The effects of catastrophic events can often linger indefinitely. The word “foreclosure” is an example. A cool five years after the real estate bubble burst, that word is now (and perhaps forever will be) a regular part of most people’s lexicons. We should be comforted that the pain from that catastrophe is waning. Foreclosure numbers are finally beginning to stabilize after things peaked in 2009. According to Realtytrac, there were almost 2 million US foreclosures in 2011, which was down 31 percent from 2010.
But despite the recent compression of foreclosure activity, we might not be out of the woods. It is predicted that as many as 10 million borrowers may default over the next few years in a new windfall of foreclosure activity. The unfortunate result of this is a collective deterioration of creditworthiness among potential homeowners. This is problematic because this newly created foreclosure backlog will not clear at a reasonable pace. Edward Robinson discusses this in a recent article in Bloomberg by saying, “[e]ven though mortgage rates are hovering at a historic low of 3.8 percent, consumers bought only 324,000 new homes last year, the poorest annual performance since 1963.”
So far, we have seen a number of different public and private solutions to help clear the lingering foreclosure inventory. Among them have been strategies proffered from the Obama Administration. Generally, the most interesting of these strategies have been those that double as investment theses for savvy real estate investors. Earlier this year we saw Warren Buffett take to the news and suggest that if he had a means to accomplish the goal, he would acquire single family homes and hold onto them given that their mortgages would be a short on the dollar. In other words, given the historically low rates of mortgages, an investor would take one out and have the option to refinance it should mortgage rates dip or simply hold onto it should mortgages increase.
There are two distinct trends emerging. First, we are seeing more institutions enter a playing field that was once dominated by mom and pop entities. “Until last year, single-family-home rentals was a mom and pop market,” says Stephen Duffy, an investment banker at Moss- Adams Capital LLC, an Irvine, California-based firm that finances real-estate investments. “Now, it’s grabbed the attention of institutional private equity because foreclosures haven’t cleared and these properties can generate high yields for years.”
Second, we are seeing a greater immersion of technology with real estate amidst these parties, as they seek to make smarter decisions in this faster-paced world of distressed residential investing. Robinson elucidates this point in his article by discussing a real estate private equity entity called Waypoint. “Waypoint uses a combination of its own proprietary algorithms and business software from San Francisco-based Salesforce.com Inc. (CRM) to turn potential acquisitions into rentals.”
In light of these two trends, we here at Kwelia are excited to be developing downstream applications for these parties such as our forthcoming revenue management product Kwelia RM. The institutional players are already comfortable with using the software to help them make smarter decisions regarding things like pricing and lease terms. However, the mom and pops of the world may not be quite so keen to such software because it has never been available anyone of their ilk. The technology is there and the competition is heating up. Given these two forces, the future will undoubtedly demonstrate a greater reliance on products such as revenue management. These foreclosure battlegrounds should be an interesting test.