
Wall Street Unlocks Profits from Distress with Rental Revolution - patrickk
http://www.bloomberg.com/news/2013-12-20/wall-street-unlocks-profits-from-distress-with-rental-revolution.html
======
jseliger
_It’s yet to be seen to what extent national landlords, with easy access to
capital and loans, can keep outbidding first-time homebuyers, depriving
families of the opportunity to build wealth, and what their impact on rents
will be._

This is an insane comment, for the reasons Matt Yglesias discusses in _The
Rent is Too Damn High_ and, to a lesser extent, here:
[http://www.slate.com/blogs/moneybox/2013/04/26/housing_isn_t...](http://www.slate.com/blogs/moneybox/2013/04/26/housing_isn_t_an_investment_but_land_is.html)
. Over the long term buying versus renting should ideally be revenue neutral,
and whether or not you can "build wealth" via a house depends in large part on
where the house is. Someone who bought a house 30 years in San Francisco or
the west side of L.A. has made a lot of money. Someone who bought in the
greater Detroit area hasn't.

The myth that buying a house is a key to unlocking wealth needs to be
addressed and yet is too often propagated by journalists.

EDIT: See also this:
[http://www.slate.com/articles/business/moneybox/2011/05/the_...](http://www.slate.com/articles/business/moneybox/2011/05/the_rent_isnt_too_damn_high.html)
.

~~~
clavalle
Well, the 'myth' has merit. Let's apply common sense.

You buy a smallish house in a suburb and pay $1000/month for you mortgage.
$900 of that goes directly to equity.

At the end of the year, if you home retains its value, you have over $10,000
in equity.

If you pay the same amount for rent, you have nothing to show for it. And
oftentimes rent for an equivalent house is actually more than the mortgage +
tax payments.

So, which is better $10,000 or $0?

The volatility of the last few years has complicated this a bit (people going
underwater, for example), and I don't think people should see a home as a
vehicle for getting rich, but it is generally a nice value store.

Plus, there are HUGE advantages for people invested in the area to own their
property. It is more stable for them (they can't be kicked out), they are more
likely to invest in the value of their area (volunteerism, making sure local
politicians take care of the parks, reporting crime, that kind of thing).

Edit: Let me point out that yes, these numbers are made up and don't
accurately reflect reality. I did not use a mortgage calculator or anything (I
thought that would be obvious) but the underlying idea that I was trying to
convey holds....if you are spending x dollars and are able to store any
portion of that in something that holds some value it is better than spending
x dollars and not storing any of that value. So, even if only $10 of every
$1000 spent on the mortgage goes into equity, it is better than $0 if you
rent.

~~~
jordanb
Your math only works if you're near the end of your mortgage life. At the
beginning, nearly every penny of your mortgage payment goes to interest, which
is front-loaded.

For most Americans, who move around fairly often, they will never come close
to paying off a mortgage and the only equity they will ever own will be what
they bought with their down payment plus whatever they get on the margin if
the value of the house goes up.

If you, say, live in a house for five years and then move, then you basically
rented the house from the bank for five years. Except that unlike a renter you
also assumed the (upside and downside) risk of home value change, and assumed
the cost of taxes, maintenance, etc. Plus you tied up a large sum of money in
a down payment.

This may be worth it if you want to bet that home prices will go up in the
next five years. It also may be worth it because mortgage interest, unlike
regular rent, is deductible from your taxes, which is perhaps the most
obscenely regressive thing in the tax code.

~~~
clavalle
Even if 99% goes to interest, $10 is still better than $0.

~~~
wpietri
As long as you ignore the many thousands of dollars you paid in transaction
costs to get the place. And potentially the many thousands you pay in
opportunity cost if the house keeps you from moving when you otherwise would.

~~~
refurb
And don't forget the opportunity cost of having the money for your down
payment locked into an asset and not earning returns in other investments.

------
malandrew

        "In October, Bloomberg reported that a hedge fund, 
        Magnetar Capital LLC, had quietly bought 1 out of every 11 
        homes in the Ohio town of Huber Heights and then pushed 
        for property-tax cuts that would have blown a hole in the 
        school district’s budget."
    

That's quite a short-sighted move that makes a quick buck now, but lowers home
value in the long term. In areas where there are a lot of single family
residences, there is usually also demand for better schools. When the schools
worsen, so do property values.

Furthermore, this is setting things up for changes in landlord-tenant laws.
The level of lobbying power and expertise in tenancy laws they are going to
accumulate is going to make them a formidable foe for tenants rights groups to
fight against.

I fully expect this to get pretty ugly long term.

~~~
geogra4
>That's quite a short-sighted move that makes a quick buck now, but lowers
home value in the long term. In areas where there are a lot of single family
residences, there is usually also demand for better schools. When the schools
worsen, so do property values.

This is part of the reason why this trend is so terrible. The Hedge Funds do
not care about long term investments or the long term health of the
neighborhood. You squeeze as much money out of your investment as you can and
then get out of it before the day of reckoning comes. It's the stock market
mindset applied to every single assert class.

~~~
mbillie1
> It's the stock market mindset applied to every single assert class.

This is an excellent phrase to describe this phenomenon (and probably many
others).

~~~
patrickk
Wall Street also bets on other basic commodities like food and oil, which
drive up their prices.

If two parties want to sell each other stocks bonds (asset classes likely
purchased by deep pocketed, sophisticated investors), and the asset blows up,
fine. Both parties can afford to take the hit. But where those assets are
basic essentials, it's just downright slimy.

Oil: [http://www.nakedcapitalism.com/2012/05/les-leopold-how-
wall-...](http://www.nakedcapitalism.com/2012/05/les-leopold-how-wall-street-
drives-up-gas-prices.html)

Food:
[http://www.theguardian.com/commentisfree/2013/may/23/goldman...](http://www.theguardian.com/commentisfree/2013/may/23/goldman-
sachs-agm-drive-food-prices-up)

------
zero_intp
Interestingly, I bought a house to rent in 2011, with cash and fixed it up and
filled it. This year, I have spent more than six months trying to get
financing on it from the major commercial banks. I am closing soon, but it was
a MAJOR hassle.

What I have found, There is a near conspiracy level arraignment between banks
to completely undervalue the properties, give higher interest rates, require a
greater stake, and lower the borrowers acceptable debt-to-income ratio. I had
three appraisals come in, the bank appraisals were all manipulated and
internally inconsistent, and LOW. The independent appraisal I had done came in
rationally.

When I was house hunting (both in 2009 and 2011), my wife and I would break
into the empty foreclosed homes to tour them and inspect them for damage. No
one, realtors or bankers, would ever respond to calls regarding the
properties, no offers were ever responded to by the banks. All of these
properties in our neighborhood were eventually sold, and to big investor
groups. They are now predominantly rentals. Our experiences at the time showed
what we perceived to be a fixed market where the realtors were holding out to
sell to their friends. Now we realize that they were holding out for the
institutional buyers.

~~~
busterarm
I would believe this even if I hadn't 100% seen this for myself, except that I
have.

As a side note, realtors are the absolute scum of the earth. Worse than
lawyers.

Apologies in advance to any lawyers.

~~~
malandrew
Real estate agents aren't the problem. My mom is a real estate agent and I've
known a lot of real estate agents in my life. The absolute scum of the earth
in this industry are actually the members of the Board of Realtors that
represent the individual agents across the country and rig everything like a
cartel. It's a licensed procession with a lot of political influence
nationwide, which gives them immense protection from market forces that would
have drive the percentage they earn from sales down years ago.

Any shitty experiences you've had with real estate agents are probably better
explained by Hanlon's Razor. There are a few exceptional real estate agents,
but my experience has been that real estate is a profession for those
incompetent at everything else. When they say prices are going to keep going
up and that it's a great investment, they usually actually believe that fully.
They have bought whole hog into the idea that real estate is the best
investment and that prices keep going up. You can't even work as an agent if
you don't really believe that since that is the only condition in the market
that is really in your interest as a broker since it's the condition where
liquidity is highest, and liquidity is the best thing for brokers. If you
don't harbor that believe you either stay out of the market/profession
entirely or you enter the speculative side of the market, buying low and
selling high.

Those who can do, those who can't do anything, broker real estate.

FWIW, this largely applies to residential real estate. In commercial real
estate, the brokers are a lot more like the banksters promoting a kleptocracy.

~~~
busterarm
Overwhelmingly agree. This is exactly my experience. I know the Board of
Realtors has been a huge problem, but (as you've touched on) the talent pool
of people within who could change things is nonexistent.

------
Von_Jones
This article is super interesting and potentially highly political, although
Bloomberg does well to neutralize the issue behind straight business
reporting.

Related, I am interested in the following questions and am looking to do some
research in the new year to investigate:

1\. How much is paid in home loan interest to banks annually. 2\. How much of
this bank income is paid in interest to (a) savers, (b) other issuers of debt
3\. How much of this bank income is paid in dividends to bank owners. 4\. How
much of this bank income is paid in salaries to bank staff. 5\. How long the
average home owner spends working for the above three categories in their
quest for home ownership (I look at this as a form of indenture).

Following this article, I will also be looking at the question of how much in
rental income is paid to financial institutions.

I am also interested in the relationship between bank lending and house price
increases, ie as banks lend more, do they understand how this affects future
business, ie an increase in lending of 10%, leads to house price rises of x%,
leading to an increase in bank income of y%.

I guess there must be such models out there?

Any sources of data / reading would be much appreciated!

~~~
VLM
Most mortgage pushers don't hold the note and promptly sell them off.
Commissions and fees vary quite a bit around 2 to 5 percent of loan size. So
"most people lending money" are playing a commission game on how fast they can
sell and turn around and loan the money again.

Dude who pushes / approves loans in the modern system does not equal dude who
holds the note.

You might find thehousingbubbleblog.com or zerohedge to be interesting reading
although it takes a bit of study to understand whats going on.

------
winstonx
(1) America's elite creates a housing bubble (2) America's elite forecloses on
the residents (3) America's elite buys the houses at low cost, then rents them
back to the residents.

That's a nice racket.

~~~
wavefunction
You forgot a few steps:

(1b) American taxpayers bailout insolvent securities firms whose whole
business is supposedly predicated on competent risk assessment as a core skill
yet totally ignored best practices to threaten the entire economy.

(1c) Pays themselves handsome commissions.

(3 addendum) buys the houses at a low cost made so by the bubble they created
_with the bailout money of the taxpayers!!!!!_

(4b) destroys communities, defunds schools, further atomizes and disorganizes
the modern American society

~~~
malandrew
Yup, they are giving out mortgages with all that free/cheap money,
unfortunately they are only giving it out to themselves.

------
marincounty
I don't see a way of fighting back other than rent control. The damage is
done. Rent is beyond ridiculous. Oh yea, there's no bank loyalty anymore.
There all thieving bastards. Shop around for the best interest rates(I know
there dismal). Look at the fees their charging--close your account if
necessary. I've noticed people stay with the same banks, and Insurance
companies for years? Out of some kind of loyalty? When it comes to making
money, and investments; some investments are more moral than others. If you
are a thieving Landlord(meaning you are gouging your tenants) I honestly don't
know how you sleep at all--

P.S. If you live in a detached "mother in law unit" in San Anselmo, CA.; you
have rent control. Look into it. If your Landlord has been overcharging you
take them to court and get all your over payments back.

------
acd
Central banks central plan the interest rate, so credit ( new money ) becomes
artificially cheap. Then they investment companies buy up the foreclosures
homes and rent them back to the previous owners. In that system you will newer
be free, but a slave to the system, always trying to keep up just to stay
afloat above the surface. I minor form of debt slavery if you will.

The FED is as federal as FEDEX it's privately owned by the big banks. You can
read more on how it was created over here:
[http://www.bigeye.com/griffin.htm](http://www.bigeye.com/griffin.htm)

------
7Figures2Commas
This is really, really old news, and the headline is, if not exaggerated,
entirely premature.

Yes, some companies have been buying single family houses by the truckload and
turning them into rentals, but whether the model can be successful on such a
wide scale remains to be seen. There are a number of major challenges, and the
treatment of the publicly-traded companies in this space makes it clear that
investors are well aware of them.

One of the companies mentioned in the article, American Homes 4 Rent, is
publicly-traded[1] and raised far less in its IPO than it had intended in its
original prospectus[2]. Similar companies, Silver Bay Realty Trust and
American Residential Properties, are also publicly-traded[3][4] and currently
trade well below their IPO prices.

Another company mentioned in the article, Colony Capital LLC, operates its
rental venture through Colony American Homes, which pulled its IPO earlier
this year[5].

Turning single family homes into rentals on such a large scale may prove to be
a wildly successful business, and some of the issues raised by this article,
such as the impact on the housing market, are worth discussing, but it's a
shame that the article sports a baitlink title and gives the impression that
there's no risk to the investors playing in this space.

[1] [http://www.google.com/finance?q=amh](http://www.google.com/finance?q=amh)

[2] [http://www.bloomberg.com/news/2013-07-31/american-
homes-4-re...](http://www.bloomberg.com/news/2013-07-31/american-homes-4-rent-
raises-705-9-million-in-u-s-ipo.html)

[3] [http://www.google.com/finance?q=sby](http://www.google.com/finance?q=sby)

[4]
[http://www.google.com/finance?q=arpi](http://www.google.com/finance?q=arpi)

[5] [http://www.reuters.com/article/2013/06/05/us-
colonyamericanh...](http://www.reuters.com/article/2013/06/05/us-
colonyamericanhomes-ipo-idUSBRE95411O20130605)

------
sheetjs
Relevant infographic on Blackstone (largest owner of rental homes) which
summarizes some of the key aspects of the investments:
[http://www.bloomberg.com/infographics/2013-12-20/blackstones...](http://www.bloomberg.com/infographics/2013-12-20/blackstones-
big-bet-on-rental-homes.html)

------
awjr
Pension funds are restricted in the UK to only be able to invest in commercial
properties. There seems to be a conflict of interest here, where banks can
make it hard for normal people to buy residential property while there
investment arm is able to easily buy. That is one very scary situation to be
in.

~~~
chrisaycock
> _banks can make it hard for normal people to buy residential property while
> there investment arm is able to easily buy_

Under the Volcker rule, banks don't have an investment arm. That's why the
article is about Blackstone and Colony, rather than Bank of America or Wells
Fargo.

------
bckrasnow
My question is, what next? What other industries and/or markets can and will
Wall Street do this to now? This is greed at its finest. Especially the
property taxes comment in Ohio.

~~~
wavefunction
Next on the agenda is the carve up and sell up public properties and
concessions. Every where, every thing must be commoditized for the profit of
the few at the cost of the many!

Postal services, education, national parks, government agencies turned
"public-private." Water, utilities, roads, policing, emergency services!
Rights and freedoms! The sky's the limit my friends!

------
goombastic
That's it, even rents are going to go through the roof now. Earlier it was
housing as an investment that meant people had to look for rental homes since
the investors had crowded out and outbid actual end users; now this. Housing
needs to be made a basic right.

------
michaelochurch
Renting is disparaged in the U.S. because of the assumption that anyone who
can own a house, will. It's actually not a great economic move unless you plan
on living in a place for over 10 years. Commissions and repairs will eat you,
unless the price/rent ratio is really out of whack.

On one hand, I viscerally hate that this is happening. It's shitty that the
financiers (through wacky adjustable-rate mortgages, pump-and-dump games
against the housing market, etc.) have taken communities and houses away from
people. The "American dream" game is pretty rigged. On the other, I'm not
surprised.

Wasn't Blackstone the pinnacle of prestige in private equity, though? I can't
imagine them retaining that after going all in on the new suburban slumlord
game.

~~~
tptacek
More than half of families with incomes below the median family income in the
US buy. Meanwhile, rental is the dominant form of residency in the most
expensive areas of the US; for instance, fewer than a third of Manhattanites
own.

How does one reconcile this with the idea that rental is disparaged as a
practice of the lower income classes?

