A few days ago I noted that whilst housing starts were increasing, housing sales - or, rather, mortgages to fund housing sales - were declining. This mismatch suggested to me that builders were living in a dream world.
Reader FormerFlyer pointed out in two comments to that post that investors (of whom he's one) are buying many properties for cash, looking for good deals in repossessed houses and the like. Intrigued by his comments, I looked for more information, and found that one of the biggest private investment groups in the country is doing the same thing. Bloomberg reports:
You can read more about Blackstone's property plans in this infographic from Bloomberg.
Thanks for alerting me to this, FormerFlyer. It was definitely something new on my horizon. I knew that individual investors were buying up properties - my father-in-law among them - but I wasn't aware it had grown into such a mega-business for mega-investors. Unfortunately, it also causes many homeowners to lose their homes if they can't make arrangements with their lenders. I have no problem with the market deciding such things . . . but the apparent ruthlessness with which it's being done might create problems that will erupt further down the road. Something to think about when choosing where to live and/or to buy a home.
Peter
6 comments:
Thanks to the Fed and QE, there are few places where a decent return can be made from money. The stock market has benefited, but is ready for a correction; the big players should know that. Bonds have payouts that are minor compared to the risk, let alone the inflation we are told isn't happening. If you're a mega-investor, property has to be looking pretty good right now. Where else can you get a decent rate of return (rent)? Since business property is still overbuilt, residential is where it's at.
Another factor that I just came across: ObamaCare. Yes, that thing.
It appears the majority of exchange policies only cover out-of-network care in-state ONLY. Meaning a snowbird will have to either quit traveling, or will have to buy two policies, one in their home-of-residence, and one in any other state they spend a lot of time. As this gets more widely known, then either the coverage and already high rates shoot up, or else the tourism and seasonal travel industries get absolutely hammered. Some very, um, "interesting" potential fall out from this. I expect the first bunch of news stories about the time spring break rolls around, then come summer break.
ObamaCare - the "gift" that keeps on giving.
http://www.softgreenglow.com/wp/2013/12/about-that-freedom-to-travel-you-had/
This house of cards is predicated on "people have to live somewhere." Individually, the houses may be purchased at below market value, but the total holdings of any particular investment firm engaging in the process is substantial, and so is the stake held by the individual investors who make up the firm(s).
The plan is to acquire, fix up, and rent, "laying off" some of the intermediate expenses to parallel or subsidiary service firms to reduce the total risk of the primary investment group(s) by bundling packages of "assets".
It seems not radically different from what got us into this in 2005-2008, and whether it succeeds or causes more damage remains to be seen. "People have to live somewhere" but someone who can't pay an $800 mortgage probably can't pay a similar rental fee; what happens when Obamacare tanks the economy a couple more notches, and the investment firms are still bearing the cost of normal rental unit repairs?
There might be a lot of money to be made now, but this may turn out to be just manufacturing more Detroits.
This all goes back to the evils represented by consumer debt. Make no mistake... these folks that are losing their homes... are CONSUMERS of housing, and they overconsumed. This idea of housing as an investment was another dutch tulip craze. Our dear leaders in Washington decided that the great Amerikan dream was that everyone should own their own home. (Some have now started to realize, that that is NOT the case.) Those folks never owned that house - they convinced the bank they would pay back a loan to buy that house, ergo, until that happened, they were living in the bank's house... and they're driving the bank's cars, etc. THEN, assume you have the house paid off... you're still living in the county's house, driving the state's car, etc. and if you don't believe that, stop paying your property taxes, license fees, etc and see where you're living and what you're driving in twelve months after that.
Maybe we should spend one hour of the high school day teaching kids about this stuff instead of another hour of tolerance, acceptance, feelings and gender studies. They'd be MUCH farther ahead learning about reality instead of that other useless blather.
Anonymous: you can teach your own kids this stuff, but not everyone does. I volunteer in my kids classrooms from time to time to give "guest lectures." The regular teacher gets an hour or two of "prep time" (which they like), and I get to cover something in more depth that the teacher only know about peripherally. Last time is was 90 minutes about the nature of science (we get it wrong sometimes, it needs to be verified, etc) leading in to the history of climate change (always has, always will) then into the specific problems with the current AGW debate (another one we got wrong - flat temps for the last 17 years). Make it fun and funny, interesting, thought provoking, subversive (emphasizing "how do you know?" and "just because the experts says it's so, doesn't mean they are right.") It's not an hour a day, but sometimes little doses pf reality here and there can do a great deal. Stay involved, and don't give up hope.
Being a mid-level healthcare executive who didn’t own a home made for some uncomfortable conversations over the years. My earnings ramped up just about the time the bubble started to inflate. I did not feel that the prices were justified, and stayed out of the housing market. In 2001, I made the decision to rent long term rather than buy, and to save as much as I could for other investments. I would constantly get questions about my “ludicrous” decision to rent when EVERYONE knew that home ownership was the pathway to individual wealth.
I would explain that renting was cheaper even after the tax incentives (where I lived anyway), that housing should be bought on a fixed interest with pay-down amortization over a reasonable number of years (anywhere from 15-30 is fine). I had several mortgage brokers tell me that I could get lower payments by being “creative” about financing, that fixed rate was for suckers, and that it was perfectly acceptable to buy a house on an interest-only or even a negative amortization loan. That everyone was getting rich off their appreciation, and I was missing out. I said that the gimmicks being used to get people into mortgages were signs of a sick market. I was repeatedly called a fool.
Now, at my company, of the 9 execs at my level, 2 have stable housing because they bought prior to the bubble, borrowed with traditional terms (one has paid off his mortgage) and didn’t use their houses as ATM machines whenever they wanted a new bass boat or a trip to DisneyPlace. 2 have lost their houses to foreclosure and are renting in uncomfortable circumstances. 2 have ARM’s that have raised their payments to within striking distance of 70% of their total take home pay and they are struggling to make ends meet (which is practically a SIN for someone making over $100,000 a year). One is trying for a short sale, and still can’t believe how unfair it is that she’ll get a IRS 1099 for the write-off amount when it goes through. I and one other guy have taken our savings and bought at what would be traditional prices (if looked at over a 30-40 year history), and the other guy is a Dave Ramsey fan who bought his house for cash and has no mortgage at all.
Just the other week I was surprised to meet up with an acquaintance who had been one of the biggest mortgage brokers in town during the boom, a guy that said “You don’t understand how finance works in the modern world” and “everyone is buying this way, and they can’t all be wrong.” He’s lost his house and his business, his ex-wife and kids won’t talk to him until he gets current on child support, which he won’t be doing because he’s working on a tree farm for minimum wage plus room and board, and his only hobby is his new-found fascination with the joys of high-strength marijuana. He spent almost a half hour trying to justify what happened, and that he was just going along with the flow, and that everyone else was doing it too. I reminded him that I told him it was a sick market, and that he was too greedy to see the signs. He said he didn’t have anything to do with it personally, it was just bad luck. I told him that I was reminded of a quote:
“No one raindrop believes it is responsible for the flood.”
He just walked off.
FormerFlyer
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