Big landlords, big financing, big disaster.
SIMPLIFIED ANATOMY OF A COMING CRASH
The basic endeavor:
- Large, often publicly traded companies buy up single family tract homes by the hundreds, dominating markets for properties with proximity to certain schools, jobs and other facilities. They then rent to lower-middle class families who are typically unable to buy.
- As soon as they purchase the homes, the companies then sell off the future rental income of the homes to Wall Street entities. These become bonds offered to investors in various portfolios called tranches, after having them rated by big rating agencies. The rating agencies offer a supposedly reliable third party opinion of the likelihood of performance of the bonds.
- Companies use the advanced funds generated to buy more homes, repeating the process with more and more cash to work with.
- They repeat the process, with portfolios growing year by year exponentially.
The dynamics of disaster:
The purchase of the homes was initially in blocks of entire defunct neighborhoods left vacant or unfinished by the last Wall Street mortgage debacle. Those are all gone. So now the purchases are in much smaller foreclosure blocks or even single properties, for prices closer to market, or even higher.
Because the landlord companies obtain from Wall Street the home purchase money as well as an immediate cash payment back to them from selling the future rental income, their motivation to purchase is not true to market. They are effectively getting what we used to call a "cash-out purchase." The more properties they buy, the more cash they get. This is causing these home prices to rise above those which families would be willing to pay for the same properties. That's artificial demand, and that's a bubble.
The afflicted areas see a limited diversity of landlords, allowing the companies to set monopolistic rent pricing and also less desirable (shorter) lease terms. The companies have raised the rental rates above those of the market. Because there is virtually no regulation on these rents, there is no one to stop them. They simply say that this is what the market demands. But it isn't. That market is a false bubble they are creating.
Addicted to their cash advances and locking up the local rental markets, the companies are willing to pay more and more for the homes they acquire. This drives up the price for the real, qualified, home buying public, which is increasingly shocked at the appraisal values driven by the companies' practice. That's another bubble.
How it's going down twisted:
The companies won't forever be able to find enough houses to buy in order to satisfy their need for advanced Wall Street cash. They are already beginning to build homes to fill the gap, pretending as always that this is what the market demands. In reality, it's what their cash flow demands. The market has little to do with it.
The renters will not continue to sign on to the bad rental agreements, especially with the precarious position of the landlord companies growing ever more desperate, and outed in the press for these shenanigans. This will cause Wall Street to pressure the companies to produce more rental agreements for the new homes, no matter what. That's when false rental agreements will be executed and used to get more advances from Wall Street. That's a scam.
The bonds will default, the credit agencies will again collapse, the companies will go bankrupt and their officers will skate free, probably to serve in the public sector, where some have already run.
With billions in bond crashes, the single family home market will be dominated by bankrupt companies looking to unload, sending prices plummeting. Those who bought in competition with the companies on the upswing will be decimated and upside down in their homes, causing a second wave of property abandonment and crash beyond the immediate areas of purchase.
How to protect yourself:
- Don't rent a home from any big company
- Don't buy or rent a home in any market dominated by big landlord companies
- Don't buy any bonds secured by single family residential rents
You may not be keeping up with the Joneses for now, but you'll be ahead of them later.
American Homes 4 Rent
Colony Starwood Homes
rent secured bonds