In a previous article, the 2011 4th quarter Case-Schiller Housing Price Index pointed out that Atlanta, Georgia was the weakest housing market in the nation, with overall price erosion of 11.7% from October of 2010 to October of 2011.
Now, a new “white paper” from the Federal Reserve, dated January 4, 2012 has also cited data that helps explain the inherent weakness in the Atlanta housing market. This paper is entitled “The U.S. Housing Market: Current Conditions and Policy Considerations“
As a life long Atlanta native, I’ve spent the past 16 years working in the Atlanta housing market. But even I found some of the data in this report to be surprising. During the housing boom, Atlanta enjoyed one of the fastest growing housing markets in the U.S. But today, it appears that the proverbial chickens have come home to roost.
According to this report on the current state of the housing market, Atlanta has approximately 5,000 REO properties that are owned by either Fannie, Freddie or FHA. I was surprised to learn that this number is almost double that of any other major U.S. city, including even Detroit, Phoenix and Los Angeles, who each have around 2,000 to 3,000 agency-owned REO properties. As such, the report points out that Atlanta, GA is a prime candidate for a conversion program to turn those REO properties into rentals. The objective would be to cause rent rates to fall, while perhaps helping home prices increase or at least stabilize, for owner-occupant purchases.
While 5,000 properties may not seem like a whole lot for a big city like Atlanta, it does represent an economy of scale that the Federal Reserve is looking for in terms of adding enough rental properties to the local economy to reduce rental rates.
Atlanta also has one of the largest investor populations of any major city, boasting 4 major investor clubs near the city, and several major investor clubs in the outlying metro counties. I doubt investors would be excited to find that 5,000 or more properties could be converted to rental. This is especially true if they are concentrated within the relatively small confines of the city of Atlanta. Rent rates are not exactly shooting through the roof, and rental demand is not really all that strong, in spite of recent media reports to the contrary.
A quick check of the Atlanta Housing Authority website, www.AHA.org indicates that there are 943 rental properties currently listed as available for rent. A quick scan down the list shows that quite a few were listed months ago. This is in keeping with my older file data from several years back, that shows that during the housing boom, Atlanta’s investor population took the Atlanta housing market from what was once a tight rental market in the late 1990’s to an over-abundance of rental properties in the couple of years prior to the housing melt-down. In fact, there is a very plausible argument to be made for the idea that investor foreclosures led the first wave in Atlanta, beginning around 2007, before the general housing market collapse in 2008-09.
In short, any decision to proceed with adding existing REO inventory to the Atlanta rental property market would definitely push rental prices lower, even as property taxes and insurance costs are on the increase, making it even more difficult to cash flow these properties than it already is. Investors in the Atlanta market should be mindful of these developments. It could put some serious downward pressure on net cash flows in the Atlanta rental property market, especially in those areas hardest hit by foreclosures.
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