Wall Street Bought Your Foreclosed Home. They’re Happy To Rent It Back To You.
Home prices down 30 percent in many major metropolitan areas, unemployment at its highest rate in 25 years, foreclosures on the rise, wages stagnant, and access to mortgage credit notoriously tight — after years of betting on risky subprime mortgages, that was the scene at the end of the Great Recession. After shattering the economy and causing millions to lose their homes, what was Wall Street’s plan to get their profits back in the black? Buy up the foreclosed mortgages and become the former owners’ new landlord.
In the wake of the Great Recession, large institutional investors purchased more than 200,000 single-family homes worth an estimated $20 billion in some of the hardest-hit communities across the country — areas like Phoenix, Tampa, Atlanta, Las Vegas and Inland Southern California. At first glance, it seemed like investors were going to hold onto these properties and flip them for a profit, but increasingly Wall Street has decided to find new profits streams in managing and leasing single family homes.
This is a shift in dynamics away from smaller, traditional mom and pop landlords. In many cases these were the same homes that families lost, and after sitting vacant for months, are now being forced to rent. It’s unclear what long term impact these new landlords and a single-family rental driven rebound will have on our neighborhoods, renters, and homeowners.
For many families, the fallout of the recession is an altered definition of the American Dream that no longer includes homeownership. On the surface, the housing market looks like it is recovering. However, its most important metric, the rate of homeownership, is still down across the country. According to the Joint Center for Housing Studies at Harvard, homeownership is at its lowest level since 1995, at only 65 percent of occupied homes being owned by the tenant, while the number of renter households is growing at double the average rate in the last 50 years.
Between 2006 and 2012, the number of renter households increased by 5.2 million, more than half of which were single-family housing rentals. Instead of attracting new homeowners to the market with low home prices and interest rates, institutional investors used their cash advantage to buy homes at their lowest price, drawing down the supply of affordable homes and creating another hurdle for first time homebuyers to overcome. With mortgage credit tight, working families are bidding on home after home, only to be beat out by investors who can afford to buy the homes outright with cash.
The growing proportion of renter households means that fewer families are able to build equity in their home, which is often the main vehicle for saving and creating long-term wealth amongst the middle class. In areas like Riverside, California, which I represent, renters are struggling to make ends meet with incomes that are still more than $5,000 below their pre-recession level and rental costs that have risen $756 over that same period of time. Across the country, more than half of renters are spending more than 30 percent of their income on rent, and nearly a third are spending more than half of their income on rent. With these kinds of margins, it’s no wonder that renter households are finding it harder to pay the bills and save for important things like retirement, putting their kids through school, or even to make a down payment on a home of their own one day.
Another concern is how smoothly investors can transition to the role of landlord and property manager. A report released last fall by the Community Development Department of the Federal Reserve Bank of San Francisco analyzed the growth of the single-family rental housing market in California, Nevada, and Arizona, and the potential implications for property maintenance and neighborhood stabilization in low-income neighborhoods. Unlike a traditional or small scale landlord, investment firms are managing tens of thousands of properties across the country. The largest of these companies owns more than 40,000 homes over a wide geographic area.
The logistics of managing properties and providing timely maintenance on that kind of scale are daunting. In fact, stories have begun to emerge about tenants who don’t even know who to call for repairs. When they do get in touch, it’s a struggle to get routine maintenance completed to replace leaky pipes, fix broken heating or cooling units, or clear out pests.
These large firms don’t stop there. Besides profiting from the rental payments themselves, they’re now developing new financial products to shift the risk and responsibility involved in managing these properties away from them, while maximizing profits. Last year, Blackstone, Colony Capital, American Homes 4 Rent, and others, began issuing securities backed by the rental income from their properties. Bondholders are paid back with interest with the revenue from rental payments. But what happens if vacancies rise or repairs and expenses add up faster than expected? Who will Wall Street put first, bondholders or tenants? If recent history is any judge, it’s dangerous to put our housing recovery in the hands of the very same people who destroyed the American Dream for millions and brought down our economy with it.
Now as home values have appreciated, there is a very really concern that investors could begin to sell off their rental properties, destabilizing local markets and leaving tenants in the lurch. A recent report by RealtyTrac estimates that if properties purchased by the largest investors were sold now they could see a gained equity return of 26 percent of $8.9 billion in total. In select markets, those returns are even higher. Riverside County, part of which I represent, could lure investors to sell with an estimated net equity gain of 46 percent over 2012. With these kinds of financial incentives looming, it is unclear how these investors will behave and what impact it will have in communities across the country.
Policymakers at every level should be paying attention to the steep rise of single-family rental properties and the implications for our neighbors and communities. I’ve called on the House Committee on Financial Services to hold hearings on the rise of institutional investors and sent letters to federal regulators urging them to study and understand the trends in the single-family rental market that are shaping our housing recovery. We need a recovery that works for everyone, we need more information about the forces and companies shaping our neighborhoods, and we need policies that improve access to affordable housing and help working families reach the American Dream.