One Corp Owns Over 83,000 Homes. Rents Are Skyrocketing. What’s Next?
Will half the country eventually lose the ability to buy a home and end up living in houses rented from huge investment companies?
In the column below I pointed out that the feedback effect will always wreck an unbalanced system. Unbalanced, spinning spheres turn into pears.
If Unchecked The Feedback Effect Always Turns An Economic Anarchist Society Into A Plutocracy
The feedback effect always drives unbalanced systems to the extremes, never to the middle. Unless checked, the rich…
This column is about the feedback effect and the residential housing market.
In the 1990s the economic anarchists (libertarians) lobbied the government to deregulate Wall Street. To be perhaps more accurate, the Wall Street people desperately wanted looser rules that would allow them to sell more risky new products and people with large amounts of money and who were unwilling to accept bank interest desperately wanted new products to buy.
Both used the economic anarchists’ theory that everything would be wonderful if we only didn’t have those pesky government regulations to prevent clever people from becoming even richer.
In 1999 Congress repealed the 1933 Glass–Steagall Act.
When senators like Elizabeth Warren argued for more regulation of the securities market, economic anarchists such as Alan Greenspan claimed that such regulation was unnecessary because rational people will always act in their own intelligent and informed best interest and therefore they will not engage in economically risky conduct.
The Congress agreed and rejected calls for more regulation.
The Crash Of 2008
One of the results was the weaponization/bubbilization of below-market-rate mortgage-investment pyramids and eventually the mid-to-late 2008 financial meltdown.
How The Meltdown Could Have Been Avoided
This is a digression. Skip it if you want.
Now, this financial implosion could have been resolved without millions of foreclosures and the attendant economic devastation through the creation of a new section in the bankruptcy code which would have allowed anyone who’s home was “under water” to file a 1 page petition with the bankruptcy court.
If granted, the relief would have been in the form of a bankruptcy court order requiring the lender to reduce the interest rate to two times the Federal Reserve discount rate for the next five years and to recalculate the monthly payments at that rate under a thirty-year amortization schedule.
At the end of the five years the rate would automatically be modified to match the then-prevailing rate according to a specified index with the proviso that the debtor would have four months after advance notice of the rate adjustment to re-finance or pay off the loan without a prepayment penalty.
If this had been done, the newly-calculated monthly payment would have been less than what it would have cost the homeowner to rent alternative living space so s/he would have stayed in the house and made continuing mortgage payments and property taxes and kept the property in good repair.
There would have been almost no defaults and almost no foreclosures. By the time the five years had passed the market would have recovered and the value of the properties would have risen to levels above the mortgage balance.
The banks would have gotten 100% of their money back plus some interest, though at a lower rate.
The Solution Was Philosophically Unacceptable To Wall Street
The digression continues here.
But to the Wall Street insiders in both the Bush and Obama administrations — Henry Paulson, Larry Summers, Tim Geithner — the idea that the government would pass a law preventing a secured lender from foreclosing on its security and instead forcing it to accept a lower interest rate was an anathema, no less horrifying than asking a bunch of evangelical Christians to endorse cocaine-fueled wife-swapping parties.
So, instead, over six million homes were lost in foreclosure AND the lenders lost much of their principal as well. So much for Greenspan’s idea that people act rationally in their own best interest.
Instead, Wall Street demonstrated a lot of the “I’d rather kill myself that do that” thinking or, more accurately, nonthinking, so the banks took a bath, and over six million people lost their homes.
One Man’s Crash Is Another Man’s Opportunity
Anyway, while the housing market was crashing other Wall Street people, who had lots of cash and were in search of a bargain, saw this as an opportunity to cheaply buy up those foreclosed homes.
These buyers knew that the people who lost their homes still needed a place to live. If you could buy a house that used to have a $400,000 mortgage for $150,000 you could profitably rent it at a price that was a fraction of the previous mortgage payment, and all those people who used to own those homes and who still needed a place to live would be happy to pay the rent. DUH!
The Rush To Buy Single Family Residences
As of early 2022, Invitation Homes, Inc., the largest home owner in the U.S., owned approximately 83,000 single-family residences.
As of June 2021 over 24% of all single-family homes sold were purchased by investors, up from about 18½% of home sales purchased by investors in the previous year.
On a daily basis in the SF-Bay Area, we see TV ads from at least three companies promising to “buy your house as-is for cash immediately. No broker’s fees. No closing costs. No required repairs.”
The Increasing Demand For Single Family Residences As An Investment Asset
In the real estate trade the word “velocity” means how fast properties sell. In 2000, on average 21% of homes sold in the first 30 days. In January and February of 2021 the velocity had more than doubled to 50% of homes selling in the first thirty days.
If I had access to the velocity figures for the first seven days I would guess that the velocity in the first seven days went from less than 10% in 2000 to over 35% in 2021.
We’re almost to where the feedback effect comes in.
The Effect On Purchase Prices & Rents
The Fictional Community Of Sunnydale
Let’s start with a fictional community, Sunnydale, that has 100,000 single family residences that are all owner-occupied. There is a normal amount of sales when people move, families get bigger or smaller, there are divorces or financial problem, etc. Let’s say that there’s an average of 2,000 home sales per year.
Now Blackstone or Invitation Homes or one or more smaller investment funds with a hundreds of millions dollars they need to do something with, or all of them, target Sunnydale. They make offers on every house that comes on the market. Of course they don’t buy every house because their initial all-cash, no-fees, no-repairs offer is a bit under the asking price, but they still manage to buy half the properties, 1,000 homes.
Now there were buyers out there for all the 2,000 homes, but, of course, some of them expected and needed to pay a bit below the asking price or needed a long closing to complete their loan apps or wanted repair contingencies in their contracts. Those 1,000 people lost out to the investors and were unable to buy a house.
The 2,000 individual buyers competed against each other for the remaining 1,000 homes, driving the price up. Over the next year the investors continued to make cash offers and they bought 1,000 of the next 2,000 homes that come on the market, driving the prices even higher.
After a few years the investors had managed to acquire 15% of the homes in Sunnydale and they owned almost 100% of all the rental homes in Sunnydale.
Prices Are Up & Rents Are Up
So, here’s where we get into the feedback effect.
When we had 100,000 owner-occupied homes, on average each year 2,000 owners, 2%, would opt to sell their house. Now we have 85,000 owner-occupied homes, so, on average we would expect only 1,700 homes instead of 2,000 to come on the market.
But now, the competition from the investors has raised prices so much that many of the existing home owners who might have sold in order to buy a bigger house or to be closer to work or family are no longer willing to sell because the price of a replacement house is much higher than they want to pay.
“If I sell this house another house will cost me so much more for so much less and my property taxes will go up, so I have to stay where I am” they say. Now there are 500 fewer homes for sale than in previous years.
So, now, instead of an annual turnover of 2% of 100,000 owner-occupied homes, the inventory has declined to 1,200 houses. If only half of these are purchased by investors that means that a market where previously every year 2,000 people bought 2,000 homes, we now we have 1,500 people (2,000 minus the 500 who are staying put) trying to buy the 600 homes the investors didn’t get.
Here’s the feedback effect at work.
Each year the number of owner-occupied homes declines which decreases the quantity of homes offered for sale. Each year the price competition for the smaller number of homes put on sale drives prices higher and also discourages some existing owners from selling.
The higher prices increase the value of the investors’ properties.
On paper, the investors’ homes are worth a lot more money. They can tap this value by refinancing their mortgages and pulling cash out which cash they can use to buy even more homes. Just like playing Monopoly.
If I can borrow $250,000 at 3½ % and use it as a down payment on a $500,000 house whose value will increase 10%/year then I’ve lost $8,750 in interest and gained $50,000 in appreciation. I would be an idiot NOT to refinance my existing inventory and use that money to fund buying more inventory, right?
All those people who couldn’t buy a home have to live someplace so they’re renting the investors’ homes, driving up demand for rental housing. Of course, as the paper value of the houses rises and the refinanced mortgage payments increase, the investors increase the rent.
As the pool of owner-occupied homes decreases the number of rental units not owned by investors also decreases, thus reducing supply of non-investor rental properties which gives the investors greater bargaining power, allowing them to further increase rents.
If investors kept the rents at a commercially reasonable level, if they didn’t get greedy, you might have a stable situation where a much smaller number of people could afford to buy a house, where a material percentage of houses were owned by investors, and where many people lived in houses rented from investors.
If Only Landlords Didn’t Get Greedy
The trick would be to keep the system stable and the key to that would be not pushing rents beyond the point of reasonable affordability, to stabilize the rents, give the tenants a break. But that’s not possible for humans who’s only goal is more money.
Corporations are run by people whose sole motivation is more More MORE. Landlords will always push rents to the absolute short-term maximum which is always higher than the long-term maximum. And you’ve got to keep the rents high to cover the increased loan payments and higher property taxes.
That’s an unstable system and the feedback effect always drives unstable systems away from the middle and toward the extremes.
The profit motive drives the unstable housing market to an unstable extreme of high prices/rents, and
The fear motive drives the unstable housing market to the unstable extreme of low prices/rents.
The Feedback Effect Keeps Driving Prices & Rents Up
- Investors drive up the price of homes for sale –>
- Unsuccessful buyers drive up the cost to rent a home –>
- Higher purchase and rental prices increase the value of homes –>
- Higher home values fund refinanced larger mortgages –>
- Higher mortgages –>
- Higher rents –>
- Higher home values –>
- More investor home-purchase competition –>
- More unsatisfied buyers who have to rent a home –>
- Higher rents –>
- More mortgage refinancing –>
- Higher mortgage payments –>
- Higher rents–>
Until rents hit the breaking point.
The Feedback Effect Driving Prices & Rents Down
- People cannot pay a higher rent –>
- Evictions rise –>
- Vacancies rise –>
- Investors’ cash flow goes negative –>
- Investors can’t cover the negative cash flow–>
- Investors start to sell properties –>
- Additional inventory drives home prices down –>
- Former renters are now able to buy houses –>
- Reduction in number of renters drives rents down –>
- Falling rents puts more investors’ properties into a negative cash flow –>
- Foreclosures on investors’ properties increase –>
- Increased inventory from foreclosure sales drives prices down –>
- Rents decrease as more renters buy homes–>
- Investors sell more properties–>
The market bottoms out.
In human terms the feedback effect works like this:
- Humans see a chance for a profit and they buy something –>
- The lure of profit drives more people to buy and the price goes up –>
- Greed and Fear Of Missing Out (FOMO) drive people to buy even more and the price increases –>
- The price reaches its peak –>
- Owners sell to take profits –>
- Increased supply drives prices down –>
- Dropping prices frighten other owners to sell –>
- Panic selling drives prices to a minimum level–>
- Prices are low –>
- Greed & FOMO drive prices up –>
- Profit motive increases sales –>
- Prices start to fall –>
- Fear drives prices down
Wash, rinse, repeat.
We Probably Won’t See Most Homes Owned By Investors
So, while I initially thought that in twenty or thirty years we would be a nation where home ownership in certain key markets would be permanently 25% — 50% investor-owned, freezing middle and lower class families out of home ownership and out of any way to accrue value and increase family wealth, I now think that investor home ownership in those markets will fluctuate through boom and bust cycles.
This will still be very bad for the middle class.
It will still drive rents materially above what they would be if there were no investors who owned large numbers of homes.
It will still price many people out of the ability to buy a home.
But I don’t think it will result in a never-ending, always-increasing, percentage of investor-owned homes.
Use Tax Policy To Deter Investors From Owning Large Numbers Of Homes
Personally, I would like to see a graduated tax on rental income and capital gains from residential properties in proportion to the number of properties owned with the goal of deterring investor ownership of more than four or five properties.
But then how would rich people’s hedge funds and investment corporations get so much richer so much faster?
The system is all about giving people with capital the opportunity to get much more capital, much faster, no matter how severely the process negatively affects everyone who doesn’t have a store of capital to invest.