Wall street to blow new housing bubble
Over the last few years, it seems like the housing market has finally rebounded from the last real estate crisis. As Mother Jones reports, housing prices in some areas have been rising as much as 20 percent annually. However, the homeownership rate is still dropping. If less people are buying houses and becoming homeowners, then why are prices increasing?
But you see, my friend, that corporations are people too, and multiple homeownership among some of the largest financial corporations has soared. Wall Street firms, such as the private equity firm Blackstone, have been buying scores of foreclosed single family homes and renting them out. Armed with deep corporate pockets and the ability to pay upfront in cash, these firms are able to outbid individual buyers and own as many as one in every 11 homes in some areas, according to bloomberg.com.
Furthermore, Blackstone and its competitors have begun selling securities backed by rental payments from the properties they have purchased, which — considering Wall Street’s last foray into the real estate market — should raise some alarms. Here’s a sequel that no one wants to see: from the same people who brought you the smash hit movie of 2008, Real Estate Crisis: Subprime Meltdown, here comes the blockbuster event of the summer: Real Estate Crisis 2: Rental Fever! The single largest question, as elaborated upon in a credit analysis from Standard & Poor, is how Blackstone and other companies will manage the vast number of single-family homes it has acquired to avoid disruptions to cash flow. Unlike apartment buildings, single-family homes require more individualized care and are dispersed geographically, making maintenance incredibly difficult. Horror stories have already emerged detailing rental companies’ mismanagement. In one case, a company simply painted over the mold in response to a tenant’s complaint of mold on the walls, The Huffington Post reports.
It is also unclear how these companies will ensure that their houses are consistently leased and that their tenants consistently pay. According to the same Mother Jones article, Blackstone expects that 95 percent of its homes will be occupied at all times, each with an average monthly rent of around $1,300. These expectations may be overly ambitious for single-family rentals, and, therefore, they would need to be revised significantly in the case of an economic downturn. Of course, the activities of these rental companies will need to be watched carefully, but it is questionable whether regulatory agencies will do anything about it. The story of the mold on the walls is a disturbingly apt metaphor for the state of American financial regulation over the last few decades. The Dodd–Frank Wall Street Reform and Consumer Protection Act, which was supposed to provide more stringent regulation of the big banks after the 2008 crisis, has largely remained unimplemented, according to USA Today. This is especially true in regards to its two most important proposals: ending too-big-to-fail firms and banning proprietary trading.
While a housing bubble in itself may not be a bad thing, a housing bubble backed by unregulated, risky trading is a toxic combination that could once again implode the United States economy and, even worse, leave scores of people homeless without even an apartment to rent. The United States needs to push for stronger financial regulation before events play out like they did in 2008.