Private Equity Residential Landlords Rushing to Cash Out via IPOs

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We’ve been skeptical of the private equity land rush to snap up single family homes for rentals. They’ve been a big enough force in the housing market nationwide to lead some commentators to question how solid the housing “recovery” is. Yet the combination of rising enthusiasm for housing and a richly-valued stock market is leading a raft of PE firms to ready IPOs as a way to take profits and establish valuations for their profit participations.

Now bear in mind that real estate is ever and always local, and PE guys have figured out that for operational reasons, they needed to concentrate their buying in certain markets, meaning, say, 200 homes on one side of Atlanta as opposed to 200 homes in 30 states. So it’s possible that some operators who got in early, or otherwise bought well have solid portfolios.

But then we have hot money stories like Las Vegas. As Reuters reported last week:

Local real-estate broker Fafie Moore says private-equity firms and hedge funds have largely “crowded out” local buyers like Marchillo. That’s because the investment firms have broadened beyond their initial focus – buying homes at foreclosure auctions. Now, they are also bidding for homes listed by private owners and banks. In a sign of how freely the money is flowing, Moore notes around 60 percent of all sales are in cash these days.

Fellow broker Trish Nash says she has seen cases where a home gets listed and quickly draws a dozen bids, many in cash. Realtors are talking about a mini-bubble forming here.

“There is an artificial appreciation in our market,” says Nash. “I know (the big investors) say they aren’t going to be flippers, but for them it is all about the bottom line.”

The article describes why the “recovery” may have been pushed beyond sustainable levels by hot money:

Cracks are showing in Vegas and beyond. Here, rents on single-family homes were down an average of 1.9 percent in March from a year ago. In other regions targeted by institutional buyers, such as Phoenix, Southern California, Atlanta and Florida, rents are either falling or flat, according to online real estate service Trulia.

Now mind you, the falling rentals story is an even bigger deal than you might think. At a real estate conference at which I spoke last year, one institutional investor who was on the receiving end of PE pitches for single family rentals sniffed that many were forecasting 5% rent increases for several years running. That’s wildly optimistic given high unemployment and continuing weak wage growth.

And of course, as we pointed out in earlier posts, the very activity the PE landlords are engaging in is bound to undermine their market. Tight rental markets have resulted from many homeowners losing their house through foreclosure, as well as the properties themselves being removed from the market via the foreclosure process. Buying and converting formerly owned homes to rentals increases rental supply which reduces landlords’ ability to maintain high rental rates.

What is particularly interesting about the Financial Times report on the IPO plans of various PE funds is their eagerness to go to market now:

A handful of companies that rent houses to single families are preparing to launch initial public offerings on the US stock market as their private equity and hedge fund owners take advantage of investor interest in the US housing recovery.

Colony American Homes, backed by investment firm Colony Capital, is expected to be among the largest in what is becoming a new area of the US publicly listed property sector.

Others looking at a listing include units of investment fund Ellington Management; Fundamental REO, whose fund received a large investment from Goldman Sachs; Waypoint Homes Realty Trust; American Homes 4 Rent; and Barry Sternlicht’s Starwood Property Trust, according to industry insiders and analysts.

The most popular view I heard last fall was that an exit via an IPO, with the rental business as an operating company, was the easiest and cleanest route. A portfolio of 1000 houses would be large enough to make for a decent-sized deal. But interestingly, back then, the assumption was that the portfolios would also need to have reached “stabilized yields,” meaning they were rented up and had seen a fair number of lease renewals so investors would know the turnover, vacancy rates, and costs associated with both making homes ready for the initial rental and freshening them up when a lease expired. That would take two to three years. We are well short of that timeframe. That means that investors will be buying a pig in the poke.

So why does this move make sense now? All you have to do is look at the continuing-to-defy-gravity stock market. I happened to be on the treadmill in a gym on Monday of the sort where like it or not, an individual monitor goes on when you work out. It was on CNBC and I didn’t bother changing it since I was reading. Even so, when Jim Cramer came on, it was interesting to observe how attention-getting his arm-flailing is even with the sound off. And via captions, his message was clear: The market is super! Even though earnings suck, it’s blown off the bad news. He ever professed to be mystified in how many companies in a a big range of sectors had disappointing earnings. So don’t fight the tape, just enjoy it and find a way to make money.

In other words, investors are so confident that the Fed won’t let them lose money that they are insensitive to fundamentals. That makes this a terrific time to launch questionable investments that tie into perceived uptrends in the economy. So as usual, caveat emptor.

Update: I neglected to include another reason to be skeptical: servicers are still holding back a lot of inventory via attenuated foreclosure timelines. Lysa flagged a choice tidbit on p. 21 of this report from LPS: “The average time of serious mortgage delinquency before foreclosure starts is now up to 492 days nationally, while the average days delinquent for those already in foreclosure is 834 days.” Even though the report discussed how the number of delinquent homes is falling, the attenuated timetable suggests that, as observers in some markets have indicated, servicers still have a lot of product in the pipeline.

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  1. hondje

    I live in BFE, a small blue color town called Pueblo in Colorado. I live in a rough neighborhood, and the house next to mine was forclosured over 2 years ago. For the first year it was occupied by squatters, and then after that someone came by, changed the locks and put up some signs saying it was owned by Fannie Mae. So, it stayed really quiet for about 9 months, with just the yard guys coming by to poke at the weeds. 3 months ago, it started getting regular – like daily, sometimes more – people to look at it, from all walks of life. Now, this house is a total fixer upper in a ratty neighborhood, the property itself is listed at 35,000 last I looked. Everyone who chatted me up was looking at it as an investment property, and quite a few were suits driving rentals and not your local slumlord. I have absolutely no conclusions or data to offer, other than it is quite unusual to me to see so many people looking at a shithole to rent out.

    1. Susan the other

      Just a thought, hondje. Is Pueblo near a big fracking operation? Or a rare-earth mine? Or a pristine water source? Or some kind of once-viable manufacturing? Because if you tie up loose ends sometimes you see the method in the PE madness. There are more than 4m foreclosures, and counting, out there. US manufacturing and other industries have tanked and there is no hiring to speak of. But curiously there are virtually fast-track plans to open wide America’s arms to work immigrants – say 4 million of them. So with a little insider regulation writing that translates into 4 million guaranteed renters.

      1. Ike

        Interesting comment Sue. Upton Sinclair’s The Jungle comes to mind. only this time it is energy, not beef.

  2. ScottS

    I figured out the concept (if not the term) of a counter-indicator by watching Jim Cramer flail his arms about. I had a coworker who was also consistently wrong about stocks. So consistently wrong, that it was worse than flipping a coin (50/50). This is an incredibly useful bit of information. It’s just 180 degrees the wrong way.

    But apropos of the topic at hand, I’ve noticed, in my own little anecdotal world, that the home sales have stopped. Just today, a house I’ve had my eye one went (again) from pending to active. The seller prepended this to the description of the house: “Buyer not performing AGAIN!!!”

    How long until Obama starts bribing us $8 large to buy houses again?

  3. Elliot

    A person I know slightly from a tradegroup was asking about these investments last winter..seemed like bad Karma (profiting off other’s bad housing) and also, by the time Yuffies have heard of it, it must be going south and needing sacrificial investors. (Yuffies = Young Urban Failures).

  4. Doug Terpstra

    So the blood harvest from turnips isn’t quite panning out as the models forecast. Surprise, surprise.

    “5% rent increases for several years running” is asinine malpractice at best, no matter how sophisticated the modeling software and processors. “That means that investors will be buying a pig in the poke.” Indeed. Bernanke’s rentier cartel, Obama’s “savvy” investors, are once again about to foist these non-performing dogs—Lloyd’s “shitty deals”, Paulson’s subprime bombs—on gullible suckers, including your 201K manager, before the unavoidable detonation. No surprise at all to see serial perp Goldman Sachs named in this latest fraud scheme.

    In Phoenix, choked inventory is still shrinking, thanks to Fed intervention and forbearance, so flips and investor sales, still near 30%, and are finally dropping after absurd price jumps . . . 36.5% last year according to The Phoenix Business Journal. That’s worse than original bubble inflation rates, and of course equally unsustainable. How can they possibly pull off almost exactly the same caper again within five years? If this blows up the global economy again, Bernanke could finally “swing” for it.

    1. wunsacon

      Sorry, what’s on p21 to support the proposition “they won’t make it in time”? I’m a bit dense on this.

      1. AbyNormal

        unloading/bundling that inventory while the rate of unemployment compounds…(really just my unrefined opinion)

  5. rjs

    Are Hedge Funds Becoming the Market in Real Estate?
    In a recent article, a reporter for the Atlanta Journal-Constitution detailed how his family had visited 80 houses before finally buying one.  Several of the houses were snapped up by hedge funds, despite full price offers or better from the couple.  What J Scott Trubey wrote about in his first person piece, “80 trips to find the perfect house” is what many others have been experiencing as hedge funds have come to dominate the housing market.
    Trubey tells how one bid was well over the asking price.  “We knew the house was hot, and we made an audacious bid-$8,000 above the asking price,” he wrote.  “But we lost.  Our Realtors said it was likely to a hedge fund, private investors scooping up homes.”

    gonna be a lot more losers before this is over…

    1. AbyNormal

      im having problems opening your headline link…ive heard Blackstone & Blackrock are buying heavily around atlanta

      In the Home Stretch? The US Housing Market Recovery
      (plenty discrepancies in their ‘shadowbox’)

      then there’s…
      Blackstone has spent more than $2.5 billion on 16,000 homes to manage as rentals, deploying capital from the $13.3 billion fund it raised last year, said Jonathan Gray, global head of real estate for the world’s largest private equity firm. That’s up from $1 billion of homes owned in October, when Blackstone Chairman Stephen Schwarzman said the company was spending $100 million a week on houses.
      It’s bought so quickly it’s “warehousing” more than half of the homes it’s acquired as it completes the purchase and hires staff and contractors to renovate and rent the properties, Gray said. It takes about 30 days to fix each home and then as much as 30 days to lease the property, he said. (im seeing empty sold houses going on 5mos…since ive been watching)

    2. Mark P.

      I’m sceptical regarding “a reporter … visited 80 houses before finally buying one. Several of the the houses were snapped up by hedge funds, despite full price offers or better from the couple.”

      It seems to me that hedge funds/PE making money in the residental RE market only works via their specific advantage of being able to buy significant numbers of REO properties at below market rates for cash.

      Maybe local exceptions to this exist here and there.

      1. Ms G

        I’ll bet you are right about speculators (PEs and Hedge Funds) getting deals at below market. That would be the “bulk purchase” discount, where they might be buying 100 REO properties from 1 bank or 1 Fannie Mae, and get whatever, 30-60% off who-knows-what-price.

        Another example of extreme market disfunction. Here you have millions of Americans who can’t afford housing, there’s a massive inventory of empty housing, and the people who could most benefit from the huge discounts — individuals who need affordable housing — get excluded so that the very people who created the affordability crisis can profit again.

        The exact same thing is happening in New York City with rental buildings — huge swaths of rent-stabilized early-century buildings have been bought by speculators as “portfolios” and the level of slumlordism (and fraudulently jacked up rents) is at an all time high.

  6. Aaron Layman

    Great post, and yes I would agree that these charlatans would love nothing more than to hand off their hot potato before it blows up in their face.

    Here in the Houston market, inventory continues to decline and home builders can’t find enough good lots(at the right price!) to build on. Even though starts were up over 30 percent in Q1 this year, overall inventory is still well below normal. In my West Houston market we’re down to 1.6 months’ inventory. That’s rather astounding when you consider that we don’t have zoning in our area, and builders have free reign to develop where they can find the right numbers. The problem is that everything has been so distorted, and prices re-inflated, that the builders are wary of getting too excited about a market that is running on steroids.
    Rents have indeed jumped in our area (and resale prices as well) as the decline in inventory and decent job growth have created pricing pressures on existing supply. Things have gotten overheated due to market imbalances, and we’ll likely see a decline in sales soon if inventory doesn’t pick up.
    Existing owners in our area seem to be aware of the distortions, and thus they haven’t rushed to jump in and sell with the recent price gains. Why bother when you’ll just get hosed on the other end trying to buy a replacement. Little quality inventory available right now, so best to stay put unless you really need to move.

    Yes, you heard that right. A Realtor telling you to stay in your home. In the spirit of full disclosure, I’m also a licensed educator as well.

      1. gepay

        Aaron Layman
        I am guessing you can write the way you do because you are a realtor in a good market which would be doing ok even if those things the post talked about weren’t happening.

    1. John

      Doesn’t work that way. Once the hedge funs pawn them off on Fannie/Freddie for a profit, Fannie/Freddie will insist they are worth way more then they are and refuse to lower the price by half or more to their true value.

      And they will sit empty. Rotting from the inside out. Just like this country.

      1. Ptup

        Houses are worth much more than you and I think they are today because of still very cheap and easy money available to the average schmoe to enter the market, and what still seems to be an unshakable faith in “home ownership” by most, even after all of this carnage. I thought that, by this time, I could take my cash and finally buy a nice little thing for the end of my life somewhere nice, but, ain’t happening. I’m watching prices go up in a lot of places I’d like to live. So, hey, whatever, I’ll continue renting, and, the more product on the market, the better. It’s not all about the numbers in the rental market, anyway. My landlord hasn’t raised my rent in five years in a pretty expensive market filled with banker scum all around me, because he appreciates my rent on the first of the month, and no whining or hassles otherwise. He’s seen worse, and doesn’t want to paint every year and maybe lose a month or two of cash flow just to make a little more each month.

        1. R Foreman

          Banks and hedge funds are looking for people like you to share their losses. You’d better get involved before prices go up.

  7. financial matters

    Definitely best to watch Cramer with the sound off ;)

    As you say with the stock market insensitive to fundamentals it’s hard to say how successful this will be. And unfortunately as someone mentioned a good chance to get this stuffed into regular folks pension plans. Another example of privatization gone awry. Rather than private equity there should have been fiscal support for local communities to renovate these foreclosures and move them in a more not-for-profit way.

  8. Jim in SC

    I’m not so sure we’re going to see cheap rents for years. Where I live, in the SC suburbs of Charlotte, NC, rents have not kept up with inflation for a long time. Over ten or twelve years, rents are up twenty percent, inflation is up thirty five percent, and property taxes are up a hundred percent.

    A factor that hasn’t been considered in predicting future rents is the information revolution. This New Republic article briefly mentions a partnership between Blackstone and Experian to monitor tenants’ rental payment history.

    If data like payment history, the condition in which a tenant left the property, etcetera, is going to become available in a credit report type format, then in the long run, rents are going to head up, not down. I think the Experian/Blackstone relationship is just the beginning.

    Sub-prime tenants are going to pay through the nose.

    1. Ptup

      I don’t get your logic. If the industry uses more and more available information to screen tenants, which I don’t argue they are doing, just as employers are using this info to trap the unemployed, then the market for them is even more restricted, right? What, like there will be a flood of tenants out there who will just smile and accept the 5% annual raises as they pay such high rents as they fear losing whatever low paying job they were lucky to find? Or maybe the millions of “retired” seniors living on Social Security as their only cash flow? Of course not. Blood from a stone and all that. Water will find it’s level here, and I doubt that houses will just sit and “rot”, especially when they can be owned fairly cheaply if mortgage rates stay low and taxpayers are supporting the new subprime FHA loans. Well, except for Florida. One good summer in that heat and humidity with the air turned off will destroy any dwelling.

      1. Nathanael

        The investors are stupid enough to leave houses empty, due to asking excessive rent, for 5 years at a time. After roughly that long, usually they bail and someone more sensible buys in, but the damage is done, especially in Florida.

        1. Ptup

          That’s ridiculous. You’re confusing the banks, or, mortgage holders from before the crash, with present investors. The banks had no incentive to sell homes or even foreclose on them with no mark to market valuations forced on them and other factors. These new buyers better damn well show some sort of profit somehow soon. They will not just let them sit empty for five years. Hedgies aren’t stupid, after all.

          1. scraping_by

            Certainly venal, and there’s many ways to say stupid.

            Oddly, you can do ROI calculations that make letting an asset sit unused look better on paper than doing a transaction for less than a necessary minimum. The shortfall transaction is a current, realized loss. Put it into the current month’s spreadsheet. However, the costs of nothing coming in can be made part of the year end calculations. A lot can happen in twelve months.

            Then, too, the money inputs can be dissociated from the particular asset, made part of some general overhead. That makes no money coming in, zero income, a better thing than a loss, negative income.

            When financial meets real world, weird things can happen.

          2. Ptup

            Dude, again, you’re talking about big bank accounting in the age of TBTF and TBTProsecute. Hedge funds and private equity actually have to show a decent income to justify their fees. They aren’t going to achieve that just with a little accounting fraud. Well, maybe for a few months, but, five years? Nope.

      2. NotTimothyGeithner

        Its a real world example of Zeno’s Paradox. Many claims make sense if we ignore a simple reality such as motion exists. If the customer base was reliable and the rate of growth of unchanging, then many things will work out.

        Inevitably, we will reach “no one could have predicted” stage which is usually a sign of a person listening to the tortoise and ignoring that Achilles or the hare is much faster than a tortoise.

        Moving away from that, much of the recent behavior out of Washington is based on replicating previous experience and ignoring the reality because the tortoise’s argument is persuasive and has a neat mathematical proof which makes people who are unfamiliar with math or least don’t understand what math means feel comfortable/cool. Proving that the hare or Achilles wins the race isn’t sexy or underscores the myth of technocrats.

      3. PeonInChief

        First, it’s long been common for landlords to squeeze less creditworthy tenants with higher deposits, and so on. The Blackstone proposal just enhances the data available. And it would not be surprising to see landlords raising rents 5%, as that is well within my 10/10/10 rule. Tenants do not move unless they can either get 10% better space, or save 10% on the rent for an equivalent space. That’s because only at 10% will tenants “make back” the cost of moving within a year. Finally, only when vacancy rates are well above 10% does supply and demand have any effect on market rents.

  9. lakewoebegoner

    absolutely zero chance one can make decent money renting SFH in a 10-year horizon without sweat equity unless you cut corners with deferred/suboptimal maintenance.

    too many death-by-1000-paper-cut-costs: roofing, foundation, lawn maintenance, carpeting, windows, HVAC, driveway resurfacing, pest control, appliance breakdown, etc.

    you’re better off putting your money in a fixed income etf.

    1. Jim in SC

      lakewoebegoner, you are 100% correct. This has been our experience over the past twelve years.

    2. EricT

      If the players can get Obama to mention this plan in a press conference, how much longer before these players get the landlord laws relaxed to the point where they will get the renters to pay for everything without a rent credit. I would even venture to guess that the federal government will probably eventually preempt local landlord laws as Bush did with the OCC versus the states during the earlier stages of the mortgage crisis.

    3. scraping_by

      If, on the other hand, you can get someone to write you a policy that will compensate for unusual depreciation, that won’t be your problem. It’ll be the problem of all of America’s other homeowners.

      And maybe the Feds, since they can and will turn corporate losses into corporate welfare. That is, all the rest of us taxpayers.

      And since the hedge fund managers bonus themselves on metrics other than profit and loss, it’s not their problem. It’s investors and other muppets.

      So you’re engaging in what the necons of the Bush administration called ‘reality thinking.’ In the financial world, you create your own reality by acting.

    4. Craigslister

      I recently spied a job opportunity to get $10/home/mo to maintain a home and $15/yard/mo to trim for a person with a car covering an area the size of san diego. The homes are not in the same neighborhood or section of the metropoloitan area.

      It’s the economics at the service end of the business model that makes me think . . WTF? That is about just enough money to buy gas and a camera to take drive by camera shots IF you can garner enough properties. This whole mess is unsustainable.

  10. TomDor

    Well, it’s just the same old story. Maybe a new term should be made up. I will call it micro-bubbles.
    You see the portfolio is built up in limited areas…this is done to spike the price of homes. Then ya get your IPO done….ya see this just gives the people who blow the micro-bubble a big shot of cash they take to the bank…IBGYBG.
    To perpetuate this for a little while… you got to migrate your operations a little bit – harvesting each little micro-bubble ya start and harvesting the profit like a combine in a corn field. Of course, what is left behind is a further withering of demand in the community thus harvested…no plans need be made regarding next seasons harvest as the micro-bubble blowers will have cashed out and moved on – leaving behind unproductive soil.
    Ahhh, the games the predators play…such carnage the majority blindly let happen. We just can’t admit how stupid and destructive it all is.

  11. diptherio

    Typo alert:

    ‘…one institutional investor who was on the receiving end of PE pitches for single family rentals sniffed that many were forecasting 5% rent increases for several years running. That’s wildly optimistic given high employment and continuing weak wage growth.”

    Should be “unemployment,” methinks.

    1. Little Lord Forecloseroy

      Pam Martens suggested no-jobs as one of the key causes of not being able to pay the mortgage. A major hotel compnay in the DC area is accelerating an end to domestic information technology careers, through aggressive outsourcing. These are example of “rent or mortgage stable” careers that are being dismantled for the greater corporate good. Pam Martens:

      “I think it’s time to take Wall Street literally: they’ve made it abundantly clear they have an insatiable appetite for killing things: the housing market, the financial system, the economy, reform legislation, the next generation’s future. “

  12. Capitan Enselmo

    If people couldn’t afford their mortgage payments on hyper inflated housing, will they now be able to rent at a payment that’s quite close to that unaffordable monthly toll?
    Presumably, this depends on which market is being sold to, upscale producers are content with a smaller numbers of wealthier customers. So it is with housing.

  13. MB

    There *is* a bubble in Silicon Valley. FB and valid IPO money has driven anything in affordable limits up w/all cash offers and going 80k+ over asking. So let’s see.

    2001 Tech run up – unaffordable bubble.
    2004 thru 2008 – wild insane bubble thanks to Greenspan-irrational exuberance.
    2008 thru 2010 – some bargains, but nobody knew where the bottom was.
    2010-2011 – seemed to be a reasonable re-set, though banks figured out how to robosign, sit on inventory and dribble it out at “retail” prices. If you have all-cash, you could get deals. At 800-1 mil plus in my area, that’s a hefty amount of cash if you own your home already and don’t want to rent. Otherwise, it seemed sort of reasonable for *here*. “Free-market” (ha-ha) not allowed to work due to free money for banks. No distress for them, thanks to Bernanke.
    2011-now. All cash and rising. Compared to now, 2011 was a bargain, but I didn’t realize it would go from foreclosures and short sales to bubble in one year. Lots of IPO money buying hard assets if comparably reasonable to rent out or again, or stock option buyers prepping for inflation days ahead and steady rent increases. Not sure if it’s syndicated investors, I mean speculators/boa constrictors, looking for yield to yet ongoing, squeeze the renters to death.

    Either way, who wants to buy in a bubble, even if you could win against all cash bids? I’d have to sell my house in one of the best zip codes, relocate to an apartment and HOPE like hell I can find something better. The truth is – I can’t. Sadly, I cannot move just like it’s been here for umpteen years.

    1. MB

      * Qualifier: To try to buy anything decent or with an iota of charm. Ranch cracker box is the standard here.

      1. evodevo

        You want to live in a small town in central Ky, there are plenty of Victorian bargains here, if you have nothing keeping you in CA. There have been several cash out in CA and move here, with happy results.
        Be warned, however, that some of the stereotypes are true!

        1. Jim in SC

          There are plenty of real estate bargains throughout the South and the Midwest. I even saw a sign yesterday ‘owner financing’. Hadn’t seen that since the ’70s.

          1. MB

            I’m wondering if they will ever reinstate ASSUMABLE LOANS! Fat chance. Fairness is out and rigged is “de rigeur”. Ha.

  14. TomDor

    This whole set-up has been going on forever. News of a new production plant going up in some corn field gives the speculators a chance to buy in low (many times trading in inside information and local bribes and funding to get designated politicians elected). So new homes go up and land prices sore without any effort on the landowners/homeowners part. This rising of prices makes the land, for the new facility, go-up… leaving less for actual construction….then the people moving in to get jobs need to pay more to live in the area and they demand more wages to buy in to inflated property/home prices… may ask, where is the job base in these areas the speculators are buying?. Anyway, soon enough, the cost of living and producing goes up and, what once was a competitive location for production is no longer competitive – the speculators have moved on at this point having taken their gains while leaving the downside to the people living in the area. Just slap in to the equation – globalization and, you see where it all leads.

    This kind of play is the basis of the migration of people from inner cities to the suburbanization of America – it is this speculation that has driven the cost of living and producing up. It is the basis and derivative basis for the concentration of vast wealth for a minority who overwhelmingly have made their gains from speculation.
    It is the result of taxation that overwhelmingly favors financial speculation over labor and industrial capital.

    It is known that more dense areas of population (cities) is a more efficient form of community – less transport costs, energy costs, etc. Yet, we see a continual expansion outward while cities have been suffering from doughnut syndrome. The resultant inefficiency can be seen in the amount of proportional consumption in resources the USA uses in relation to the rest of the world.

    It is the speculative nature underlying and extracting it’s portion of the economy that drives costs ever higher. Real capital, labor and a place to produce (a spot on the planet) drive costs – a big proportion by far – is in support of the rentier class, the exploiters who employ no labor but, gain in asset inflation and extraction of the buying power of most people thru economic rent/speculative gambling.

    Most people are under the delusion that rising rental rates and higher real estate prices are good for the overall economy, a sign that things are getting better…..The truth is just the opposite.

  15. Trent

    posting from Pittsburgh and the real estate market in the city right now is going haywire. The past couple of years have seen rents rising and now it seems that everyone is trying to buy a house. The general idea seems to be to buy a house, fix it up while living in it then rent it out. I suppose that makes sense being that the city is still bankrupt and the public school system continues to fail, along with sub standerd public transportation. Everyone seems to be putting their money down on our local messiahs (higher education and healthcare), but it feels like its only a matter of time till it blows up. Anybody else live in an area dealing with the same factors?

      1. Trent

        actually the gas market has shed jobs the past year. I’m not saying it isn’t a factor, but i think the majority of the money still involves education and healthcare.

        and this one is kinda funny coming from the president of CMU, though i doubt his school will be that harmed by the bursting of the student loan bubble.

        1. Jim in SC

          Healthcare and Education are the gods of the moment. I think this is true everywhere. Healthcare is still coasting on mid-20th century drug discoveries and the prestige of conquering polio and a few other scourges. The benefits of better scanning technology (MRI,CT,PET) is a mixed blessing, in that many conditions resolve themselves before presenting symptoms, and discovering things that are not yet producing symptoms–colon cancer is an exception, of course–causes needless worry and expense. Of course, don’t ask your barber if you need a haircut.

          The proliferation of dental insurance plans is causing an explosion in the reported incidence of periodontal disease, because that’s what dental insurance pays the most for in relation to the dentist’s expense. In contrast, they don’t pay enough for preventive care to cover costs of cleaning.

          As for education, our secondary schools and colleges are following the money, i.e..whatever the federal and state governments will fund and parents borrow to pay for. It is something of a Field of Dreams ‘if we build it, they will come’ mentality. In other words, if we pile the educational credentials and experiences on the students, employers will come to town and wish to employ them for beaucoup wages and benefits. Despite this dream being realized only seldom, keeping the dream alive tends to correlate with re-election in a municipal setting.

          Yesterday I attended a graduation ceremony for our local Technical College. The school requires virtually everyone to take extensive remedial math classes before they can take the one required math class for credit. Nevertheless, I was surprised by the very few graduates in truly technical fields (say two year engineering degrees). On the contrary, there were thirty nurses, and quite a number of accountants and dental hygienists too. The graduate we were there for was getting an RN, and she tells us that their class started with about eighty, and that many of the people who finished owe $30,000 to $40,000, and this at a state school! What about all the people who dropped out, I wonder? Are they working at Wal-Mart and paying their debts on minimum wage? There would certainly be a lot more buying power in the economy if all the people who went into debt to get an educational credential they didn’t get could have that money back.

          1. Trent

            its funny, over the years of reading about this crisis and doing my own research on the nature of money and such i’ve had some ah ha moments. All this learning has caused me to look back on my childhood and think of things such as baseball cards, really most american boys first interaction with economics (trading cards, and getting value for yourself, what you are willing to give up, knowing the person who you are trading with and what they value). Many more instances come to mind, beanie babies, Pogs, and so on. I’ve come to the conclusion that money in its current state is fraud, and without something limiting its creation any industry will become a bubble. As one collaspes and trust is destroyed it must move to an area where its effects are less visible until it collaspes that industry after quite the run up. I am certain that this last attempt at overall reflation has finally taken the last few industries not totally inflated into the woodshop for their schlacking. This is the bubble we won’t be able to reflate from when it bursts.

  16. Mary McCurnin

    My husband and I live in a suburb of Sacramento. We learned we have to move from our rental home in August and have been looking around. The market is flooded. Have bad credit? Doesn’t matter. All you need is to prove income, that you are not a felon, and that you have never been evicted. Rents are down probably 10% and I think they will go down even further by the time we find a new place to live. I am not even worried about finding a landlord that will take our two dogs and two kittahs. There is a feeling a panic out there and it is not the renters!

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