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May 14 2013

“The Big Long”: Betting on the Housing Market

Kellogg Real Estate Students and Alumni gather at Wieboldt Hall for the Sixth Annual Distinguished Alumni Panel

By Benjamin Engleman '13, Daryl Quick '13

On February 13, the latest Kellogg Real Estate program Distinguished Alumni Panel was held at Wieboldt Hall to discuss the rebounding single-family residential market and various methods by which the investment world is taking long positions in the recovery.

The panel was moderated by Adam Metz ’90, Senior Advisor at TPG Capital and former Chief Executive at General Growth Properties. Metz was joined by:

Tucker McDermott ’08, Co-Founder of Fay Financial. McDermott described Fay Financial as a firm comprised of former mortgage professionals focused on special-servicing arbitrage opportunities that capitalize on a market inefficiency or inability to maximize the value of distressed single-family homes.

Steve Peterson ’94, Partner at AHP Capital Management. At AHP, Peterson is using private capital in consensual strategies to reorganize loan terms and keep people in their homes. AHP works with homeowners to determine their financial means and realistic goals and then focuses on mutually agreeable solutions including principal write-downs and payment reductions. Begun as American Home Preservation, a nonprofit organization which attempted to negotiate workouts with lenders, AHP now operates as a for-profit investment fund purchasing the nonperforming notes outright.

Dan Rosenbloom ’02, Managing Director at GEM Capital. Mr. Rosenbloom co‐manages GEM’s public‐private debt research platform and leads distressed debt acquisition efforts for GEM Realty Properties.

Mike Travalini ’09, Director of Business Development at Waypoint Homes. Waypoint Homes, founded in 2008, owns and operates approximately 3000 former REO, single-family rental homes in 7 U.S. markets. Mr. Travalini focuses on the expansion of Waypoint’s unique platform into new market and direct portfolio acquisition opportunities. After acquisition, Waypoint renovates the homes and leases them to residents with innovative programs that facilitate a path to future home-ownership for those that desire it.

Mr. Metz opened with a summary of compelling data points in the housing market, noting that housing demand should continue to outpace construction for three to four years with jobs to new homes at a historic two to one ratio, apartment rents rising faster than inflationary rates, and the single renter business generating 6-7% yields unlevered. He made cautionary comments, however, about the long-term direction of Fannie Mae and Freddie Mac and the political future of the mortgage interest tax deduction.

Mr. Peterson also spoke in measured optimism. He stated that the amount of talk about the housing recovery, itself, was a sign of “frothiness.” He also commented that, for the most part, banks have been meeting their mortgage portfolio needs by focusing on the most affluent and well-credited borrowers and asserted that the real, sustainable, housing recovery would occur when mortgage credit returns to the middle class.

Mr. McDermott echoed this sentiment and explained that there has been no need in recent years to “lend below a 660 credit score” with “plenty of demand in the super-prime market.” He added that there are plenty of qualified buyers in the “580-660 range” and expects to see subprime lending return at some level in the short term.

Mr. Rosenbloom talked about housing within the context of an “early recovery”. He explained that few of the multi-family properties in the GEM portfolio were believed to be losing tenants to home ownership. In assessing the housing market, he proposed that a very telling indicator is the ratio of homes being bought by investors to those being bought by individuals, which is improving but not where he’d like to see it. He highlighted the influence of institutional investors buying portfolios of thousands of homes as income assets, what he termed “macro bets” on the housing economy.

A discussion then followed on the economics and operational realities of single-family home rental. Mr. Travalini explained that approximately 13 million single family homes are operated as rental properties today of the 40 million rentals units nationally, primarily by individual owners that own between 1-3 properties. Because this transformation has been fueled by availability of distressed properties, single-family rental inventory is generally scattered and it is difficult to target geographies. The key, going forward, will be a permanent shift to more professional management and scaled, automated property management functions from the cottage industry that largely exists today. Waypoint sees long-term growth potential in the asset class driven by demographics in addition to present capital market circumstances, citing a decline in home-ownership interest by young adults and an increased demand for mobility in the labor markets.

Following the panel discussion, a networking event was held in the reception area of Wieboldt Hall.

About the Author

This article was written by Benjamin Engleman '13, Daryl Quick '13.