In a recently announced program, the Federal Housing Finance Agency, which regulates the quasi-government lenders Fannie Mae and Freddie Mac, is offering qualified investors the opportunity to buy pools of foreclosed homes, provided they agree to rent the properties for a certain number of years.
In its pilot run, the foreclosure-to-rental initiative aims to shift some of the burden of managing foreclosed and vacant homes from Fannie Mae to private investors, who'll be tasked with maintaining the properties. Freddie Mac and FHA loans may be considered at a later stage of the program.
By mandating that the properties be used as rentals, the program seeks to lower rents where foreclosures have hiked up demand and to stabilize communities in the hardest-hit areas. As neighbors of foreclosure's victims know too well, vacant homes drag down prices and attract all manner of blight. Home prices nationwide have fallen 33 percent since the height of the bubble in 2006, according to the Federal Reserve.
Along with corporations, investment trusts and banks, individual investors can also get in on the action, as long as they're worth at least $1 million (though the actual barrier to entry may be higher). See the pre-qualification form here.
But even for the largest and savviest investors, the mortgage giants' first major foray into the foreclosure-to-rental space could prove too costly.
Donna Robinson, an Atlanta-based real estate investor and consultant, expects the foreclosure pools to range anywhere from 500 to 1,000 properties -- anything smaller, she said, wouldn't be worth bundling. Fannie and Freddie owned about 180,000 homes at the end of September, The Wall Street Journal reported. Add in FHA-owned homes, and the number rises to 215,000. Even at 1,000 homes apiece, it would take more than 200 mega-investors to work their way through the current backlog.
If the pools are as large as Robinson anticipates, then distance is the investor's biggest enemy. While real estate investment trusts (REITs) may be comfortable in managing several hundred-unit commercial properties, operating 500 single-family residential homes (defined as up to four-unit properties) spread out across a city -- or even nationwide -- is an entirely different story.
Local compliance issues and getting properties up to snuff across a large market will take time. Investors could spend upward of a year waiting for clearance to rent their properties while carrying the day-to-day costs of maintenance, insurance and taxes, Robinson said.
Yet with risk comes reward, and Robinson expects investors to get steep discounts on their purchases. "No pro is going to pay anything above 30 to 40 cents on the dollar, tops," she said.
In the Works
With the initiative still in its infancy, much can change before the program rolls out. One way Fannie might avoid having to make huge price concessions to investors is to offer them a stake in the pools while keeping a share of the returns, suggests Nick Timiraos at The Wall Street Journal.
But whichever route the FHFA ultimately chooses, the program's success remains tethered to several larger housing factors, said Celia Chen, an economist for Moody's Analytics Inc.
Even though foreclosures will pick up in the early part of the year, home prices should start to stabilize toward the end of the year as part of the $25 billion mortgage settlement is used toward principal reduction, she said. The REO-to-rental program will take a while to kick into gear, and could benefit as a result.
But some analysts are less hopeful about the program. A report by Goldman Sachs suggests the effort will have "positive but modest" effects, with maybe a 0.5 percent increase in home prices within the first year, and a 1 percent increase in the second -– but that's a best-case scenario, the report states.
Scope is also a factor in the program's success. There are at least four times as many properties still in some stage of foreclosure as there are in the REO inventory, according to a January report from the Fed.
Correction: A previous version of this article said that Fannie Mae and Freddie Mac reportedly owned about 180,000 homes at the end of September, and that Freddie Mac-owned homes increased that number to 215,000. It is FHA-owned homes that increase that number to 215,000.
Top Five Real Estate Markets to Watch in 2012
Foreclosure Fire Sale: Will Bulk 'REO to Rental' Program Fly?
Total population (2010): 1,130,490 Median sales price (Q3 2011): $224,300 % ch. median sales price (Q3 2010-Q3 2011): 7.3% Sales volume (# units sold Nov. 2010-Oct. 2011): 12,156 % ch. sales volume (Nov. 2010-Oct. 2011 vs. Nov. 2009-Oct. 2010): -39.8% Sales per population (Nov. 2010-Oct. 2011): 1 sale per 93 people Unemployment rate (Nov. 2011): 7.8% Foreclosure activity rate (Nov. 2011): 1 in 1,295 units Walk Score: 40
Despite a steep drop in sales, the Raleigh-Cary market saw considerable price appreciation last year, with its median sales price for single-family homes jumping 7.3 percent from third-quarter 2010 to third-quarter 2011.
At $224,300, the Raleigh-Cary metro had the highest median sales price among the 10 markets on this list and was the only market with a median sales price above the U.S. median. Nonetheless, its affordability rate stayed above the national level, with 73.6 percent of its homes affordable to households earning the area's median income, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.
Total population (2010): 623,061 Median sales price (Q3 2011): $120,900 % ch. median sales price (Q3 2010-Q3 2011): 5.5% Sales volume (# units sold Nov. 2010-Oct. 2011): 9,002 % ch. sales volume (Nov. 2010-Oct. 2011 vs. Nov. 2009-Oct. 2010): -10.8% Sales per population (Nov. 2010-Oct. 2011): 1 sale per 69 people Unemployment rate (Nov. 2011): 7.1% Foreclosure activity rate (Nov. 2011): 1 in 958 units Walk Score: 41
Like Raleigh-Cary and other markets on this list, home prices in the Wichita metro area weathered the housing downturn comparatively unscathed.
"Inventory has been up and sales have slowed, but values have been relatively unaffected," said Mike Grbic, associate broker and owner of Mike Grbic Real Estate Experts -- Select Homes in Wichita.
The Wichita metro's median sales price rose 5.5 percent from third-quarter 2010 to third-quarter 2011, to $120,900. For 2011 as a whole, the city of Wichita posted one of the top 10 year-over-year median sales price hikes nationwide, up 17.2 percent, according to a chart provided for this report by Onboard Informatics.
Total population (2010): 1,054,323 Median sales price (Q3 2011): $123,400 % ch. median sales price (Q3 2010-Q3 2011): 1.4% Sales volume (# units sold Nov. 2010-Oct. 2011): 11,240 % ch. sales volume (Nov. 2010-Oct. 2011 vs. Nov. 2009-Oct. 2010): -18.6% Sales per population (Nov. 2010-Oct. 2011): 1 sale per 94 people Unemployment rate (Nov. 2011): 6.9% Foreclosure activity rate (Nov. 2011): 1 in 4,001 units Walk Score: 63
The Rochester metro area had a 6.9 percent jobless rate in November, compared to an 8.2 percent rate nationwide. The area has seen employment grow 2.8 percent since its fourth-quarter 2009 trough, while employment in the nation as a whole has risen 1.3 percent during that time.
The metro has one of the top 20 fastest job growth rates nationwide, according to Brookings.
Of 100 major metro areas, Rochester is one of only 22 to have regained more than half of the jobs lost between its pre-recession high and post-recession low, the think tank said.
While Rochester has long been associated with the Eastman Kodak Co., the area's economic performance no longer depends on the declining fortunes of that company.
Total population (2010): 569,633 Median sales price (Q3 2011): $157,900 % ch. median sales price (Q3 2010-Q3 2011): 0.8% Sales volume (# units sold Nov. 2010-Oct. 2011): 7,448 % ch. sales volume (Nov. 2010-Oct. 2011 vs. Nov. 2009-Oct. 2010): -25.4% Sales per population (Nov. 2010-Oct. 2011): 1 sale per 76 people Unemployment rate (Nov. 2011): 5.3% Foreclosure activity rate (Nov. 2011): 1 in 863 units Walk Score: 48
The Des Moines-West Des Moines metro area had a 5.3 percent unemployment rate in November -- among the lowest rates in the country. Moody's predicts the area will see a further 2 percent jump in jobs from third-quarter 2011 to third-quarter 2012.
"Strong Midwestern values, a highly educated and productive workforce, and the culmination of many years of cooperation between civic, corporate and government make the greater Des Moines area an attractive city to call home (and an) oasis of prosperity," said Brian Wentz, an agent at Burnett Realty in Clive, a suburb of Des Moines.
"That has attracted and retained top employers and led to many years of sustained growth, with no end in sight."
Total population (2010): 528,143 Median sales price (Q3 2011): $128,700 % ch. median sales price (Q3 2010-Q3 2011): 7.3% Sales volume (# units sold Nov. 2010-Oct. 2011): 6,109 % ch. sales volume (Nov. 2010-Oct. 2011 vs. Nov. 2009-Oct. 2010): -18% Sales per population (Nov. 2010-Oct. 2011): 1 sale per 86 people Unemployment rate (Nov. 2011): 7.5% Foreclosure activity rate (Nov. 2011): 1 in 973 units Walk Score: 37
Located between Nashville, Tenn., and Atlanta, the Chattanooga metro area enjoys a low unemployment rate, high affordability, and the highest rate of out-of-state in-migration among the 10 markets.
The area's median sales price rose 7.3 percent in the year through third-quarter 2011, to $128,700. The vast majority of homes in the area, 81.3 percent, were affordable to median-income households during that quarter.
"One of Chattanooga's largest resident communities, (which) historically had enjoyed 3 to 3.7 percent on an average differential between list and sales price ... increased (to a) 4 to 4.9 percent differential from 2010 to 2011," said Linda Brock, an affiliate broker at Prudential RealtyCenter.com in Chattanooga.