Just when people thought we were safe from creative financing applied to bonds backed by homes, a new improved approach is about to surface. The past year has seen an increase in buying homes for rent by private equity funds and others. The private equity buyers are funded by their fund investors, much the same way private equity investments in corporate businesses are funded. As noted in the New York Times yesterday, American Homes 4 Rent, a publicly traded real estate investment trust is planning a bond issue to raise funds to purchase homes for rent. The company went public last summer and has a market value of about $3 billion. If this bond issue proves successful, and is followed by further issues from other companies looking to enter the home purchase-to-rent business, this could accelerate a shift towards renting from buying.
The growth in buy-to-rent may raise some risks to the economy. If a large buy-to-rent firm fell on hard times or if housing prices in an area with significant rental activity were to drop, the owner of rental homes might be tempted to dump the houses on the market putting huge downward pressure on prices, and the local economy. Such a move might mean falling prices and the specter of default for rent-to-buy bonds. At present the extent of rent-to-buy is modest and the risk of a major economic reversal from a collapse in the rental housing market is limited.
Separately the Census Bureau reported today that the home ownership rate for the fourth quarter of 2013 was 65.2%, a bit below the figure of 65.4% at the end of 2012.