Locals Priced Out of Buying Homes (Part 2) – Wall Street Destroys Housing Again

Foreign Money and Wall Street; A Tag-Team Driving Up Housing Costs
A house owned by a private equity fund. It looks like a house I would want to own.

In my previous article titled, Locals Priced Out of Buying Homes – Foreign Buying “Skyrockets”, I discussed how speculative foreign money, specifically Chinese money, has driven up real estate prices in many areas of the nation. In this article, I discuss how Wall Street money is having a similar effect. Keep in mind that these buyers do not intend to actually live in these homes. In effect, they have artificially heightened demand, while shrinking supply. This has profoundly and permanently changed the single-family real estate landscape for all of us.

Many young adults are sitting on the sidelines of the housing market…new data shows that one huge factor is the competition — some might say unfair competition — young adults face from investors who can just swoop in, drop a pile of cash and buy the houses they want. These investors then turn around and rent these properties to those same young adults for increasing amounts every year, making it even tougher for young would-be homeowners to ever save up enough money for a down payment.  — Money

Private equity shifts the supply curve up, raising prices in a weak economy, causing homeownership rates to drop
Despite no pick-up in homeowner demand and a lackluster economy, prices in 2012 began to rise sharply.

Toward the end of 2012, a number of brokers in many areas of the country began noticing something strange. Home prices were starting to rise, and fast—about 20 percent annually. Normally, higher home prices would signal increased demand from homebuyers and indicate that the economy was rebounding. But the home ownership rate was still dropping. The real estate market was out of long-term equilibrium.

What many hadn’t realized was that something completely unprecedented was quickly transforming the owner-occupied real estate market. Large private equity firms and real estate investment trusts (REITs) such as Blackstone, Waypoint, Starwood, and American Homes 4 Rent with the funding help of Goldman Sachs, Deutsche Bank, and Morgan Stanley began scooping up tens of thousands of single-family homes.

Homeownership rates continued to fall to levels not seen since the 1960s as institutional money was buying

Indeed, many of the investment banks that were helping these private equity firms and REITs had been instrumental in causing the housing bust only a few years prior. These institutional buyers had an uncanny ability to time the 2012 nadir of the housing market cycle.

The typical house a single-family rental REIT purchases

At a time when owners were being foreclosed upon, this deep money paid cash to scoop up large swaths of housing stock at a time when the average person should have also been buying. The banks could not keep up with their foreclosure backlog and were selling many homes for pennies on the dollar.

So far to date, these firms have spent about $30 billion to buy more than 200,000 working-class, single-family residential homes. Their initial objective was to capitalize on depressed prices with rental income as their secondary goal. Their time horizon was to last about five years until they disposed of these properties to home buyers.

In 2005, there were 10.5 million single-family rental properties. Today there are 17 million. That’s almost a 70 percent increase.
Owner of 50,000 single family homes in desirable areas and a former subsidiary of Blackstone

We’ve quickly becoming a nation of renters — and not just apartment dwellers. Since the housing crisis, more renters are writing the monthly check for single-family homes and are also writing checks to corporate landlords like Invitation Homes, Colony-Starwood, and American Homes 4 Rent.

Between 2012 and 2016, Blackstone acquired almost 50,000 single family homes in thirteen markets including Southern California, Northern California, Seattle, Phoenix, Las Vegas, South Florida, Tampa, Orlando, Jacksonville, Atlanta, Charlotte, Chicago, and Minneapolis for total upfront costs of approximately $9.6 billion.

Owner of over 30,0000 single family homes in places we would like to own

Here is a recent article titled, More homes (a lot more) in the plans for Scottsdale-based rental real estate company, which aptly illustrates the fierce consolidation of the single-family housing sector. The story stated that Colony Starwood Homes announced its plans to acquire a portfolio of 3,106 single-family homes. That is a rise of about 10% in their portfolio count. This means Colony owns at least 30,000 rental houses. Their portfolio of rental houses are located across California and in big cities including Chicago, Atlanta, Tampa, Miami, and Orlando.

Back in 2005, there were about 10.5 million single-family rental properties, said Karan Kaul of the Urban Institute. “Today that number is north of 17 million. That’s almost a 70 percent increase.” She says most of the growth has been directed in the single-family market. During the housing crisis, when foreclosures were mounting, investors with cash snapped up tens of thousands of distressed properties in cities like Atlanta, Phoenix and Las Vegas, and converted them to rentals.

What Started as a Short-Term Buy and Flip is Turning into a Long-Term Landlord Plan
AMH owns 50,000 single-family homes that someone else used to own

While actual housing price growth rates have lagged expectations, rents have been rising at a decent clip. What began as a plan to buy and flip became more of a long-term proposition. This means that most of the corporations and REITS involved in the single-family market intend to become longer-term landlords.  The longer these firms own their properties the more money they will make as their rent roles continue to increase.

Average rents for single-family rental housing increased 4.5 percent in 2017 compared to the year before – ATTOM Data (formerly known as RealtyTrac)

Rents in the single-family sector continue to rise slowly, despite what the housing bears claim. We must be wary of the housing bears who cherry-pick their data to conform with their confirmation bias. As a Realtor and investor I only observe rent increases in the single-family segment and see no sign that this trend is changing. In fact, in all my years of investing I have never seen a drop in rent rates with respect to any housing segment in the Washington DC area.

Corporate Investors Plan to Build Entire Communities of Single-Family Rental Properties

With today’s housing supply so tight and prices rising, it’s not as easy for companies to snap up cheap homes anymore, so some are planning to expand by building new houses, even entire neighborhoods, and putting them up for rent.

Total rental units rising much faster than owner-occupied units, we are becoming a sharecropper nation.

According to this article from Bloomberg,  American Homes 4 Rent, a five-year-old real estate investment trust and the biggest of the publicly traded landlords by number of homes, is buying lots and houses around the U.S. Colony Starwood Homes plans to purchase at least 600 just-erected properties over the next year from more than a dozen builders. Privately held AHV Communities LLC is plotting whole neighborhoods for those who want — without the bother of ownership — single-family residences with some apartment-complex bells and whistles, such as fitness centers and bocce-ball courts. Residents don’t even have to mow their lawns.

The bet behind the build-to-rent boom is that there are enough people who dream of the detached-house life but can’t afford to buy into it. With tight mortgage standards and rising prices, and millennials putting off marriage and loaded up with student debt, that might not be a long shot.

We Are Becoming a Nation of Sharecroppers; We Are No Match for Institutional and Foreign Money

The boom/bust asset cycles are finally tearing us away from our own homes. As long as the economy remains lackluster for the average family and household income growth is subdued, it will be difficult for the average family to afford much of the housing stock that becomes available.

We may look at the housing price charts and exclaim we are in a bubble, but between institutional money and foreign funds pouring into the residential single-family housing market, we can be looking at a market that may be out of reach of the average American for many more years – perhaps permanently.

In the end, this fulfills a goal of the globalists. Their objective is to make us a nation of debt-slaves, living on a rented debt plantation. I wish I had better news for us. It would be nice to think that home prices will be coming down, but if they do, most people will still not be able to afford them.