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Private Equity's Real-Estate Empire

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After the housing bubble popped, millions of Americans lost their homes as property values plunged. Many saw this as a tragedy. Some big investors saw it as an opportunity. Private-equity firms led by Blackstone quickly bought tens of thousands of homes at deep discounts, most of them out of foreclosure. They converted the properties into single-family rentals, taking advantage of another opportunity — the ready market for rentals among the many Americans no longer able to buy homes because of the recession or tighter mortgage rules. Real estate investment trusts, private-equity firms and hedge funds have spent at least $25 billion purchasing more than 150,000 houses since 2012, by one count. This flood of money has upended a rental industry traditionally dominated by mom-and-pop owners, and introduced institutional investors around the world to an untapped asset class. Blackstone went on to invent a new version of the money machine that fed the homeownership bubble. Communities across the U.S., still recovering from a housing crisis fueled by Wall Street speculation, were left to assess how they’ll fare with out-of-town money managers as their most powerful landlords.

In the first quarter of 2016, the nation’s homeownership rate was  63.5 percent; in 2015 it had hit 63.4 percent, its lowest level since 1967. The number of renter-occupied units had increased by about 5 million since 2011. Most landlords of single-family homes only own a few units. But the entry of big investors, both as purchasers and as lenders, has had a big impact on the market. Blackstone, BlackRock and Colony Capital all now offer financing to smaller landlords looking to expand their holdings. Two years earlier, Blackstone had fueled its own vast purchases by pioneering a new kind of bond in which investors are paid out of rental streams — a variation on the mortgage-backed securities that made so much money for Wall Street before blowing up. Moody’s rated the biggest portion of Blackstone’s first bond AAA and the firm was able to borrow $479 million at 1.9 percent, less than half the typical 30-year mortgage rate. The money covered most of what the company had spent buying and fixing up the houses, which had already risen 18 percent in value. In 2016, the big players in the field were consolidating their holdings; Blackstone began offering to sell some of its homes to tenants. But a Federal Reserve report found that institutional landlords filed eviction notices in Atlanta at much higher rates than mom-and-pop owners.