Bloomberg News

Wall Street’s Rental Bet Brings Quandary Housing Poor

August 29, 2013

LaTanya Moore-Newsome, a real estate agent with Century 21 in Atlanta, has been calling Wall Street-backed landlords for months on behalf of her low-income clients with government housing vouchers.

She said some of the area’s biggest homebuyers in the past two years, including Blackstone Group LP (BX:US), American Homes 4 Rent and Silver Bay Realty Trust Corp. (SBY:US), repeatedly told her they had nothing available for tenants who use subsidies under the federal Section 8 assistance plan. Last week, she finally got a positive response from Blackstone’s Invitation Homes unit, which said it would accept applications from her renters.

“It’s a really uphill battle dealing with these investors,” Moore-Newsome said. “You already have to deal with some of the issues with owners not wanting to take Section 8 in nicer areas. Now you have these big companies come into their neighborhoods and they say we’re not renting to you either.”

Private-equity firms, hedge funds and real estate investment trusts have bought more than 100,000 U.S. homes, becoming dominant single-family landlords in markets hardest-hit by the housing crash such as Atlanta. As the companies seek thousands of tenants to fill newly renovated properties, their decision whether to lease to low-income Americans with Section 8 vouchers stands to affect both their profitability and poor residents who have been longtime renters.

Blackstone Inherited

Blackstone -- the largest company in the fledgling industry after spending more than $5 billion to buy 32,000 U.S. homes -- inherited at least 200 Section 8 tenants when it bought a portfolio of Atlanta-area houses in April for about $100 million. That brought the amount of homes occupied by voucher holders to less than 1 percent of its portfolio, the company said at the time.

Invitation Homes, which operates the business, leases to 81 of the almost 17,000 families with vouchers in Atlanta and neighboring DeKalb and Cobb counties, according to data from the three largest Atlanta-area housing authorities.

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“Invitation Homes has a significant number of Section 8 tenants and continues to rent to new Section 8 tenants,” Christine Anderson, a spokeswoman for New York-based Blackstone, said in a statement.

Some institutional landlords, including Waypoint Homes Inc. and Sylvan Road Capital LLC, consider voucher holders a reliable client base because they have a low turnover rate and the government pays most of their rent on a timely basis. Other investors that are building home-rental companies may not want to take on the red tape, stigma of renting to poorer tenants and the potential extra costs, said Christopher Thornberg, principal at research firm Beacon Economics LLC in Los Angeles. They also don’t want to leave their homes vacant for long, he said.

Market Saturation

Private Equity's Instant Rental Empire

“As the markets become more saturated with rentals, you may find these guys going to a Section 8 model -- if they don’t decide to sell -- simply because they don’t want these houses sitting empty,” Thornberg said.

Investors are buying houses for the potential value appreciation as much as the rental cash flow, and may be reluctant to commit to Section 8 tenants because those leases come with long-term constraints that reduce the ability to sell quickly, according to Raphael Bostic, assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development from 2009 to 2012.

“These guys are not really rental people,” said Bostic, a professor of public policy at the University of Southern California. “They’re transaction oriented.”

Dangerous Neighborhoods

Landlord participation in the $18.9 billion HUD program is voluntary, as long as there’s no discrimination against Section 8 tenants based on their race or other protected status. The vouchers assist low-income families, the elderly, and disabled afford housing in the private market, paying landlords at or close to market rates, with tenants contributing 30 percent to 40 percent of adjusted gross income for rent and utilities.

Section 8 voucher holders occupy about 5 percent of the country’s 40 million rental residences, almost double the number in public-housing projects units.

Some single-family rental businesses, such as American Home, avoid purchasing properties in areas where many renters have housing vouchers, according to Chief Executive Officer Aaron Edelheit.

“We steer clear of dangerous neighborhoods,” said Edelheit, whose Atlanta-based company owns about 2,500 rentals in the Southeast. “Our experience in the past has been Section 8 involves lower-quality neighborhoods, higher crime, higher vandalism, higher delinquency and problems.”

Fund Buying

Blackstone, Silver Bay, Thomas Barrack Jr.’s Colony Capital LLC and self-storage billionaire Wayne Hughes’s American Homes 4 Rent (AMH:US) started buying residential properties en masse in the past two years in cities including Phoenix, Las Vegas, and Atlanta. They’ve been seeking to take advantage of U.S. prices that fell as much as 35 percent from the 2006 peak and growing rental demand from some of the more than 7 million Americans that lost their houses to foreclosure.

The U.S. homeownership rate fell to 65 percent this year, its lowest level since 1995, according to Census Bureau data, as fewer people were able to qualify for a mortgage.

Institutional investors bought 24 percent of homes sold in the Atlanta region in the first half of this year, the most of any metro area, and up from 12 percent a year earlier, according to RealtyTrac, an Irvine, California-based data firm. The figure was 25 percent for July.

Prices Soaring

The buying spree has sent prices soaring and rents leveling off. U.S. home asking prices jumped 11 percent in July from a year earlier compared with a 3.9 percent increase in rents, according to San Francisco-based Trulia Inc. (TRLA:US) In Atlanta, asking prices rose 19 percent, while rents climbed 2 percent, the real estate information website reported.

Investors face a shrinking supply of low-cost homes as the number of foreclosures shrinks. There were 49,000 completed foreclosures in July, down 25 percent from a year earlier, according to a report today by CoreLogic Inc.

With a glut of properties to fill, investors that shun some of the 2.2 million Americans with federal vouchers in certain regions risk higher vacancy rates and lower yields, according to Jeff Pintar, CEO of Pintar Investment Co., which has invested more than $1.5 billion in single-family properties.

“If you’re an investor in the markets that have Section 8 housing as a predominant portion of the community and you’re not accepting vouchers, you’ll have a bigger difficulty getting that property leased,” said Pintar, who manages more than 2,500 homes in Southern California, Las Vegas and Atlanta, with about 15 percent occupied by Section 8 tenants.

Finding Homes

As the number of investor-owned homes increases, Atlanta real estate agents such as Moore-Newsome say it’s been harder finding homes for voucher-holding clients.

“The majority of properties my clients are interested in are owned by these big companies,” Moore-Newsome said, adding that these tenants were already living in the neighborhoods investors have flooded, renting some of the same properties that were later purchased as foreclosures.

Moore-Newsome, who also represents market-rate renters and buyers, said she’s called Invitation Homes on a monthly basis since last year to inquire about its properties to rent. Last week -- after Bloomberg News asked Blackstone about its Section 8 policies -- was the first time the firm agreed to accept one of her applications for voucher holders, she said.

Invitation Homes’s policy is to renew Section 8 leases and accept new tenants, according to a person with knowledge of the firm. Any inquiries that were turned away were because of a glitch at the call center level as the company builds out its operations and trains its staff, said the person, who asked not to be named because the practices are private.

‘Don’t Understand’

Nicole Borden, a real estate agent with Coldwell Banker in Atlanta, said she was told this month by representatives from Invitation Homes and American Homes 4 Rent that the companies aren’t offering any of the homes on the market to Section 8 voucher holders.

“This is not homeownership,” Borden said. “I don’t understand how so many people are being turned down from rentals.”

Peter Nelson, chief financial officer of American Homes 4 Rent in Agoura Hills, California, didn’t respond to e-mail and telephone requests for comment. Silver Bay, based in Minnetonka, Minnesota, and Colony declined to comment. The three companies have failed to show a profit while acquiring properties faster than they can fill them with tenants, according to filings.

American Homes

American Homes 4 Rent had leased 56 percent of its 18,326 homes as of June 30, according to an Aug. 20 statement. The company, which reported a $14 million loss for the second quarter, has cut about 15 percent of its workforce this year, a person familiar with the terminations said earlier this month. The company fell 0.1 percent to $15.90 at the close in New York after selling shares for $16 at the end of July.

American Homes 4 Rent avoids renting to voucher holders, said the person, who asked not to be identified because the company’s policies are private.

Silver Bay filled 65 percent of its properties as of June 30, up from 53 percent the previous three months. To qualify for an Atlanta home, tenants must have three times the rent in income, according to the firm’s website, which would likely exclude Section 8 applicants since their vouchers are based on low earnings.

Negative Connotation

The Section 8 program was created under President Richard Nixon to shift support for low-income housing to the private sector after large government projects, such as Chicago’s Cabrini-Green, became hubs for crime and blight, said Susan Popkin, a senior fellow at the Urban Institute in Washington.

“It’s sort of gotten the connotation of poor people of color moving into my neighborhood,” Popkin said. “But the research we’ve done and other people have done is that there’s no evidence they bring crime to a community. There’s no evidence they hurt property values.”

Over the long-term, affordable housing is going to be harder to find as government subsidies fail to keep pace with demand, rents continue to rise and new construction falls behind population growth, according to Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School.

“Relying on the rental market going forward to house working families, this is going to be a challenge,” she said in a telephone interview. “Rents have increased through the recession and vacancies have declined. So it’s unlikely to be a market where rents stabilize or decline long-term.”

Waypoint Homes

One firm that’s welcoming Section 8 tenants is Oakland, California-based Waypoint. About 5 percent of the almost 4,000 houses the firm owns were leased to Section 8 tenants, according to a July regulatory filing. Waypoint has asked the Housing Authority of the County of Los Angeles how it can get approval for “hundreds” of homes in the district, said Emilio Salas, deputy executive director for the agency, which has almost 23,000 vouchers.

Voucher holders are a financially stable base of renters, said Jeff Brock, CEO of Key Property Realty, a real estate investment and management company that he founded in 2001.

Once leases are in place, overseeing the homes can be more labor intensive. Brock has a separate department within his company dedicated to managing the 25 percent of homes with Section 8 renters. The voucher program is administered on the county level, so operators spread across wide areas may have to work with several housing authorities. Georgia has 159 counties, second only to Texas.

“From a purely cash flow circumstance, Section 8 is better than having a market-rate tenant,” Brock said. “Our tenancy is longer, our collections are lower and our delinquencies are fewer. We get paid on time.”

Higher Rents

The median rent for a three-bedroom property in the Atlanta metropolitan area for Section 8 is $1,158 in 24 out of 29 counties -- higher than the single-family median market rent in 83 percent of the region, according to data provider RentRange LLC.

Still, Jean Barner, one of Moore-Newsome’s clients, is among the Atlanta voucher holders having trouble finding a house. She’s seeking a bigger home for her family of seven members to rent next month after getting custody of her 7-year-old grandson.

Barner, 47, obtained Section 8 assistance in 2008, after breast cancer left her unemployed and with more than $50,000 in medical bills. She’s said she’s been turned away by large landlords who told her there’s nothing available for Section 8 tenants.

“A lot of owners with nice houses won’t rent to us,” Barner said. “They won’t even look at us. If half these landlords just give us a chance, they’d have someone to take care of their houses instead of them sitting vacant.”

To contact the reporters on this story: Heather Perlberg in New York at hperlberg@bloomberg.net; John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net


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Companies Mentioned

  • BX
    (Blackstone Group LP/The)
    • $32.88 USD
    • -0.12
    • -0.36%
  • SBY
    (Silver Bay Realty Trust Corp)
    • $16.31 USD
    • 0.13
    • 0.8%
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