in January 2017:

In unwinding their bank-owned properties, the GSEs [Fannie Mae, Freddy Mac, etc.], U.S. Treasury, and Federal Reserve innovated new structured transactions for disposing of hundreds of thousands of bank-owned homes, also known as real estate owned (REO). The Federal Reserve was the first to suggest that private equity firms were the one group with cash on hand to invest in foreclosed homes (Bernanke, 2012). In 2012, the Federal Housing Finance Agency (FHFA), conservator of the GSEs, issued a pilot to develop structured transactions that could be used to sell its REO homes in bulk. The private market followed by developing and standardizing financial instruments to allow broader market investment in converting foreclosed homes into single-family rentals. Rental housing, traditionally the purview of mom-and-pop landlords, caught the attention of large financial firms.

This Bernanke-triggered first wave of PE firms ended up buying about 350,000 homes, concentrated in a relatively small number of markets. After that wave, activity subsided somewhat. But now the second wave is washing over the housing market, but under entirely different conditions: peak home prices and rising interest rates.

This is how inflection points show up at the subcutaneous level in all housing markets. Read… Anatomy of the Housing-Market Inflection Point in the Bay Area’s Sonoma County: Insider View

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