Wall Street Is Crowding Out First-Time Homebuyers
This November saw Blackstone's release of the "revolutionary" $479 million REO-to-rental fund that pays investors with the income streams from renters living in previously foreclosed homes. Blackstone, the largest investor in single-family rental homes, spent about $7 billion to purchase 40,000 homes.
To many, Yogi Bera's famous quote, "It's like deja vu all over again" seems way too fitting. But to the credit of Wall Street, they never totally repeat the past, and the American people or government may not allow them to forget what just happened during the end of the last decade.
However, this innovation presents a cautionary tale not about markets, risk, and government bailouts, but about the foundation of the American Dream.
Wall Street innovation isn't such a bad thing
At its core, financial innovation is a natural part of Wall Street, and it doesn't necessarily have to be bad. Before the housing bubble burst about five years ago, the public was pretty much unaware of the concept of "financial innovation." However, since 2008, the idea equates to that of a dirty word because of the excesses and abuses of the housing market in the mid 2000s.
Take for instance our same housing market. Back in the late 1970s, securitization became a very useful investment and financial tool. The baby boomer generation began to create an ever-growing housing financing need. Because of these demographics, banks would have had to constantly raise equity to service this growing need -- and that wasn't sustainable.
Before securitization, banks had to hold loans until the mortgage matured or the owners were able to pay the loan off. Securitization, however, allowed them to fund the loans off the balance sheet and supply more homes to more wanting homeowners.
What went wrong was innovation going awry
Some would say it was those greedy Wall Street Bankers doing what they do -- taking advantage of us who live on Main Street. That's the end result of two decades that saw the rise of the Chinese economy, the total reconfiguration of the U.S. banking system, a dot-com bubble burst, September 11, record low interest rates, the amplification of the campaign for the "American Dream," and regulators who turned a blind eye. Real estate drove the economy back then, and everyone wanted a piece of it -- even when there weren't enough pieces to go around.
So, before terms like "systemic risk" creep back into our everyday vocabulary, take comfort that the past's blatant lack of due diligence won't fly this time. Already, we have two pieces of the pie that didn't come about during the housing crisis:
Rating agencies are squabbling over AAA grades (that's a good thing).
Investors are asking questions to gauge how this instrument works and what it will look like in the future (eight years ago, no one even knew what they were investing in).
All in all, it may seem like we're going down the same path, but I believe these REO-to-rent bonds are built with more fail-safes than their mortgaged-backed predecessors. They will go the way of most Wall Street innovations: They will live or die by their management and the market.
What this move tells us about homeownership
We hear that the housing market is coming back, but we should be asking, "Why is it coming back?"
What's glaringly visible is that first-time homebuyers are being left out of this "rebound." In fact, they are being pushed aside. In the last decade, U.S. home ownership dropped from 70%-65%. That should be expected. But the numbers aren't getting better.
Over the last five years, Wall Street bought up about 200,000 homes for about $20 billion for the purposes of rental income.
RealtyTrac just reported that institutional investor purchases in September of 2013 accounted for 14% of all U.S. residential sales. That's a new high. Also, cash sales reached new heights as they represented anywhere from a third to nearly 50% of sales.
Wall Street balance sheets and cash from investors will always trump home buyers who have to get traditional financing to purchase homes.
It's been this private equity push that's driven U.S. home prices to their highest since 2008. And these same companies plan to make more purchases by securitizing their rental cash flows that will free up more money to do so.
The true cautionary tale and what is says about our housing market
Over the last eight years, renter households have beaten homeowners ten-fold. Are possible homeowners just scared of real estate these days, or is there more of a systematic problem?
It's a combination of both.
The mortgage that is a student loan is weighing heavily on newer graduates. According to a recent Deutsche Bank report, student loan obligations were the only type of household debt that actually increased since the housing crash.
Now think about this burden with already stringent mortgage regulation. First-time homebuyers can't come up with the necessary (high) down payment or credit score to qualify. And starting next year, it will be even more difficult to attain a mortgage under the new regulatory deadlines.
If the Blackstone REO-to-rent fund is a splash, you could see this market explode. And if it does, those homes will be taken at the expense of first-time homebuyers. What we don't want to see is a new generation of possible retail homeowners locked out and demoralized about a housing market they feel they will never be a part of.
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