Published March 18, 2008

Landlords look for bargains in US housing market

Rental market looking up as mortgage rates rise

(LOMBARD, Illinois) The US housing crisis and credit crunch may end the American dream of property ownership for millions of people, but for landlords seeking bargain investment properties the market is looking up.

'There will be a lot of product hitting the street in the coming months and it should be pretty cheap,' said Mike Bacza, watching the bidding at a foreclosure auction last month in this western suburb of Chicago. 'This year I expect I'll buy at least two multi-family units in a decent neighbourhood.' The 48-year-old union carpenter is not ready to purchase today, but observes from the back of a large crowded conference hall where hundreds of people - most of them investors - are looking to snap up one of some 170 foreclosed homes.

'I'm on a reconnaissance mission,' Bacza said, jotting down bids. 'I want to know what's selling and for how much.' Building contractor Chad Blankenbaker seeks foreclosed homes to 'flip' - buying at well below market value, refitting then selling them at a hefty profit. 'I'm shocked at how low the prices are here,' he said. 'There's so much inventory that no one has to fight to buy anything.' Around the country the housing crisis represents both a business opportunity for landlords and a huge shift in the rental market.

During the property boom, mortgage rates were low and people could buy a home with little or no money down, so there was no incentive for many Americans to rent.

'The US rental market was nearly flat between 2000 and 2005,' said Ken Fears, an economist at the National Association of Realtors. 'Some landlords were so desperate to get tenants that we saw cases where they would offer three months free rent and other promotions to fill vacancies.'

'Now mortgage rates have risen and it's harder to gain access to credit, allowing landlords to jack up rents for the first time in years,' he added.

What is good news for small-time landlords, however, may not be good for publicly traded US real estate investment trusts as the extra supply is expected to push prices down.

Some real estate analysts also worry that many landlords will turn their units into government-subsidised rental housing and stifle the rebirth of some US inner city areas.

For many people, the housing market is all bad news now. The Mortgage Bankers Association (MBA) said on March 6 that in the fourth quarter of 2007 a record 0.83 per cent of US home loans entered the foreclosure process. The US mortgage delinquency rate of 5.82 per cent was the highest since 1985, the MBA said. Officials added that they didn't expect foreclosures to peak until mid to late 2008.

Dave Webb at Texas-based firm Hudson & Marshall, which held the auction in Lombard on behalf of lenders, said he expects business will be brisk all year, nationwide.

'Last year we sold 7,000 units, in '08 we should sell 15,000,' he said. 'If we had the capacity we could do 40,000.' Even markets like Chicago, which has not experienced the same boom-and-bust intensity of states like Florida or California, have seen many foreclosed homes hit the market.

According to real estate data company RealtyTrac, Chicago was the 30th ranked US city for the percentage of homes with foreclosure filings in 2007. In absolute terms, its 73,469 filings put it in fourth place.

Auctions are often the last resort for lenders to offload foreclosed properties they could not sell using real estate agents. At the Lombard auction, most prices were around 60 per cent to 70 per cent off the list price - itself well below market value. Projection screens showed photos of properties boarded up in inner city areas, but there were also many higher-end houses in wealthy suburbs.

'There's no emotion here,' said real estate agent Greg Fisher, looking around the conference hall. 'These investors know what to bid, what it will cost to get these properties into reasonable shape and what to sell or rent them for.' The lack of easy credit following the credit crunch means that there will be no shortage of renters in most markets.

'The housing crisis has removed the ability of people to get out of the rental market and onto the property ladder,' said Van Johnson, president of the Georgia Association of Realtors. John Vranas of Vranas & Chioros Realty Group, which owns rental properties throughout the Chicago area, said the 'rental market has been firming since the first quarter of last year'.

'We're now seeing normal vacancy rates of 3 per cent to 5 per cent compared with double digits during the property boom.'

BMO Capital Markets analyst Rich Anderson said he expects that 'an unprecedented flow of rental properties hitting the market could be a negative for multi-family Reits over the next few years'.

He said the influx of properties could especially be a 'thorn in the side' for Reits like Apartment Investment and Management Co and Camden Property Trust with exposure to hard-hit areas like Florida, Texas or California. -- Reuters