Monday, June 28, 2021

Hammering the American Dream

Owning a home has long been part of the financial stability plan of American families. Once that becomes a reality, many continue follow the advice of Will Rogers, “Don’t wait to buy real estate. Buy real estate and wait.” Some invest in raw land, but many more understand that the economy may go up and down but people always will need a place to live. Rental properties have long been the path to wealth – what a deal, your tenants make the payments and after a while you gain a substantial asset.

This value of this strategy has not been lost on major financial players. Chief among them is Blackrock, Inc. The giant has over $8 trillion in properties under their management with offices 30 countries. Additionally, they have been buying up entry level homes, and because they could, they bumped the rents up around 30%.

They are not alone. Other institutional investors, including giant KKR, private equity funds and hedge funds are reported to have spent more than $25 billion – with a “b” - to buy up over 150,000 single family houses since prices dipped in 2012.*

Five of these corporate single family landlords sold shares in public offerings and there were eleven debt offerings totaling $6 billion in the past year alone. This covers the price they paid for homes and remodeling – and more importantly, allows the real estate gobbling juggernaut to continue. Whole neighborhoods have been turned from owner-occupied into rental properties. When there weren't enough to satisfy the institutional appetite, they even bought new homes.

In spite of this, there are some not following this pattern because, they say, single family homes are generally not constructed as rentals. The maintenance costs are proportionally too high. This would indicate the institutional buyers are working under different economic thinking and expectations than traditional investors.

What Does This Do To The Market?

In some areas this took many starter homes off the market making it more difficult for families to find, let alone, buy, their own home. Anyone with an understanding of the Austrian school of economics will tell you that this puts upward pressure on home prices. It is as simple as reduced supply in a time of increasing demand, Even Keynesians will grasp this.

This was going on long before the covid fear closed down businesses and sent many people home to work remotely. The shutdown showed them two things, among others. First that they needed more room if they were to work from home and secondly, they didn't need to live so close to their employers.

Carried to its logical conclusion, those who could, began migrating from the over taxed and over regulated environs to more friendly regions, even to the point of buying properties sight unseen because of the highly competitive market. Put this together with the reduced number of homes available in some areas and you find the outrageous increase in real estate values that are only moderated by outrageously miniscule interest rates.

I might add at this point that low interest rates are not necessarily a bad thing – particularly to an industry so dependent on the availability of affordable financing. However, it is a double edged sword. For people just starting out and looking to put together a down payment for a home, a business or any other large purchase, the banksters are pretty much useless with the with their almost non-existant interest rates on savings – but then most investors already know about this.

Is This a Good Idea?

Blackrock found itself on the Forbes list of 50 Most Admired Companies in 2013. This is understandable – as an investment, the company leveraged it's commanding position to expand in the relatively safe market of single family home rentals. People need a place to live and this dominant position enabled them to rent to them for top dollar.

It is doubtful that those who would have liked to buy and could not, either because of the twin curses of limited availability and inflated prices probably didn't take part in the survey. They could not experience the increase in equity over the years as they paid down a major asset and watched their home's value grow. They did not have the privacy or security that comes with owning their own home. They did, however, have the opportunity to pay rent and live with the landlords terms.

This is not to say that rental properties are bad things. I have rental properties and people are quite happy to live in them. The point is that renting should be a choice. So should the ability buy investment property without dealing with out of town competition with almost unlimited funds. Here is where personal relationships become even more important.

We can't roll over and play dead like many mom and pop hardware stores did when the blue store and orange store came to town. I get emails every day hawking plans for different ways of working. Some of the ideas may work, but one thing is sure, we need to be aware of the environment we are working in instead of wondering where the deals went. It isn't just the dreams of home ownership that is getting hammered in some areas, but, for some, the dream of successful investing.

    *source Keefe, Bruyette & Woods

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