PropertyInvesting.net: Property Investment News

I would give it a D-. The federal government’s first response to the crisis was to hand the banks that caused it hundreds of billions of dollars. Though their responses improved marginally from that point forward, it showed a crisis of priorities, where liquidity in bad banks was valued more than the wellbeing of the millions facing foreclosure.

Though I am thankful for the National Mortgage Settlement, HUD’s Neighborhood Stabilization Program, Treasury’s Hardest Hit Fund and the creation of the Consumer Financial Protection Bureau—its regulations trumped more bank-friendly foreclosure laws in Georgia—all of these responses to the crisis are minuscule compared to the losses experienced by struggling homeowners. There have been no structural changes to our economic system that would prevent such a crisis from occurring again.

I would give the overall response since 2007 a C—with the response from 2007 to 2008 getting an F, the response from 2009 to 2010 getting a D and the response since 2011 getting a B- or B.

Unfortunately, the initially slow and timid response meant that those hurt earlier in the crisis—disproportionately families of color and lower-income households—received less effective assistance. More effective programs, like Home Affordable Refinance Program 2.0 and the principal reduction component of the Home Affordable Modification Program, did not roll out until later, and by then those at risk were decidedly more middle-class and less likely to be families of color.

I would give the feds a D. Continued faith by policy makers in market-based solutions has created an “opportunity” for equity firms to profit from the availability of distressed homes across the country and increased demand for housing that their own actions helped to create. Given the role of these private institutions in destabilizing the economy more broadly, it is essential that policymakers move aggressively to curb their influence in the rental property market. Unfortunately, save for a few brave members of Congress, at present the political courage to take on the financial giants seems absent in Washington.

Among the things that entities like Blackstone do to the world, this is one of their least damaging actions. The research and common experience show that home ownership by those who can afford to buy and maintain the homes has significant advantages. As the old saying goes, “No renter ever paid to have a rented car washed and waxed.” Home ownership by reputable owners who can afford to keep the home in good repair is associated with far better maintenance of the home and yard, which adds value to the entire neighborhood. It also decreases crime in a neighborhood.  

Long-term U.S. demand for housing has declined materially, not simply due to the Great Recession. Many young Americans no longer see purchasing a home as evidence of independence, adulthood and productive investment. Renting is not an irresponsible act, so adding to the supply of well-maintained rental properties where doing so reduces unoccupied homes strengthens a community.  

One risk, however, is that entities like Blackstone will have the incentive, expertise and political power to successfully demand reduced appraisals on their large holdings of thousands of homes. If they are able to do so, the local communities and school districts could lose substantial amounts of tax revenues at a time when their need for that revenue is particularly great.

There is nothing inherently wrong with rental housing, especially when investor-owners maintain it well and treat tenants fairly. Unfortunately, in most cities in the U.S., tenants have access to few legal protections, are offered only short-term (1-year) leases and are vulnerable to escalating rents. For many families, especially those with children and older households, value stable housing situations where they can raise their kids or retire in security, many rental situations are less than ideal. And at a neighborhood level, rapid declines in homeownership can lead to a loss of social capital from stable residents who are particularly vested in the area. Even the large Wall Street single-family investors who rent out homes look to invest in neighborhoods with relatively high homeownership rates.

There are at least two other concerns that are posed by large single-family landlords: First, is the potential concentrated ownership of substantial numbers of residential parcels in a community among one or a few investor-owners. Generally highly concentrated land ownership is not desirable because it may give a few owners too much economic and political power in a community. Second, it remains to be seen whether the large single-family operators can efficiently maintain properties while returning the expected financial returns to their investors. If they are not able to do so, they may begin to disinvest from their less lucrative properties, either by not investing in maintenance or by “dumping” such properties onto the market rapidly, either of which could create spirals of declining home values in particular neighborhoods.

Despite the relatively small number of single-family rentals institutional investors currently own, their tactics stand to have a large impact on local housing markets because of the high concentration of investment activity in a handful of markets. The institutionalization of the single-family rental market in the footprint of the foreclosure crisis merits consideration of impacts on renters, as well as broader consequences on community stability and security.

The implications of this shift in the rental market are of special significance for people of color, women and immigrants. African-American and Latino households experienced a dramatic loss of wealth as a result of the foreclosure crisis, with their ejection from homeownership and into the rental market contributing to intensified competition for affordable rental housing. People of color, particularly Hispanics, will account for the majority of the anticipated growth in rental demand over the next decade. The burden of eviction and lack of housing access, as well as the health impacts of overcrowded and poor-quality housing, falls disproportionately on people of color, women and immigrants.  The commodification of single-family rental housing by financial actors threatens to intensify the ongoing rental crisis for these populations.

Because this market has emerged so recently and is developing so rapidly, we lack adequate information about its consequences. Will gentrification result as investors upgrade properties and increase rents, thus worsening affordability issues and contributing to displacement? Could investors’ lack of management experience and their investment practices contribute to housing decline and neighborhood instability?

Not at this time. The mortgage-backed securities market posed no “risk” to the greater economy when the underlying loans that backed the mortgage securities were properly underwritten. Rental-backed securities are, at this time, only a tiny percentage of the over $4 trillion mortgage-backed securities markets. It is, of course, essential for the government to mandate strong underwriting of such rental securities and to ensure that the underwriting is real and maintained.

Rental-backed securities do not yet pose the same risks as mortgage-backed securities to the greater economy. The problems caused by mortgage-backed securities were compounded by the fact that they were riddled with subprime loans and constituted the foundation of the built-up housing bubble. Rental-backed securities are not at a similar level yet, though they have started off strong, going from non-existent to over $5 billion in the span of a year.

One of the risks of rental-backed securities is the further "financialization" of housing in the United States, converting yet another form of housing into a method for extracting wealth from communities. Renters living in these homes have no idea that their rent is securitized and they have less secure tenure than homeowners. With this in mind, it is possible that should rental revenue fall short of meeting bond obligations, institutional investors can evict tenants, even model tenants, to sell the homes to make up for lost rental revenue.

Tough to call because it is still a new market. The growth of the rental bond market may also increase investors’ appetite for yield, and encourage higher rents as a result.

An important question is the extent to which rental securitization of geographically dispersed properties creates new interdependencies among renters in different markets. For example, if returns are lower than expected in one market, could renters in other parts of the portfolio face increased housing costs?  If indiscriminate buying by institutional investors pushes up prices and ultimately make the value of investments fall, the pressure for investors to flip property will grow, potentially creating another speculative cycle that could end in a bust, subjecting communities to yet another round of destabilization. Moreover, pricing risk on rent-backed securities would require long-term data on rent payments, which could enroll unwitting tenants into alternative credit scoring mechanisms that might impact tenants’ credit and future homeownership opportunities.

No, the opposite is true.  Converting vacant homes to rental reduces the market rent. What you are observing in Riverside is the continuing extremely high level of home prices relative to California incomes. People are living farther from where they work in the hopes of finding (relatively) lower rental rates than they would pay in Los Angeles. Riverside is considered a (relatively) less expensive housing market than L.A.

There are four fundamental drivers of the high levels of rent-burdened households. First is widening income inequality, where the ranks of lower-income renters continue to grow. Second, the foreclosure crisis pushed many former homeowners into the rental market, putting more upward pressure on rents. Third, there is quite limited production of lower-cost housing of any kind. (Most of the apartment building going on is clustered in higher-rent segments in desirable, high-rent districts.) Finally, sources of housing subsidy for lower-income families are severely strained—especially the largest program, the Housing Choice Voucher program.

Undoubtedly! The housing landscape underwent a seismic shift as a result of the foreclosure crisis and the wider recession that began in 2006. The rate of homeownership fell dramatically after more than a decade of unsustainable growth, returning to levels last seen at the beginning of the housing market boom in the mid-1990s.

The foreclosure crisis has driven millions of former homeowners into the rental market. In addition, the number of young adults and senior citizens facing economic hardship is on the rise, sending even more people in search of rental units. All of this contributes to a tightening of supply and a steady increase in rents, with no relief in sight. Renters currently represent approximately 35 percent of all households, with far higher percentages in many major cities. There is no reason to believe the rate of homeownership will increase in the near future, and mounting evidence indicates it may fall further.

The growth of the rental demand has created a favorable environment for landlords, as millions of new renters enter the market. Low home prices and continued low interest rates mean that potential yields in the single-family rental market exceed those of 10-year Treasury bonds and other investments.  With large amounts of inventory under bank and government ownership, the foreclosure crisis has created the opportunity to consolidate the single-family rental housing market under the control of massive financial institutions.

In "Wall Street Landlords," Fault Lines examines investment firms' new bet on housing. The film airs on Al Jazeera America Saturday, November 8, at 7 p.m. Eastern time. It will air again that evening at 10 p.m. Eastern and Sunday, November 9, at 2 a.m. Eastern.   

america.aljazeera.com

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