As a former newspaper guy, I know that the effects of Wall Street swooping in to buy media chains can be a disaster. The thinking goes: a hedge fund, like Alden Global Capital for instance, will buy a newspaper chain like Tribune Publishing. Then, Alden will gut the staff, thereby destroying the quality (and credibility) of the newspapers just so the hedge fund can make bigger profits.
What’s left is a husk of a newspaper that no longer can serve the community it seeks to cover.
Some doctors have a similar worry about private equity institutions buying up medical practices and then becoming an entity that allows the interest of the shareholders to run roughshod over patient care. All in the name of a few bucks. Or a few million.
Now, Wall Street wants to buy your home and turn it into a rental. The trend could run small landlords out of business. It could give tenants substandard service. Like the newspaper business, all of this could turn into a debacle.
Those were my initial thoughts, anyway. If Wall Street is spending billions just so it can be your landlord, that probably isn’t a great trend for the everyday person.
Wall Street Is Going After Single-Family Homes
As financial author and podcaster Paula Pant declared on a recent episode of “Afford Anything,”
“One of the factors influencing the housing shortage is that many major Wall Street firms right now are buying up the housing supply, specifically single-family homes. And they’re buying these homes in order to turn them into rental properties. These major firms use algorithms to determine which homes to buy. They make offers sight unseen. They have the funds to be able to make all-cash offers at or above asking price. And they're able to close within a few days so they can play to a competitive strength that most individual home buyers, mom-and-pop home buyers, can't compete with.”
According to Bloomberg, the private equity-backed Invitation Homes raised rental prices by almost 11% in the third quarter of 2021—thanks in part to housing shortages—and a single mother of two from Atlanta who rents a three-bedroom home from Invitation is frustrated with an apathetic landlord. She recently told CNN, “The multitude of steps that have to be taken to get any repair done is always infuriating when we pay so much in rent . . . At this point I'm stuck in a renting pattern because rent increases keep going up and moving out is expensive.”
But Joe Ollis—the CIO of The Peak Group, a new White Coat Investor partner that is now offering a REIT fund to WCI readers—has a slightly different take. As he noted to me in a recent phone interview, private equity’s shift in how it buys real estate began about a decade ago, coming out of the wreckage of the Great Recession. From the 1980s until the mid-2000s, institutions leaned toward buying and running entire multi-family apartment complexes. After the housing bubble burst in 2008, though, Wall Street turned its attention to single-family homes, in part because innovations in software and hardware for professional management companies made the economics of single-family rentals match those of multi-family rentals.
Now, the idea of buying rental homes and, instead of flipping them for a quick profit, holding onto them for a long-term play has become more attractive.
“If houses are already rentals, they might be owned by somebody who owns just one or two homes, and that small landlord is typically not equipped to give the best-renting experience to tenants,” Ollis told me. “To have a bigger institution that has those capabilities, there would be better appliances, better response times. Hypothetically, an institution would be better equipped to be a better landlord.
“The double-edged sword is that these institutions could be just looking at a number. There won’t be that personal touch. They won’t have an empathetic bone in their body. That’s the pro and the con.”
Is Wall Street Contributing to the Housing Shortage?
Can you blame Wall Street, though, for exacerbating the housing shortage? Not exactly, Ollis said. While private equity institutions own the vast majority of multi-family complexes in the U.S., he said only 3-4% of house rentals are owned by those institutions. Between now and 2030, he thinks that could increase to 10%.
So, it’s not like private equity would be monopolizing the real estate market. Yet, here’s a potential dilemma.
I live in Austin, Texas, where home prices have skyrocketed since the beginning of the pandemic. Apple is moving here. Tesla already has. Samsung is heading this way, as well. People from California and New York, people who can overbid an asking price by 25% and pay it all with cash, are moving to central Texas and squeezing out the locals who simply can’t keep up with those prices. Wouldn’t private equity trying to squeeze its way into this kind of housing market make it all worse?
Wouldn’t hot markets like Nashville or Phoenix be in the same danger?
“Think about housing as a full ecosystem,” Ollis said. “You have supply and demand metrics and controls on both sides. In Austin, the demand absolutely exploded with Apple and Amazon coming there. The supply side just did not keep pace and it was exasperated by a couple of forces. This is not a blame game, but no builders were building out of the recession. And when builders were building, what they would concentrate on? The more luxury homes. That was compounded and made more difficult by a lot of policies that make it more difficult to build.
“I’m not saying it’s bad, but it’s a combination of all these things that got us to the point where we are today. But [a private-equity backed company] like Invitation Homes, when they look at coming in, they have to make money, too. If the rent is not keeping pace, they’re not going to be buying it.”
The Peak Group was started when brothers Todd Bowers, working as a home inspector in Oregon, and Ryan Bowers flipped a house for a tidy profit. They continued to invest in real estate, flipping houses in the Northwest in what was a fluctuating market, but soon, they discovered they wanted more stability. In 2012, they reunited in the Dallas-Fort Worth market and eventually turned their mom-and-pop shop into a company that builds new construction and provides passive income opportunities for hands-off investors (WCI readers can check out Peak's new REIT fund information here).
Currently, The Peak Group owns about 1,500 single-family homes. That’s nowhere close to a private equity-backed company like Invitation Homes, which was started by Blackstone Group in 2012, that owns closer to 80,000. But Ollis isn’t worried about Wall Street-backed institutions making a huge dent in single-family home real estate.
Here’s why: if you look at the numbers provided by Statista, you’ll see that an estimated 6.5 million homes will sell in the U.S. in 2021. With a median home value of about $280,000, that’s about $1.8 trillion in transactions. Perhaps, private institutions own a total of 300,000 homes. With that same median home value of $280,000, that’s $84 billion. Considering Zillow estimates all home values at $33.6 trillion, that $84 billion (0.0025% percent) is rather insignificant.
“Single-family homes as an asset class is actually one of the largest asset classes of everything,” Ollis said. “It’s larger than the stock market. It’s probably equivalent to all the debt that’s in existence in the S&P 500. Even if 10 more Invitation Homes were to come in, we’re talking about $350 billion [out of $33.6 trillion in home value]. It’s just not going to move the needle.”
Ultimately, private equity is going to want to play a game where opportunity is present. Houses are in shorter supply. Prices and rent are massively increasing. If Wall Street can find a way to profit, it will. Just like with newspaper chains and medical practices, if there weren’t big opportunities for private equity to make money in the acquisition of single-family homes, Wall Street probably wouldn’t bother.
What I’m Reading This Week
If you’re a sports fan, you might have heard the kerfuffle about Tampa Bay Buccaneers receiver Mike Evans accidentally giving away to a fan one of the most expensive footballs to ever be thrown by Tom Brady. It was Brady’s 600th career NFL touchdown pass, the first time anybody has ever crossed that threshold, and as he usually does after scoring, Evans found a fan in the stands and gifted them the ball.
Except this ball’s estimated value is worth $500,000. So naturally, the team and Brady wanted that ball back. Turns out the fan, Byron Kennedy, is a resident doc living in Florida. So, Byron did the right thing and got rewarded for it by receiving season tickets, autographed memorabilia, and . . .
One Bitcoin, currently valued at about $62,000. Here’s how it happened.
— Byron Kennedy (@yohoitsbo) October 25, 2021
— NFL (@NFL) October 26, 2021
Hey Byron, great job on doing the right thing. And if you’re reading this (or if anybody who knows Byron is reading this), email me at email@example.com. I want to chat with you.
Nikki Sixx on Saving
You’ll probably come to realize in this column that I’m a big heavy metal guy. I never really cared all that much for Mötley Crüe, but radio personality Eddie Trunk had an interesting conversation on his podcast last week with bassist Nikki Sixx. Even with all the stories about Mötley Crüe in its heyday and the band's taste for excess and debauchery, Sixx actually has some good advice for investors.
In the podcast, Sixx said,
“When people don’t manage their finances as a responsibility to the fans, then they start to do things that are not dignified. They make music that’s not defined. They jump genres. They do things the fans don’t deserve. Very early on, I had a strategy for how to do without to save. Many times in my life, I was doing without. I wasn’t getting the house I wanted to get. I didn’t go to that place I wanted to go. I didn’t spend the money I wanted to spend. I was saving it. It continued to grow and grow. When there were some really lean Mötley Crüe years, I was fine.”
Interesting insight from a man you wouldn’t necessarily expect to hear that from, especially from a guy who was so heavily involved in drugs that he was dead for two minutes after overdosing on heroin in 1987. As Trunk observed,
“That’s amazing you were that astute to do that given how whacked out of your skull you were.”
Fast and Slow Investor Risk
What’s the difference between fast risk and slow risk? It’s the difference between heroin and a pack of smokes. Or the difference between cash and the S&P 500. Nick Maggiulli lays it out for us.
Thanksgiving Day Loans
You might want to think about taking out a loan for this year’s Thanksgiving celebration.
Lunch Break Disasters
Here’s a good rule of thumb: don’t leave emergency surgery to eat your lunch in your car. And if you DO eat lunch in your car, definitely don’t fall asleep and miss that surgery. Otherwise, it’s going to cost you.
Money Song of the Week
I love Billy Joel. Mostly because of his music and his song-writing capabilities but also because he’s kind of hilarious. He’s this rich dude from Long Island who was once married to one of the most famous supermodels in the world and who helicopters in to gigs at Madison Square Garden. But he also sings passionately about the manufacturing industry’s heartbreaking 20th-century collapse.
Yes, I realize that Joel struggled badly for money at various times in his career. But listening to Joel sing about the loss of blue-collar jobs in the Rust Belt is striking, because his persona and the content in the song just don’t seem to fit.
I mean, when a guy who’s reportedly worth more than $200 million sings lyrics like, “So the graduations hang on the wall/But they never really helped us at all/No they never taught us what was real/Iron and coke, chromium steel,” it amuses me.
Don’t get me wrong: “Allentown” is one of my favorite Billy Joel songs. Especially when he and his band perform it in their new wave 1980s outfits.
I saw Joel in concert a couple of weeks ago. A few minutes after playing “Allentown,” he was joking about the best way to avoid drinking and driving was to do what he does: ride in big, fancy limousines. Which leads me to conclude that Joel, even if he seems completely out of touch with the song characters he writes about, can write a great tune about money or Bethlehem Steel or just about anything at all.
Tweet of the Week
On Monday, McDonald's announced it was bringing back an old favorite for a limited time: the McRib sandwich. And apparently, that's great news for S&P 500 investors.
— Nick Maggiulli (@dollarsanddata) November 1, 2021
[Editor's Note: Josh Katzowitz is the Content Director for The White Coat Investor, and his work has appeared in the New York Times, Wall Street Journal, Washington Post, Los Angeles Times, and CBSSports.com. A longtime sports writer, he covers boxing for Forbes, and his work has been cited twice in the Best American Sports Writing book series. For comments, complaints, suggestions, or plaudits, email him at firstname.lastname@example.org.]
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