How the desire by corporations and individuals to turn single-family homes into rental units is pushing up home prices, making it more difficult for first-time homebuyers to purchase a house.
In this episode you’ll learn:
- Why the United Nations is accusing certain countries and corporations of treating housing as a tradable financial commodity rather than a human right.
- Why Blackstone believes it is helping to solve the housing crisis by buying and renting single-family homes and that the United Nations is wrong in its accusations.
- How the drive by corporations and individuals to own rental housing is pushing up home prices, but not necessarily rents.
- Why the U.S. has a chronic affordable housing shortage and what can be done about it.
Mandates of the Working Group on the issue of human rights and transnational corporations and other business enterprises and the Special Rapporteur on adequate housing as a component of the right to an adequate standard of living, and on the right to non-discrimination in this context—Office of the United Nations High Commissioner for Human Rights
Financialization’s influence on the housing market has caused the U.N. to push for the view of housing as a social good and not as a commodity. Housing as an asset, however, is nothing new, and financialization actually enables individuals and families to obtain mortgages. David explains that while there is a housing crisis for those with lower incomes, the purchasing of homes for monetary profit isn’t as big of an issue as the U.N. seems to think.
Rent-backed securities influence the way housing is treated within the economy
Financialization has moved from being a medium for financing a home to a way for institutions to purchase properties and turn them into rentals in order to gain profit or create rental-backed securities. Just like mortgage-backed securities, the payments to the bondholders rely on the underlying payments of the renters. You can invest in a company that owns thousands of rental properties and earn a return of 37% YTD with companies such as Invitation Homes, which belongs to the Blackstone institution. In order to finance the purchase of such large numbers of homes, Blackstone issued bonds—these rent-backed securities. The Federal Government went so far as to guarantee some of the bonds in hopes that institutions such as Blackstone would revive the struggling housing market and give new life to places that had become slums and dangerous living areas.
Investing in real estate comes with figuring out the capitalization rate and determining whether the home you are investing in will give a worthwhile ROI. The cap rate is determined by the net operating income divided by cost. Some companies, such as Roof Stock, are a medium for individuals to purchase a home and then rent it out. At Roof Stock, some houses give an 11% yield—or cap rate. Others only produce a 5% cap rate. Still, individuals can now make a profit off of purchasing a home across the country through Roof Stock, making local competition for homes more intense, especially for first-time home buyers. David shares his personal experience with bidding on a home, only to be outbid by people who hadn’t even stepped foot in the house. Be sure to listen to the entire episode for more details on how financialization has influenced the way homes are bought.
The role of institutions in the financialization of the housing economy
While the U.N. accused Blackstone of needlessly renovating their rental properties and using that as an excuse to raise rental prices and disabling their renters to pay the rent, is that truly the case? There are mixed signals sent by the company Invitation Homes itself and its tenants. While some renters complain about the quality of service provided, the ratings of the company continue to be high, and their retention rate is higher than many other institutions. The fact is, landlords—whether company or individual—have to compensate for renovations and maintenance by raising the price of housing.
David explains that while Blackstone is one of the largest home-purchasing institutions in the nation, they only represent 0.5% of the single-family homes for rent in the U.S. Their role in the housing economy isn’t one of vast influences. Their actions will not make or break the rental housing economy. Some companies also purchase homes with the goal of “flipping” them—not renting them. This is a popular way to transform a home into an investment. A company or individual will purchase a run-down or older home and renovate “flip” the house and sell it for profit. Not all companies are purchasing homes for rent.
Financialization drives up home prices—not rental prices
Rental prices may remain relatively the same at $1,480/month. Single-family home prices, however, continue to rise due to financialization. This is caused by the cap rate on homes, which continues to drop as investors want to purchase more and more housing to either flip or rent. While rental prices have gone up 2.5% on average for the past seven years, home prices have soared. A home that cost $149,000 in 2012 now costs $226,800. The competition in purchasing a home has only become steeper with the introduction of industries and companies like Invitation Homes, and the ability of individuals across the globe to purchase homes through Roof Stock without even the goal of living in the home. This makes it extremely difficult for first-time homeowners because they are having to compete with so many different types of competitors.
The housing crisis for those with lower incomes
The true crisis, however, lies in finding affordable housing for those with low income. 25% of all U.S. renters belong to the extremely low-income profile. 71% of those low-income renters are spending more than half of their income on housing and utilities. In order for landlords to make a 5% yield on their rental property—the current, expected cap rate—they have to charge more than $1,500/month. In order to make a rental property a viable source of profit, landlords have to charge that much. Low-income individuals and families, however, simply cannot pay that. The housing market is definitely broken in this respect.
David suggests two solutions to this issue. Subsidization of the production and operation of affordable housing or the provision of assistance to low-income households so that they can afford the better housing are both ways that the financial gap could be closed. Listen to the whole episode for more examples of how financialization has shaped the housing economy and why it is both an asset and a detriment.
- [0:17] The concern of the U.N. with houses being treated as a commodity vs. a right.
- [2:27] The rise of rent-backed securities and the debated role of Blackstone.
- [8:20] The impact of single institutions on the national rent average.
- [9:59] House flipping vs. renting.
- [11:34] Buying a home to rent through a company.
- [12:56] David’s personal experience with being outbid on a house.
- [14:25] Why financialization is driving up home prices—not rent.
- [19:48] The housing crisis for those with low income.
- [22:53] Possible solutions for the rental housing crisis.
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