Affordable housing

The Sandbox Political Topics
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Where I live (seasonal town with a decent year round population), a big part of the problem are short term rentals (STRs). You can charge much more for a STR than a seasonal rental, even if it is empty for half the summer, so seasonal rentals are going away and seasonal workers are getting priced out and are starting to need to commute. Some people worry about the labor force leaving and cratering the economy, some feel that the people who rent STRs stay long enough to drop a lot of money into local businesses, so everyone gets mad and nothing happens.

There have been some attempts to build larger complexes to alleviate the problem, but they tend to get met by NIMBYs.

One route that people have been going lately to challenge the STR market is to argue that they are business in residentially zoned locations. That has gotten some legal traction semi-near me, with mixed feelings. One idea floating around is to require the owner to occupy a STR for at least 30 days a year.

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The slight problem with this approach is that without care, you’ll end up increasing rent costs, which doesn’t help solve the underlying problem.

But I don’t see any good ways to use taxation as a principle means to help address the homeless problem.

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I can believe that you are the expert here. I’ll say that getting the funding for risky mortgages was child’s play in 2006 because “gnome and his band of debt issuers” made it look like risk free profits. Does the business plan really work long term, through ups and downs?

Yep, every capitalist wants monopoly profits. I follow your story up to

Which market? Maybe this a localized thing? Like, they target small cities where it’s feasible for one company to own all the rental properties between __ and __ sq ft, built between __ and ___ ? Don’t they have competitors who are trying to buy the same properties? It’s mind-boggling to me that anybody would really be able to get a controlling market share of some housing segment in a big city.

And then, ‘you can raise rents because people will pay to not move’. I get that renters have switching costs. They don’t want to locate a new place and move. Landlords also have switching costs. They don’t want to find a new tenant and “freshen” the property and probably go a month without rent. If landlords always had the upper hand here rents would have gone through the roof long ago. Renters apparently have limits.

Maybe you’re thinking that people who rent single family houses are more stuck then people who rent apartments. Sounds plausible to say that people who have school age children are more stuck than people without. I’m not sure how big a deal that is here. Is that an important demographic feature for these investors?

I can believe that real estate firms see a way of adding profit by managing the properties. But, profit for the managers is an expense for the investors. I’ve always thought that one of the economic advantages of owning is that it reduces the frictional costs between the owner and the occupant. Investors here think they can make a profit against people who have the resources to (in an alternate timeline) have the resources to be owners.

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Be careful saying that to women who worked at home in 1955. :wink:

People didn’t have microwaves, automatic dishwashers, self-defrosting refrigerators, “wrinkle free” shirts, or (for my mom) automatic clothes washers.

Maybe “it takes two incomes to buy a house”, but also it takes fewer hours to run a house. It’s not a 1 for 1 offset by any means, but it is a factor.

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I’m not disagreeing… just saying that comparing family and income in 1955 to individual income in 2024 is not as big an error as it may seem.

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Great questions. Lots to unpack. Let’s start by looking at “market share”. Link below is from ABC NEWS affiliate in Memphis, TN.

https://www.localmemphis.com/article/news/investigations/i-team/investment-firms-buying-thousand-memphis-homes-what-does-that-mean/522-22f14ac0-581e-460d-9fca-43f313de45c6

Excerpt:
*Ladner recently bought a home Shelby County, but it wasn’t easy. He made seven offers on different homes, often 10% to 20% above asking. But he kept losing out to investors.

“A lot of these investors were coming in and making all cash, no contingency offers. It’s kind of hard to compete with that,” said Ladner.

According to the Shelby County Property Assessors Office, of the 7,000 homes that were bought by investors and turned into rental properties in the past 2 years, Cerberus Capital Management out of New York purchased the most in Shelby County, at just over 1,400. The median appraised value of the houses they bought was just over $145,000.

According to its website, Cerberus Capital is an investment firm managing more than $55 billion assets. In its portfolio, it has more than 24,000 single family homes under management in 20 US markets.*

Would it surprise you that this biz model is scalable? Think of maintenance and repair - something all landlords have to address. For Cerberus, they can have a Rolodex of local service providers. Basically put them on retainer. The local RE angents are well positioned for this. They get better rates than you would, for what should be obvious reasons.

The key is to dominate a market. (Or markets). In the ABC story, they talk about 20z of all home sales in Shelby county being private equity sales converting SFHs into rentals. Do the math yourself. It doesn’t take long to have a measurable impact on rental rates and housing prices.

From a pure investment perspective, look for starter homes. Your target market will be current or recent renters. When a $225,000 house goes on market, first time buyers are ill positioned to bid against a group offering all cash, 30 day close, and no contingencies. While the simple owner is making a life changing decision, the PE just adds it to the cost, using high level averages. Its a numbers game for them, not a life decision. You will not win the bid.

Being a numbers game, PE isn’t going to even look at Bel Aire CA.Why plunk down $12mn on a house, formerly owned by Mickey Rooney, when you can get 60 houses at $200k a pop. It’s a numbers game. Plays better when getting your bonds issued and rated.

It seems you are troubled by the vast amount of capital required to pull this off. That gargantuan pile of money is in the hands of a small number of households ( like top .1%). But the numbers are really big. More than you and all your relatives will ever be worth. And that’s just one years increase in net worth. You and your cousins are not in the game.

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451

We have the same problem in the UK

The only way to stop this is by limiting starter home purchases to first time buyers in select areas.

Otherwise, you end up with a very unstable socio-economic situation.

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I’m not surprised that there would be a lot of capital available in the economy. As you’ve pointed out before, there are lots of dollars to be made on fees setting up deals for investors.

I’m surprised by the lack of competition for rental units. In my world, there are multiple firms trying essentially the same thing. Nobody gets a dominant market share in any sizable market.

I’ll try to “do the math”. You linked to a neat source. Cerebus bought 1,400 houses in just 2 years. Apparently, all had been owner-occupied before Cerebus got them. That’s a 20% share of the owner-occupied houses that were bought by investment firms in that time. I assume Cerebus and the others are also buying houses that had been rentals.

We could say that the supply of rental units in this price range has gone up by 7,000 in just two years, but of course the demand is also 7,000 more than it would have been if these had been bought by owner-occupiers.

Shelby county has 360,000 housing units. Memphis has 270,000. How many of them are in the $145,000 - $200,000 - $213,000 assessor appraised values mentioned in the article? Realtor.com and Redfin give median selling prices of $174,000 and $185,000. (I expect those are not all single family), so it looks like they are buying around the middle of the market.

I don’t have any feel for shape of the density curve for housing. Are 20% of the total units close to the median? maybe 40%? … ?

Cerebus’s total portfolio is certainly bigger than their recent 1,400 purchases. But, “Pretium Partners” and “American Homes for Rent” and all the other investors who bought the other 5,600 house in the past two years also have bigger portfolios than just their recent purchases. And, there are the local landlords who also have rentals in that price range. They are all looking for “good” tenants.

Absent collusion, I just have trouble seeing Cerebus as having enough market share to dictate rents, at least in the generic “starter homes” price range. Maybe you’ve seen examples of much smaller niches and maybe some “We’re smarter than the other guys, we see this small segment that they are missing” talk.

Separate comment: your point about economies of scale with local contractors makes sense.

Tangent: Starter houses for $145,000 !!! I wonder what New York and California people think about that. I had to go to realtor.com to see what you actually get. I saw a 1955, all brick, 1200 sf, 1 bath, carport, slab foundation on Graceland Drive (really) for $148,000. And, brand new construction, 1100 sf, 2 bath, no garage, slab, quite a ways out (but still in Memphis city limits) for $155,000.

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Maybe we should revive the Lustron home company :woman_shrugging:

I still see these in some small towns. Lived in one briefly as a kid. Rain sounded super loud. I recall a hailstorm that sounded like machine gun fire :grimacing:

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I don’t want to live there. So, that’s one thought for you.

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Collusion it shall be.

Cerberus and Carlyle group do compete. But for investors, not renters. Both groups want increasing rents, both want steady high returns. Which sets the price for the homes. Everybody’s spreadsheets use the same inputs. As long as aggregate demand is higher than aggregate demand & there is no effective substitute (tents, anyone?), then the competition aspect of price control goes out the window. Lots of services and products behave that way. broadband monthly fees, e.g.

To get price competition you need some pre conditions. Those just are not met. Hard to move houses. They are really heavy.

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456

Exactly. When I see “housing is so expensive” I always remember that there are three important items in real estate: location, location, and location.

I’ve got a sister in Marin county. Really neat place to live. Housing is really expensive.

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Do Cerberus and Carlyle also compete when they are buying houses? Shouldn’t they get to the point where they are eating into each others profits because they are bidding purchase prices up? There has to be at least a half dozen investor groups trying to make the rental thing work in Memphis.

(Or maybe the spreadsheets all assume the same future price appreciation, regardless of how much they pay for the house. Do the spreadsheets say we get modest positive cash flow and generate some tax benefits annually but make our real money when we sell? )

It did occur to me that the investor groups may simply have more market information or they may be more callous with rents (they don’t have to look tenants in the eye like mom & pop landlords do). I could see that especially when the market is tightening and they would be quicker to raise rents.

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My son was born in Mill Valley. Truly idyllic weather and scenery.

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Yep, they do compete. But that’s a big pool. And all that does is rise home prices even more. But you are are correct.

Those spreadsheet inputs have two sets. One set to price the deal, and a second set, more or less supplied by the credit rating agencies. That second set dictates the cost of funding. These things are always based on OPM. If S&P says they use a 6% rent appreciation, then you don’t argue with them. You design the underlying bonds to minimize the cost of funds.

And so we get to one of the underlying risks borne by the investors. Anything that increases supply of housing is a yellow flag. It all works as long as the rents stay high. Adding housing is a bad thing. This segment of investors doesn’t like rezoning. It can only be bad news for them. And they have the resources to help hinder that political action.

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This is really interesting. I keep wanting to get into the details (6%, really? If purchase prices go up due to competition between investors, does that somehow lead to a spreadsheet assumption that initial rental rates will go up? Does S&P know what they are doing?) but I should try to get back to my first issue.

You are answering my “Do these deals assume profits on eventual sales?” with a “no”. So rents are critical to making it work.

I’m still having a lot of trouble with the notion that one “Wall Street investor group” can get an operating monopoly. In Shelby county, the biggest might have 20% of the WSIG properties and there must be properties owned by other landlords.

You’ve suggested that all the WSIGs are using the same analysis with the same inputs so they are getting the same “required rents” to make the deals work. I can believe that, but where’s the pushback? Or, what’s preventing them from simply raising rents another 10% and making the deals even better?

I suggested that current landlords just aren’t maximizing profits. They don’t raise rents as fast as they could. The WSIGs are cold hearted and just do it. That’s still the most plausible story to me.

You’ve said there’s no impact on demand because everyone needs a place to live. Yeah, I can believe the rental market is slow to react, but it does. My son is currently sharing a place. Both parties would rather have their own space, but money talks. That’s the mechanism that reduces demand, people double up with family or friends.

Yep, the long term limit is new construction. Shelby county population was up 0.2% between the 2010 and 2020 censuses. It seems that in this one county it wouldn’t take much construction to move the supply/demand ratio.

Long story, but at least I have one plausible theory on why rents would go up when WSIGs convert owner occupied houses into rental houses.

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Sorta related, huge discount on this structure in NYC, down about 2/3 from what it sold for a decade ago. Buyer says they are considering converting it to housing.

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I don’t know anything about it other than what I see on Google Maps.

But, it doesn’t look like a good housing candidate. I’ve read that due to window requirements, you can only use floorspace located with 25 feet or so of a window for residences. This building seems to have a footprint of 200 x 125.

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Plus plumbing and HVAC. If you think doing that kind of work is hard and expensive at your house, imagine doing it with a concrete and steel structure.

I’m not saying it can’t be done, but it would be tricky.

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Good example of the use of LLCs. Blackstone, I am sure, had the where withall to pay that debt. But…drop off the keys and say “sahwhee”.

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