Is the investor rush on single-family homes the next housing bubble?
Affordable housing activists say it drives up rents and fuels mass speculation
Private equity firms are driving toward a second housing bubble, spending more than $20 billion on single-family homes since 2012, according to a new report released Thursday by national housing activist group Right to the City Alliance entitled Rise of the Corporate Landlord: The Institutionalization of the Single Family Rental Market and its impact on Renters.
The report, which is critical of the rise of REO-to-rental and single-family rentals, says the proliferation of such rental properties have “proven disastrous for many low-income communities – with rents skyrocketing and corporate, absentee landlords proliferating in urban areas across America.”
While investor purchases of single-family homes peaked in 2012, it’s still abnormally high. Cash sales peaked in 2011 and are also still high.
“While cash sales are down from their July 2011 high of 42.8%, they are still very high (at 38.4%) compared to the 2001-2007 average of 25%,” said Mark Fleming, chief economist for CoreLogic (CLGX), at a conference on the topic two weeks ago. “Investors in general, whether institutional or 'mom and pop,' are primarily concentrated on two types of assets: distressed (real estate owned and short sales) and existing homes, rather than new builds.”
The report from Right to the City says the cities hardest hit by rental speculation include Atlanta, Phoenix, Los Angeles, Chicago, Las Vegas, Tampa, and Charlotte.
“The same kinds of financial institutions that drove the foreclosure crisis and bankrupted families across America have a new target: the rental market,” said Rachel Laforest, executive director of Right to the City, “The transformation of single-family rental housing from a ‘mom and pop’ industry to a global investment opportunity needs to be closely studied and regulated. If we don’t act fast, we could be facing another bubble and another crash.”
Among other highlights:
- Private Equity Firms have invested $20 billion in single family homes since 2012, buying mostly foreclosed properties in low-income communities and raising rents and security deposits to astronomical levels.
- Some analysts estimate the value of the rental market as a $1.5 trillion opportunity.
- This cycle of rental speculation could lead to yet another bust.
- In the meantime, families are left with absentee corporate landlords that have little incentive to make repairs, deal with pests, or discuss issues with rent.
Longtime REO-to-rental critic U.S. Rep. Mark Takano, D-Calif., weighed in on the report.
“Rental costs are getting further and further out of reach for working families. Wall Street's purchasing of hundreds of thousands of foreclosed homes for the purpose of converting the properties into rentals and securitizing them into bonds, is troubling and must be closely monitored by the federal government. This confirms and expands upon what my office found earlier this year,” he said.
"Nearly two-thirds of the tenants in these corporate rentals surveyed in my district are burdened with unaffordable rent. If there is anything that we should have learned from the housing crisis, it is that Wall Street's top priority is increasing its bottom line, not improving communities or creating products that provide long-term benefits to consumers,” Takano said. “The actions by these investors must be monitored to ensure that renters and local communities are treated fairly. I call on the House Financial Services Committee and other government agencies to take a close look at Blackstone and the other corporations following their lead.”
The report recommends the following 3 solutions:
1. Expand research
Private equity firms are opaque, thinly regulated, high-risk investors, so the need for publicly funded research is urgent to shed light on their impacts.
2. Rethink tenants’ rights for the era of big data
Tenants should know and have a say in how investor-landlords collect and use data, and how that could impact their credit score. The Consumer Financial Protection Bureau should aid tenant access to data and ensure that inconsistencies can be corrected.
3. Generate resources for tenants
Implementing a financial transaction fee on rental bonds.
Click here to read the full report.