By Lambert Strether of Corrente.
I’m going to venture into a financial topic once again, by trying to imagine what would happen if Private Equity (PE) infested the housing market in my own small town. William R. Black explains PE’s modus operandi to Real News Network’s Jessica Desvarieux in this video:
Here are the key excerpts from my perspective as the smallest property owner* imaginable:
DESVARIEUX: So, Bill, can you just explain what’s happening here in the rental market? Have we actually ever seen this before?
BLACK: … One of the things that happens when you have private equity funds purchase large numbers of homes is about the first thing they’re going to do is go to the city or the county and demand a reassessment of those homes at a new, lower market value. And so one of the first effects of all of this tends to be, in the local community, a substantial reduction in tax revenues. …
DESVARIEUX: We should also note, Bill, about where they’re actually making these home purchases. The largest private equity firm in the world, Blackstone, their rental investments are really clustered in the areas hardest hit by the housing crisis. In states like Florida and California, investors account for about 33 percent of total home purchases respectively. …
BLACK: [W]eird things began happening, where people basically couldn’t buy homes. And they couldn’t buy homes because these professional investors were getting there first with all-cash deals. …
And so in the markets where, as you say, they’ve chosen to cluster–which, by the way, are also the markets which tended to have the biggest speculator frenzy** during the bubble phase. And this is , because often when they’re buying up the homes that were already constructed, what they’re doing is able to buy for a very low price from these professional speculators who were wiped out, rendered bankrupt when the housing bust occurred. So they can buy very low. They can use that low price, as I said, to then demand a reassessment of the property and a reduction of the taxes.
And then they can, you know, do some things that are constructive, after all. They can try sprucing up the place and actually providing rental housing.
From the 30,000-foot level, it looks to me like the FIRE guys are autocoprophagous — they make the crap they eat. (In another context, this pattern would be called a “self-licking ice cream cone.”) That is, the FIRE guys drove the prices up through speculation, sold the houses high, crashed the market, and bought the same damn houses*** low (extracting fees at every stage of the cycle). Sure, some individual FIRE guys got caught standing when the music stopped playing, but as a class, they did fine in the crash, just fine, so fine.
Also from the 30,000-foot level, it looks to me like the PE guys are using my own money to destroy my minuscule livelihood as a rentier. My profits, such as they are, are taxed as income; theirs aren’t. And even if the PE guys weren’t bailed out — readers, were they? — Flexian Treasury Secretary Geithner sure went easy on them. Easier than my town goes on me.
So, the questions I’d start asking:
1) Did the town or the State help bootstrap the cycle of crapification by allowing the speculators to get away with MERS-style (i.e., fraudulent) chain of title transfers, instead of working through the town office?
2) Does the town or the state help feed the cycle of crapification by providing PE rentals with services that they don’t provide local landlords? For example — this is a college town — police services? How about snow removal? How about utilities like sewerage and utilities?
3) If and when PE “spruces up” the properties, does the town feed the cycle of crapification by doing code enforcement on PE rentals with less diligence than they do with local landlord rentals?
4) If and when PE demands a lower tax assessment on the rentals it owns, what happens to the assessments of local landlord?
It’s the last question that’s the real Sophie’s Choice, and I don’t have an answer for it. In my own small town, we pay higher taxes for a “quality of life” that we enjoy, which mainly means a decent school system. So what do we do? Lower the assessments for PE, because some revenue is better than none, maybe — but knowing all the while that PE is going to crapify the units, so the assessment is likely to stay permanently low — leave the assessments the same, so PE takes a hike, or risk a tax revolt by raising the assessments on local landlords? Not an easy choice and I don’t envy the town Council.
Black has a way out of the Sophie’s Choice, but it’s not on the table:
The right way would be to take this away from the speculators and the vulture capitalists and have the government doing this and the community capturing any of the profits from the restoration.
Indeed. And the right way to have done it would have been for the localities to have retained control over the land title system, so as to prevent securitiztion in the first place. I’m not sure that issue can ever be put back on the table, however.
Readers, what questions would you suggest? And what would your policy recommendations be? Because right now — in the the hypothetical case — the town either loses its quality of life, or I get out of the rental business because I don’t want to crapify my house, or both!
NOTE * Tenants, no doubt, have their own issues with PE rentals.
There’s no escaping the stench of raw sewage in Mindy Culpepper’s Atlanta-area rental home. The odor greets her before she turns into her driveway each evening as she returns from work. It’s there when she prepares dinner, and only diminishes when she and her husband hunker down in their bedroom, where they now eat their meals.
For the $1,225 a month she pays for the three-bedroom house in the quiet suburb of Lilburn, Culpepper thinks it isn’t too much to expect that her landlord, Colony American Homes, make the necessary plumbing repairs to eliminate the smell. But her complaints have gone unanswered, she said. Short of buying a plane ticket to visit the company’s office in Scottsdale, Ariz., she is out of ideas.
“You can not get in touch with them, you can’t get them on the phone, you can’t get them to respond to an email,” said Culpepper, whose family has lived with the problem since the day they moved in five months ago. “My certified letters, they don’t get answered.”
Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.
Talk about crapification. At least when a landlord is local there’s some prospect of bringing shame to bear, even if you can’t get them on the phone.
NOTE ** I’m surprised Black uses the term “speculative frenzy,” which seems anoydyne compared to “accounting control fraud,” which is what the frenzy was.
NOTE *** Never mind that they’re crap houses. They’re an asset class, man! Anecdotal, but back in 2007:
I was looking for information on insulation when I ran onto these two real world quotes:
Can anyone weigh in on something I’ve taken recent notice of and am concerned about… Two townhouses undergoing renovation and one new multiple story apartment building in my neighborhood have used what looks like typical styrofoam (white, not blue, which I understand is construction grade) on the facades underneath the stucco. At one site I watched as a man cut the styrofoam into the decorative lintels, whacking off large parts and shaving down little bits to achieve the shape he wanted. Then the styrofoam was attached to the building and covered with stucco.
As Groucho Marx said: “You can even get stucco. Oh, boy, can you get stucco!”
The end result looks great, but I was shocked by the method and concerned on several fronts. Is styrofoam durable, or will these homes soon look shabby if the materials don’t hold up. Is this another example of cutting corners on materials and workmanship, decreasing property value in the long term? And finally, isn’t this an environmental no-no? I’ve heard styrofoam shouldn’t be cut or broken for environmental concerns, but I don’t have any info to back up that lore. Can anyone weigh in?
Styrofoam facades… Is that a great metaphor for what Our Betters have done to us with the mortgage meltdown, or what? And this:
A developer is constructing an out-of-context multifamily building nearby in Sunset Park. I’ve seen the plans which call for five space heaters and five water heater with a total load of 1 million Btu’s. This is for a 6,300 sq ft structure.
I took a look at the construction yesterday and apparently they are installing zero insulation in the walls. Is that legal, or smart? I thought R-13 was needed in walls in this clime?
Update: Yves here. Lambert ran this post without consulting me. I can answer his questions.
1. The towns have been decidedly unhappy about the loss of revenue due to MERS and many have sued. Save for the ones in states that have recording statutes like Oregon, they’ve lost most of these suits.
2. Almost certainly not. These properties are dispersed among privately-owned homes and municipalities are not able to discriminate for or against them.
3. Too early to say, but code enforcement pretty much doesn’t happen for existing single-family homes. Look how banks have in many locations done a terrible job of managing real estate that they own (due to them buying it in at the foreclosure sale). Homes have been stripped of copper and appliances, and have in some cases been used by squatters or drug dealers. Yet the local authorities have pretty much never acted against the banks, even when the neighbors complain. The PE firms are not going to let the properties be stripped. Their level of management would be comparable in the bad cases to a negligent owner, and unless you have clear evidence of a fire hazard, local authorities are content to let people wreck their own properties.
4. The only case where this has happened on a large scale is Magnetar with Huber Heights. The town was very unhappy with the request to lower assessments across their portfolio and gave them only about 20% of reassessments they’d requested: http://www.bloomberg.com/news/2013-12-23/wall-street-landlord-loses-round-one-in-ohio-school-tax-fight.html