Comment by observationist
2 days ago
It's not that simple - the problem is that those institutions are market makers. They are a tiny portion of the market, but a huge driving force in setting and manipulating prices, because their properties get leveraged, instrumentalized, and securitized, with derivative products, speculation, and all sorts of incentives that you don't normally want operating in the arena of housing.
The things that they do have massively outsized downstream impact contrasted against their relatively tiny overall participation in the market, and they can afford to behave in ways that manipulate the behavior of the majority.
If you can decouple them from the housing markets, you also decouple the interests of the donor class, and you allow for policy that doesn't maximize the cost of real estate over the interests of the majority of the population.
> They are a tiny portion of the market, but a huge driving force in setting and manipulating prices, because their properties get leveraged, instrumentalized, and securitized, with derivative products, speculation, and all sorts of incentives that you don't normally want operating in the arena of housing.
Raising prices when you only have a tiny portion of the market does not work. People won't buy them when there's another house for less.
It's not just raising prices - it's holding prices steady at some point without the concurrent pressure to sell, for example, or manipulating other markets in order to raise or lower prices in an area, or using other mechanics to manipulate pricing, across the entire market, depending on the intended actions. If they intend to purchase properties, it benefits them to depress pricing in the area, if they intend to rent, they can afford to impose artificial scarcity until they force renters to meet their rates, and so on.
Normal landlords don't have effectively infinite money with no forces bearing prices down, nor do they have the capabilities to influence markets. Even tiny percentage shifts can result in significant fluctuations in the prices consumers see. It's a very nuanced and complex system in which these institutional investors have very outsized influence.
You're telling a just-so story, and you can tell because there isn't a simple schematic 1-2-3 story you can make from this about how these people exert control over home prices. Words mean things; wielding scarcity requires you to control enough inventory to manipulate scarcity, and REITs and corporate buyers empirically don't.
I get why people like telling stories like this: it suggests there's a single boogeyman that can be dispelled to solve the affordability problem without painstakingly goring people's oxes state-by-state and municipality-by-municipality. But it's a fantasy.
If you can tell this story in simple step-by-step form, you will. I think you could tell a story about how a large corporate buyer clears out all the marginal buyers for some thin market like an individual subdivision or tranche of new construction housing in the Sun Belt. But I don't think you can tell a realistic story for them being "a huge driving force in setting and manipulating prices" across the whole market. I look forward to seeing your attempt, though.
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> it's holding prices steady at some point without the concurrent pressure to sell
Earlier you were arguing that investors were acting as marketmakers and now you say this. Marketmakers make their profit from the difference between buying and selling some asset. They don't want to hold prices, they want turnover. If investors really are acting as marketmakers it's actually a good thing because marketmakers have the effect of adding liquidity to a market.
if they controlled even a notable minority share this might make sense, or the majority of a specific region or type of stock where there are limited alternatives, but I don't see any examples of this. We didn't even see this type of phenomenon in the biggest US crash markets where banks owned entire neighbourhoods; even they were not immune to overall market forces. To suggest PE has anything like infinite money and/or time totally ignores that everyone is subject to opportunity cost. A fund that under performs for any length of time because they're playing some sort of marginal long game won't exist for long.
You just haven't presented any evidence or even a hypothetical where this does or could happen.
This just isn’t true - I sort of wish it where.
> If they intend to purchase properties, it benefits them to depress pricing in the area
Yeah, that’s true of everyone but how would a bank/individual do that? By selling… But if they sell while they’re depressing prices, they lose money!
> Normal landlords don't have effectively infinite money with no forces bearing prices down
Neither do banks. They have quarterly earnings, tax bills, they need to buy more stock, cost of capital etc etc.
> It's a very nuanced and complex system in which these institutional investors have very outsized influence.
Just saying ‘it’s complex’ is trivially true. But, supply and demand isn’t some small factor in that calculation - it’s an iron law that exerts itself at all times.
If a bank wants to ‘manipulate prices’ then, without a monopoly, the only way to do that is to dump or buy. But if you buy up homes to ‘push up prices’ … then you end up with a bunch of homes which you paid more than their current value. Not a great business.
The person who has the real unfair advantage in the US happens to also be the most sympathetic person - the owner occupier.
This is extremely silly.
Prices are high because we don't build enough houses which is mostly because it's really expensive to build houses, then the houses we have built are all owned by empty nesters and people with 1 - 3 investment properties.
Everything else you're describing is completely ridiculous.
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I don't think that's quite what the comment is claiming. They're not saying that some small portion of homeowners are working together to raise prices. I think they're more talking about the concept of "marginal buyers." It's the marginal buyer that sets prices, not the average buyer. And particularly when supply is heavily restricted, the marginal buyers can be a very tiny portion of all buyers, and can look very different from the average buyer.
Marginal buyers have a big impact by adding a lot of liquidity, but I'm not sure they manipulate prices that much, given that if they ever tried to move prices far from the margin they would cease to be marginal buyers.
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Define "tiny portion of the market", especially "market".
There are many houses in the US. Not all of them are for sale. There's a difference between having a "tiny portion of the market" when you define "the market" as all houses in the US, and "tiny portion of the market" when you define "the market" as the houses that are actively being bought and sold. I would not be surprised if corporate involvement was a significantly higher proportion of the latter rather than the former.
It takes a lot less to put your thumb on the scale of the "liquid" portion of a stock if it is significantly smaller in size than the total stock.
The market meaning all real estate, residential and commercial, and tiny, as in under 3%, with regards to what is owned by the institutional investors. That's probably higher with regards to properties that are or have been on the market in the last ten years or so. From what I can tell, the other ~97% is owned by individuals and smaller funds and mom&pop companies, with fewer than 20 properties involved.
In some dense urban areas, up to 10% of the local residential properties are owned by funds or investors. There's also overlap with investment networks where you're not getting to BlackRock levels, but you'll have a web of companies with mutual interests and a network of private debt and collateral, and these make up around 20% of the whole. For the most part, though, the majority of single family homes are not institutional. Even multi-family units, apartment complexes, and other rental properties are only in the ~10% range of institutional ownership, with the remainder owned by individuals, mom&pops, and small investment networks.
The conjunction of capabilities and incentives in combination with a huge buffer of wealth allows institutional investors to manipulate things in ways that aren't healthy for private home ownership, and the downstream social and economic impacts of being forced to rent, or hold debt that's not properly reflective of the value of the property.
We should impose reasonable policies that serve the interests of the people, and not simply maximize wealth building at the expense of citizens and families that would benefit from home ownership.
To add to this: the "total stock" is also completely different to any other asset in terms of market forces, because it varies widely depending on the buyer in question. People don't shop for "a house" and address the entire available market of houses in the country. They shop for a house in a particular area/city, of a certain value, with certain amenities, in proximity to other things, etc. etc. etc.
In this way houses are virtually unique in terms of financial vehicles and it introduces all manner of complexity and otherwise strange forces into the market. You can't simply treat it like any other commodified asset.
That's the problem, they don't care if people will buy or rent them. They literally just sit on them writing off any losses against other business units.
When enough institutional investors are all doing that same thing, the market suppply becomes restricted, especially in focused regional areas. It ends up indistinguishable from collusionary antitrust, though there's no actual communicated collusion so it's not technically illegal. In a normal situation like that, all it takes is a single participant to cave and drops prices to take advantage of the demand. But in this case the institutional investors can keep taking the losses indefinitely so no one ever feels the need or benefit to "break" first, and they can maintain it forever.
I generally agree with you on market discussions, but I don't think you're considering this one correctly. Imagine a country responsible for just 10% of global oil production decided to stop producing. What's going to happen oil prices assuming no other country starts producing more?
They're going to skyrocket in a seemingly irrational way. But it's completely rational. The reason is that they're a finite resource that is needed, and so there is very minimal price elasticity. People will pay as low as they can, but simultaneously must have oil and so have a practically uncapped price ceiling if that's all that's available. The same is true of housing.
You're right that people won't, generally speaking, buy a house for $100 when there's another one for sale for $80. But what you've done there is greatly increase the demand for that $80 house, which is now going to naturally send its price upwards.
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Finally there's the issue that figures on the percent of homes that are owned by investment groups are misleading, because they aren't just buying homes randomly. They're going to pick up lots of houses in precise areas, and so the impact on prohibiting this behavior will be dramatic in these areas.
> so there is very minimal price elasticity.
Having lived through the various oil crises, I can confidently assert that there's a great deal of demand elasticity.
For example, when the 70s oil crisis hit, people stopped driving to the store for a loaf of bread, but would shop weekly instead. For another, people buy more fuel efficient cars when gas prices are high. For a third, people switch to electric cars.
There are regular major disruptions in the flow of oil. Pump prices change on a daily basis, and that results in the amount of gas available == number of gallons customers pay for. No gluts and no shortages.
But if you bought that tiny portion of the total market all at once or in concentrated areas you better believe you can influence it.
https://papersourceonline.com/wall-street-has-spent-billions...
https://www.kut.org/texasstandard/2022-06-14/texas-home-sale...
The thing is that there is only a tiny portion of houses ever selling at any time. The only ones that would benefit from selling are people who are downsizing or moving away.
If you buy 60% of the properties on market, the rest will see this and adjust their own prices. Usually this only works when the macro is favourable (low interest rates, easy mortgage applications, etc.), but it is definitely a large factor. It sometimes creates a even hotter market, with people thinking that real estate goes up forever, then they sell.
You're right that it's not always large investment groups. Vancouver in Canada had the same thing happen, but mostly from foreign investors and criminals washing money. The latter was facilitated by politicians who cashed in big on this.
I don’t understand the last sentence in your second paragraph. If “people [think] that real estate goes up forever” why does that trigger them to sell?
Going by the graph in the article, that's still ~13% of homes owned by investors with >5 properties. And that's total of what is currently held, it speaks nothing of liquidity. That number likely includes investors who have had that property for a long time, the current property buy-up likely means far greater than 13% of the market right now is going to those sorts of aggregators.
Dropping the price of a house by a few percentage points can be the make-or-break for some families. And small changes in availability can have large impacts on price.
If we banned (or severely penalized) all entities from owning more than 5 residential homes, this would probably reduce cost by a few percentage points across the board. That's thousands of dollars.
Personally, I think unoccupied homes in general ought to be penalized (beyond just tax burden, an actual vacancy tax).
You may be interested in learning about the Land Value Tax[0] which will in effect, taxes become more burdensome for leaving land unproductive (e.g., empty housing or land). It also shifts the calculus on home improvements, which means remodeling your home or doing other perhaps large pieces of upkeep will not trigger a property tax increase as it does today, which is better for median home owners as well.
[0]: https://en.wikipedia.org/wiki/Land_value_tax
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>Personally, I think unoccupied homes in general ought to be penalized
As is done in the UK
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I think Vancouver has a vacancy tax. Does it work?
> People won't buy them when there's another house for less.
As others have pointed out housing markets are illiquid and tend to have a limited set of sellers at any given time such that the race-to-the-bottom doesn’t happen very often.
Rather, an institutional investor buys high on houses in desired neighborhoods then charge high rents on their portfolio. Subsequent sellers in the same neighborhood see the high closing price and ask for even more.
You don't have to control the whole market to manipulate it. Housing is localized and the ideal situation is people hold onto their homes for decades before going on the market again and spend months if not years looking at purchasing a home. But investments into single family homes operates on completely different timescales and pace with an entirely separate list of considerations and values.
There won't BE another house for less, because of the way the real estate market works. If a house goes up in price, others do to.
There is always another house for less. You will almost certainly have to sacrifice on something (size, location, condition) in order to find that lower price but you can get there if price isn’t flexible.
Does no one remember “drive til you qualify”?
When a strongly capitalized minority cohort can sustain positions that are untenable for normal market participants, they can act as a kingmaker by shaping outcomes at the margin.
The theater on fire has a small exit door.
It can in an extremely illiquid market.
I assume that you are already aware that regular home buyers use debt, and, thus lots(!) of leverage to buy their homes. The average down payment for first time buyers in the US is about 10%. That is a lot of leverage! Probably much more than corporate buyers of residential homes.
What does this term mean? I have never seen it before. My spell checker does recognize it as a word.
Regular home buyers almost always enter into borrowing agreements with their bank that fit loan buying programmes with Fannie Mae and Freddie Mac. This allows for most of these loans to be securitized into MBS.
Can you give an example scenario / product? Else, this feels like handwaving. CDS on MBS is an absolutely tiny market these days.
There is already plenty of speculation from regular home buyers in the US. Do you have any suggestions to reduce the existing speculation by these regular buyers?
The vast majority of land in the country has been owned by capitalistic profit motivated players since 1776 - individual home owner occupiers.
If you doubt they will lobby to increase their profit, try proposing anything that has a 0.1% risk of their property value going down and see how they react.
An article making that case: https://www.thebignewsletter.com/p/messing-with-texas-how-bi...
A rebuttal to that article from Derek Thompson: https://www.derekthompson.org/p/the-anti-abundance-critique-...
Noah Smith on "Corporations aren't the reason your rent is too high", with nice things to say about Thompson:
https://www.noahpinion.blog/p/corporations-arent-the-reason-...
Quoting Thompson:
"The U.S. has roughly 140 million housing units, a broad category that includes mansions, tiny townhouses, and apartments of all sizes. Of those 140 million units, about 80 million are stand-alone single-family homes. Of those 80 million, about 15 million are rental properties. Of those 15 million single-family rentals, institutional investors own about 300,000; most of the rest are owned by individual landlords. Of that 300,000, the real-estate rental company Invitation Homes—in which BlackRock is an investor—owns about 80,000. (To clear up a common confusion: The investment firm Blackstone, not BlackRock, established Invitation Homes. Don’t yell at me; I didn’t name them.)
Megacorps such as BlackRock, then, are not removing a large share of the market from individual ownership. Rental-home companies own less than half of one percent of all housing, even in states such as Texas, where they were actively buying up foreclosed properties after the Great Recession. Their recent buying has been small compared with the overall market."
“properties get leveraged, instrumentalized, and securitized, with derivative products, speculation, and all sorts of incentives”
Spoken like someone has no clue what they are talking about and just throwing out jargon
I think specifically spoken like someone who saw The Big Short very recently
The truth is that BlackRock buying rental properties is the opposite of that. The foundation of the MBS market is in its name: mortgages.
I somehow doubt these institutions are market makers in the housing market, if they had been ones then they'd be offering to sell and buy houses all the time, this is a market maker's function.
Why doesn't your explanation apply to every commodity? Gold, cocoa, mustard seed, electricity? These are also essential products subject to the influence of markets and market makers.
You can substitute cocoa sources globally, but you can't substitute a house in Charlotte with one in Phoenix.
If cocoa prices spike, you buy less chocolate. If housing prices spike in your job market, your options are: pay more, endure a brutal commute, or uproot your life. The demand is far more inelastic.
> Gold, cocoa, mustard seed, electricity
I can easily live a full and meaningful life without owning gold, drinking cocoa or eating mustard. Those aren't essential and have decent substitutes.
Electricity is essential, just like housing and it's very highly regulated.
That's overly reductive. I was hoping that the specific commodities weren't going to be the focus, but I guess that was naive.
If you're going to use "housing" as an umbrella for its substitutes, let me do the same. Instead of wheat, beef, pork, cocoa, sugar, etc, let's call that "food". So now food is as essential as housing. Why doesn't the housing complaint against speculators work for food speculators?
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Just curious, where do you live that electricity is sold in an open market? Seems like a very strange setup.
Much of the US works this way, but individual consumers don't buy it that way. It's the level above that.
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Not buying this. Have you seen studies that support this line of arguments?
A “market maker” provides liquidity that allows trades to clear and keeps prices stable. They make money on the bid-ask spread. They don’t have leverage to raise or lower prices.
Another thing: Residential homes are never considered liquid assets. They don't need professional market makers.
Liquidity doesn’t make something more or less of an investment, it makes it easier to buy and sell. Liquidity in residential homes is a good thing. It means that it’s easier to sell your house and buy a new one if you need to move for whatever reason.
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If what you say is true, wouldn't the same argument apply to practically every market these institutions are in? Oil, timber, steel, AI stuff, cars, you name it.
The majority of the US population (65% https://fred.stlouisfed.org/series/RHORUSQ156N) are home owners. I agree that high home prices are not in the interest of the majority of the population, but I bet the majority think so.
If you have a model where you can do price manipulation of something while owning 1% of it, I understand why you wouldn’t share it. Where are you on the Forbes Billionaire List, out of curiosity?
Supply and demand sets prices.
The gobbledygook you posted, “ properties get leveraged, instrumentalized, and securitized, with derivative products, speculation, and all sorts of incentives that you don't normally want operating in the arena of housing”, is just that, gobbledygook.
Just because a buyer as Inc. behind its name doesn’t give it magical powers to set market prices.
If you think it does, then please explain it to us like we are really slow.
It’s not gobbledygook. I think for most people it’s hard to grasp the scale of the entire industries outside of their area of professional expertise so you can look at some numbers here:
https://www.milliman.com/en/insight/mortgage-market-and-hous...
https://www.sifma.org/issues/market-structure/housing-financ...
> you allow for policy that doesn't maximize the cost of real estate over the interests of the majority of the population.
How do you think homeowners would feel about a policy that doesn't maximize the value of their homes. That's just another way to phrase "maximizing the cost of real estate"?
Based on the data I've seen, respectfully, you are wrong. No, I can't share it. The data is publicly available, however. Feel free to dig it up and aggregate it. The data is publicly available, the effort to dig into it, finding meaning, and sell it to folks, however, is not.
What I don't understand is how this new type of asset is above reproach.
I mean BlackRock and Blackstone creating securities backed by real estate in general, not only single family homes.
What if this new type of asset signals to the broader real estate market that regulators favor large investors?
Even more likely, what if this new type of asset succeeds at the expense of first time home buyers?