258: How Financialization Pushes Up Home Prices

Welcome to Money for the Rest of Us! This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein.  Today is episode 258, it’s titled “Financialization is Pushing Up Home Prices.”

Housing as a commodity or a right

What is financialization? The United Nations describes the financialization of housing, and this is their
quote, “It’s a phenomenon that occurs when housing is treated as a commodity, a vehicle for wealth, an
investment, rather than a social good.” A social good is something that benefits all of society, such as
clean air, clean water. Some would argue healthcare is a social good, and adequate housing can be
considered a social good.

The United Nations produced a report under the direction of Leilani Farha. She’s a U.N. special
rapporteur on the right to adequate housing. She and Surya Deva, the chairperson of the working group
on business and human rights, sent a letter in March 2019 to a number of countries and to Blackstone
Group, one of the largest investors in residential real estate.

When you think about writing a country, who do you send it to? But they did, they just sent a letter to
the Czech Republic, Denmark, Ireland, Spain, Sweden, the U.S., and Blackstone. Their concern was this
financialization of housing. In the case of Blackstone, they were specifically concerned, “about the
egregious business practices of giant private equity and investment firms, which are scooping up
low-income and affordable homes around the world, upgrading them, and substantially raising rents,
forcing tenants out of their own homes.”

In the case of the country, such as Sweden, they write, “We are expressing our concern with respect to
your government’s practice of adopting laws and policies which treat housing as a commodity and
undermine the enjoyment of housing as a right. Our chief concern lies with those laws and policies
which have allowed unprecedented amounts of global capital to be invested in housing as security for
financial instruments that are traded on global markets, and as a means of accumulating wealth.”

The history of financialization

There is a longstanding history of financialization of the housing market, this is not something recent. The financialization of the housing market has facilitated the ability of individuals to get a mortgage, to be able to borrow from a bank on a house. Traditionally banks just held onto those mortgages. With government-sponsored enterprises such as Fannie Mae and Freddie Mac, as well as similar organizations around the world, that has allowed for individuals to more readily access capital to borrow to buy a house. But what they’re concerned about, the United Nations and this working group, is how financialization has moved from facilitating buying homes to big institutions buying up homes and renting them as single family residences.

Mortgage-backed securities is the tool where they package up mortgages, securitize them, and these are bonds, fixed income instruments where the payments to the bondholder are dependent on the payments on the underlying mortgages. But now there are rental-backed securities, where the payments to the bondholders are dependent on the payments by renters.

The fact that some of these companies that are buying up thousands and thousands of homes. These are companies that are now publicly traded, so you can invest in stock from a company that rents homes. Invitation Homes is an example of one of these stocks. It trades on the U.S. Stock Market, it’s ticker is INVH, it’s a 37% year-to-date.

In this episode we’re going to look at financialization of the housing market; is this a bad thing? Invitation homes, this unit of Blackstone, bought their first house in April 2012. They paid $100,700 at auction and they started renting it. At the time there was a huge glut of foreclosed homes.

This particular house was in Phoenix, an area where home prices had fallen 60%, where the Wall Street Journal reports that smugglers were stashing kidnapping victims, that’s how they described it, in houses across the border so they didn’t have to worry about neighbors. These houses were sitting empty. It was a huge crisis.

Ben Bernanke, chair of the Federal Reserve, actually encouraged these initiatives, such as Blackstone, to buy up these houses to start renting them out. The idea was it would stabilize the housing market. And it did. And then time would pass, and these companies would move on, but they haven’t. They continued to buy up houses. Invitation Homes owns 82,260 single-family rentals across 17 markets in the U.S. Their primary focus is in the western U.S., Phoenix for example, as well as Florida.

They use these rent-backed securities as a primary way of financing it, selling bonds to investors. And some of those securities have actually been guaranteed by the federal government. The United Nations says, “their business model, of which Blackstone is a frontrunner, is becoming the industry standard. Properties that are deemed undervalued, which generally means affordable to those living there, are being purchased in mass, renovated, and then offered at a higher rental rate, pricing tenants out of their own homes and communities. Landlords have become faceless corporations wreaking havoc with tenants’ rights to security and contributing to the global housing crisis.”

Is that what Blackstone is doing? A report by Reuters by Michelle Conlin wrote, “but in interviews with scores of the company’s tenants,” this would be Invitation Homes, “in neighborhoods across the U.S., the picture that emerges isn’t much one of exceptional service, as it is of leaky pipes, vermin, toxic mold, nonfunctional appliances, and month-long waits for repairs.”

Obviously, Invitation Homes doesn’t believe that’s the case. Chief Operating Officer Charles Young, in the article “disputed tenant allegations of slumlord-like behavior,” he said, “Invitation Homes serves hundreds of thousands of customers and company surveys show that they are 4.3 stars out of 5.” He said, “from time to time things happen, but when there’s an issue, we work hard to resolve it as quickly as we can.”

The United Nations sent a 7-page letter to Blackstone. Blackstone’s reply was 4 pages long. They replied within 3 days. They said the letter from the United Nations contained “numerous false claims, significant factual errors, and inaccurate conclusions.” They said, they’re “surprised and disappointed that the United Nations would send a communication without verifying the assertions.”

Blackstone’s view is that they have provided relief to devastated communities, and give homeowners confidence that there is a floor, that there’s some value in their homes, that they’ve spurred economic activity. Blackstone said they’ve invested $2 billion for renovations and improvements through Invitation Homes. That represents $22,000 per home. “Invitation Homes,” they say, “has a 96% occupancy rate, high levels of customer satisfaction (4.4 out of 5 average resident rating), and residents renew their leases and stay on average 50% longer compared to the multifamily industry.”

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