The housing market is hot. Homes last a day on the market. Buyers must bid above listing. If you bid 20% over listing, you likely will lose out. Year over year gains are insane in some markets. There’s also a huge unemployment problem. Who is buying all of these homes? It’s not just the little guy. The Wall Street Journal recently published a story on the big money buying homes to turn around and rent them out. A private investment firm bought a whole housing development to rent out to families looking for their little patch of green. This is a product of the zero interest rate policy that we are stuck in thanks to never addressing the financial crash.
Are these complaints about big buyers new? Not really. This is post-financial crash economics. This is both single family and multi-family housing. This was also a complaint in 2017. Oh no, it was also noticed in 2013. This is not new, only the level of purchasing has changed. Buying a single family home that came on the market is one thing, but buying an entire neighborhood to rent out is an order of magnitude different.
This does go back to the housing bubble bust, and the easy money FED policy that rewarded early receivers with 0% money. After the dot com bubble, the FED listening to Paul Krugman’s advice and blew a housing bubble to replace it. Single family housing starts were north of 1 million each year after 2000 and peaked at roughly 1.8 million in 2006. America hit the marginal buyer, and the meltdown occurred. After the pop, there was a huge overhang of inventory to move. Housing starts crashed below 1 million in mid-2007, and did not reach 1 million again until the end of 2019.
The problem that created our current situation is that the banks and entities that held these homes to sell were also responsible for lending to builders. Why would they fund builders of new homes when they had millions of homes to unload? It would make no sense to increase supply and crush the value of the homes they had to offload. By releasing a trickle of homes into the market during 2009, 2010, 2011 and constricting building, they could keep sold prices higher and prevent the market from finding a real equilibrium. They did not have to realize real losses on those loans.
The lenders could repair their borrower profiles by only lending to those with great credit in the 2009-’11 period. Banks, hedge funds and private equity firms could snatch up lone wolf homes in good neighborhoods to rent. The return on rentals over their FED money was a safe yield. This is all forced by the FED dropping rates to zero on the short end and buying up long term bonds with QE after QE. Treasuries yielded near zero, munis yielded near zero, and even rickety euro bonds yielded negative rates once the euro crisis was resolved. The corporate high yield market was stormed for yield. There was nowhere to go for higher yield.
Rentals became the new market. Set up a profile of a home in specific markets and wait for homes to hit the checkboxes like a Tinder match. The profile is narrow enough to become a bond and something to sell to investors. There is something else sneaky to all of this. Why couldn’t people buy homes and had to settle for renting a four bedroom home? Some couldn’t qualify. It was not all, but the new starter home couple graduating in 2011 graduated with a lot more debt than the couples of 2005. This would not disqualify all, but enough buyers on the margins, and in the Obama era of centralization into a dozen or so cities, it created an environment for a big player to take advantage of.
This is going to get worse. We are in a secular trend for more renting as the wealthy Boomers retire and are replaced by indebted Millenials. Those are renters not owners. This is the generation that embraced funemployment, gigs and destroyed consumer norms. They don’t need the attachment of owning anything. Think of it as housing as a service. Big money can come in and give worried Boomer sellers the price they are asking for, and all they need is to do is find the right renter to hit their yield target for the end recipient investor. There is another trend, a social and governance trend.
If 2020 taught us anything, it was that cities are dying and covid showed just how dead they can be. Certain types of crime were up in 2020, but the pro criminal moves by big urban DAs set the trend into motion. The momentum for criminal justice reform might only be from a vocal minority of true believers, but they have the control of who gets plea deals and who gets released. It won’t be white flight from the cities, because the middle and upper middle classes of the cities are heavily Asian now, but there will be another round of human capital flight from the cities. Remote work and wanting space may be the means and code words for this round of flight from the cities. These buyers are already showing up. Expect them to form an army once the left solidifies control of the criminal justice system from local to federal. These buyers will hold all the proper opinions, but their feet will do the loudest talking.