You’ve been saving for years. A little from this week’s paycheck, a little from this year’s bonus, Christmas money from grandma. Maybe you’ve joined the 57 million Americans now working in the gig economy, just to be able to accelerate your saving for a down payment on your first home.
And now, as prices skyrocket higher, you’re seeing your dream of home ownership- the expected norm of your parents’ generation- slip out of reach.
It’s happening everywhere. In the first quarter of 2021, the median home price grew 36% in Kingston, New York. 28% in Austin, Texas. 33% in Boise, Idaho.
Nationally, the average down payment necessary to secure a mortgage is $18,627. It doesn’t take an economist to tell you what this means to the average under-35 millennial with a median net worth of $13,900.
Who’s to blame for making homeownership unattainable for most young Americans? Look no further than a consortium of private equity firms flush with cash, buying properties far above market value, with the goal of turning America into a nation of renters.
Private Equity Buying Spree
In April, The Wall Street Journal ran an article by Ryan Dezember titled “If You Sell a House These Days, the Buyer Might Be a Pension Fund.” Based on the data presented, pension funds are the least of would-be homebuyers’ worries.
The article paints a stark picture of the American real estate market: private equity firms are elbowing private buyers out of the market, willing (and able) to pay well above list price on properties across the country. Acquisition at all costs.
As Dezember reports:
Yield-chasing investors are snapping up single-family houses to rent out or flip. They are competing for houses with ordinary Americans, who are armed with the cheapest mortgage financing ever, and driving up home prices.
The biggest culprit? BlackRock, the private equity firm with an estimated worth of $15 trillion. Last year, as part of the first COVID-19 relief bill, BlackRock was given the “keys to the kingdom” of the U.S. Treasury bond market and is likely the single wealthiest private institution in the world.
The article quotes real estate consultant John Burns, who describes “permanent capital competing with [young couples] trying to buy a house,” creating a price floor that will “make U.S. housing permanently more expensive.”
Housing prices rose 11% in 2020, and are expected to increase by an additional 12% in 2021.
Private equity firms on multi-billion dollar buying sprees are driving much of the price hike. Private equity firms and other investment vehicles have accounted for approximately one in three home sales in many markets across the country.
Total Market Distortion
Corporate buying, which barely existed before 2010, is now the norm. Corporations bought one out of every ten suburban homes sold in 2018.
The buying sprees have increased up to 65% over the last year in some markets, like Fort Walton, Florida. Corporate buying increased 54% in Flagstaff, Arizona, and 41% in Tulsa, Oklahoma. Investors of all types now account for 20% of all U.S. housing sales.
“Investors” is a broad term that includes individuals buying investment properties to fix and flip or convert into rentals. However, the private equity buying spree has driven many of these would-be investors out of the market, according to Rick Palacios, head of research at John Burns Real Estate Consulting. As he told Marketplace, groups- including private equity firms like BlackRock- “that weren’t investing in the U.S. housing market, namely along the lines of single-family rental, realized, ‘Oh, my gosh, this is an asset class that has been doing well pre-COVID and is thriving during COVID — we should take a look.”
In Boise, for example, 22% of all home sales in 2018, 2019, and 2020 were non-residential, meaning the owners do not live in the property full-time. In the same time period, the percent of homes sold for cash increased from 16.7% in 2016 to 21.9% in 2021. Private equity firms are known for paying cash for homes, a practice that makes their offers more attractive to sellers than waiting for a conventional closing process.
Private equity, flush with cash, is typically willing to pay well above list price in order to acquire the homes they target. This drags would-be homeowners into bidding wars, often ones they can’t afford.
According to data from Zillow, 20.3% of homes sold in the U.S. in 2020 went for more than list price. This is up significantly from 14.2% just a year before. Things look even worse in 2021, where so far, 28% of homes sold are going for above the seller’s asking price. In Boise, the number is 60.5%.
The behavior of other private equity firms sheds light on what these massive firms intend to do with the homes they’re buying up: take the penny-pinching slumlord property management experience and bring it to a single-family home near you. And, in the process, make it so you have no other choice but to accept it.
One such firm is American Homes 4 Rent, which as of December 2019, owned 52,552 homes in 22 states.
AH4R is known for identifying ‘target’ properties and matching the highest bid, often from young families relying on a traditional mortgage, with full-cash matching offers.
AH4R’s CEO David Singleyn is explicit in their goal: make homeownership impossible, overleverage their tenants, and turn America into a renter class and force them to acclimate to ever-rising rents.
At a real-estate investing conference, American Homes CEO David Singelyn said that the average income for applicants to his company’s homes had risen from $86,000 to $91,000 in one year, and that this was a sign that “rents had room to rise.”
“This is a choice they make to pay rent, and their wherewithal to pay rent today as well as pay rent in the future, with increases, is sufficient,” Singelyn said. “It’s just up to us to educate tenants on a new way, that there will be annual rent increases.”
One AH4R renter was given the “choice” to have his rent rise 35 percent over three years after the firm bought the house he lived in.
And, since AH4R had purchased so many homes in the region, tenants’ options were limited- especially if they wanted to stay in the same town and keep their kids in the same schools.
Another predatory firm, Invitation Homes, is known for showing up with binders full of cashier’s checks to buy up foreclosed single-family homes for the purpose of converting them into rentals. Invitation is owned by Blackstone Group, and in 2012, was reportedly on a $10 billion buying rampage, purchasing an estimated $150 million worth of homes every week.
First-Time Homebuying “Impossible”
If you’re a first-time homebuyer, in the right market with sufficient savings and access to a good mortgage broker, it’s absolutely still possible to buy a home. It becomes problematic if you’re looking for certain criteria, though, like living within thirty minutes of your workplace and living in a neighborhood that is walkable and safe for children.
Private equity’s home-hoarding has had the effect, according to Nashville real estate investor Bruce McNeilage, of taking home buying out of reach for the vast majority of would-be buyers.
“They are paying cash and can close in five days,” said Nashville investor Bruce McNeilage said of the investment groups. “Every single time it’s going to be sold to the fund. If you’re trying to get into the market it’s impossible.”
Your other option: live in the slum Larry Fink and Steven Schwarzman are building for you.
As reported in Vox, conditions as a private-equity tenant are unsurprisingly decrepit:
One man’s house was sold to a private equity firm, which forced their tenant to take on responsibilities usually reserved to the homeowner like “mold remediation, landscaping, [and] carbon-monoxide detectors.”
Another woman’s rental home was infested with rats and cockroaches. Stories like these aren’t exceptional; they are par for the course.
It’s not all bad, though. Perhaps you can use the cockroaches to create delicious home-baked “meatless” goods. Tucker Carlson would approve.