Big Landlords Aren't Always a Bad Thing
Bloomberg News reports that 49 percent of all home sales in September were paid for in cash, up from 30 percent a year earlier. Private equity firms and other institutional buyers were responsible for many of those purchases. The rising importance of institutional buyers has gone hand in hand with a steady decline in the homeownership rate to 65.0 percent, from a peak of 69.2 percent in 2004. (For perspective, the homeownership rate was about 64 percent from the mid-1980s through the first half of the 1990s.)
While this suggests that rising house prices will be far less helpful to the broader economy than in the past, there are reasons to think this is a positive development for the long term. I say this despite the fact that, according to the Huffington Post, many of the new private equity landlords leave much to be desired:
Tenants of these Wall Street-backed rental companies have also posted hundreds of scathing reviews on Internet message boards, such as Yelp, Topix and Zillow. (These sites also include a sprinkling of positive comments, though they comprise a distinct minority.)
Most who spoke with HuffPost said they moved into their rental homes only to find that renovations they were assured were comprehensive amounted to little more than a fresh coat of paint and new carpeting. Tenants said they immediately discovered major mechanical and plumbing problems: broken water heaters and air conditioners, broken toilets and in some cases even vermin infestations, including fleas, silverfish and rodents.
There are two basic complaints that people level against the changing housing landscape. The first is that buying a house is a good investment, so people who rent are being deprived of the opportunity to accumulate wealth. This argument is wrong, however, since it ignores the fact that individual houses are often terrible investments, especially when compared with other assets a person can hold in a tax-free portfolio. Owning can still be a reasonable decision, but many people would be better off putting their savings into diversified portfolios of stocks and bonds rather than wasting money on interest payments, property taxes and maintenance costs.
Besides, buying a home is still pretty easy right now even if prices and mortgage rates have both gone up somewhat. The Federal Housing Administration guarantees mortgages for people with credit scores as low as 500 if they are able to put down at least 10 percent of the value of the house. Those with credit scores as low as 580 are eligible to take out 96.5 percent LTV mortgages backed by the FHA. Anyone who is unable to buy a home under these circumstances probably shouldn't be blaming institutional investors.
The second, and more serious argument, is that the quality of rental housing just isn't as good as what you can buy for yourself, partly because the new institutional landlords have less incentive to maintain their properties as well as someone who actually has to live there. There is some truth to this, as HuffPo's anecdotes show, but it doesn't mean the small shift toward rentership is something to be resisted.
It's important to remember that the vilified institutional buyers are tiny relative to the size of the rental market, much less the total housing market. Analysts estimate that PE firms, hedge funds and real estate investment trusts have raised about $20 billion to purchase around 200,000 houses. So far they have spent far less and acquired far fewer homes. According to the Census, there are more than 91 million single family detached housing units in the U.S., so whatever the institutional buyers do is not going to affect the living standards of most people. I strongly suspect that those who want to remain in the rental business -- as opposed to those who want to flip their homes to someone else in a few years -- will improve the quality of their services in order to compete effectively.
More renters also means a more stable financial system. Housing, like most things, is a limited resource. Like most resources, we choose to allocate homeownership by letting people bid on prices in a market. Sometimes, people without much money can borrow large sums to participate in these markets, and sometimes they can't. This creates a lot of extra volatility in prices than would occur in the absence of leverage. Personally, I would prefer that rich people who live in the fanciest homes bear the burden of this volatility rather than the poor and middle class. In practice, this means offloading the risk of home equity ownership to a landlord. PE funds and their limited partners are in a much better position to endure losses than you or I, so we should welcome their growing -- but still tiny -- importance.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.