Wall Street Wants You to Rent Forever – with Ryan Dezember

The Big Rethink: A Weekly Interview.

Photo by Tierra Mallorca on Unsplash

After the housing crash, private equity firms bought foreclosed homes by the thousands, removing them from the market and creating a new class of affluent renters. With another wave of evictions about to break, those firms are back at it again — this time while prices are rising, not falling. Wall Street Journal reporter and Underwater author Ryan Dezember joins us to explain how these companies see the market and what it means for the future of American housing post-pandemic.

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Transcript

Greg Lindsay
So with that Ryan if you want to come on out. We will start the conversation. Thanks for joining us.

Ryan Dezember
Thanks for having me.

Greg Lindsay
So Ryan when did you first catch on to what was happening with Blackstone, you know I covered it in very high speed, but there you were I believe in Alabama, as a reporter on the Wall Street Journal’s beat on this, and owning your own home. When did you first become aware of these companies like Invitation Homes and American Homes 4 Rent and the implications they had?

Ryan Dezember
Well, so I had been living in Alabama covering the real estate boom and bust there for the local paper Alabama. I joined the journal and it was just sort of happenstance that I was assigned to cover Blackstone, right around when they started buying homes by like the tens of thousands. By that time, I had a house, that I had to become a reluctant landlord myself. I was renting from a distance to someone. It was very expensive I lost a lot of money every month, and a lot of sleep, and it was just, you know, all the sort of things you can imagine going wrong: problem tenants and things breaking and you being 1000 miles away and not able to fix them yourself. All those things were happening. And here I am, you know, covering Blackstone and they’re buying $150 million worth of homes a week at the peak off the courthouse steps. And so I was just like, my initial reaction was like I have one and it’s a nightmare, and you’re buying that many like you’re crazy. But what you know, what they had that I didn’t have, was they had scale. They had a lot of technology. You know this was 2012-2013 when they were really ramping up and buying houses. I don’t think they could have done it without the iPhone, and you know the sort of leap and mobile computing that we’ve had. That combined with the, you know, 40 cents on the dollar homes that they were buying. Those two things happen at once and sort of enabled them to really conquer this final frontier of institutional investing, you know they’ve done shopping centers, office malls, timberlands, you know, basically everything has ended up in a wreath, here was a chance to single family homes. So, being a landlord in that situation, you know at that same time, I was like, again, you guys are nuts, what are you thinking. I was obviously wrong. They made a tremendous amount of money, and really built these companies to last. Even for several years, the questions persisted that, well maybe they‘re running them out but then they’ll just sell them when the market comes back. What we’ve seen is that’s not the case, they’ve consolidated. And they are growing now again without, you know, as your slideshow, there’s no discounts out there in single-family homes really.

Greg Lindsay
Before we get to what they’re doing now, I mean, can you talk for a moment about, I mean obviously the fact they were able to buy tens of thousands of homes from the courthouse steps as you put it, was due to, of course, the mass evictions of the financial crisis, and what little was done to help homeowners then too. I mean how do they buy it? Did they have agents in various courts and they were signing them up there, or how do they go about doing that?

Ryan Dezember
Yeah, yeah, they just enlisted. Now Blackstone, they just tied up with a group out of Phoenix, that was actually investing in trailer parks, which is sort of a whole other topic but a very lucrative thing to be a landlord of. And there was a group out there called Treehouse Investments, it was, you know, doctors and dentists money and you know a few rental executives. They teamed up their ability to manage properties and their skill. Now, that group in Phoenix, which was you know a hotspot for foreclosure, they shifted into, you know, let’s start doing single-family homes. We’re already collecting grant, we’re already buying properties and managing properties that aren’t under one roof like an apartment complex. In Blackstone, after auditioning all sorts of people like this, you know, because there’s always been landlords out there that have some scale but it’s usually limited to a region at most, maybe a few thousand homes. That would be sort of extreme that tens of thousands now, you know, and Blackstone found these folks built this company, Invitation Homes, you know, American Homes 4 Rent was built by the folks behind public storage, which actually the Canadian head of public storage is a guy named Dave Singelyn whose running American Homes 4 Rent now. You know you had Barry Sternlicht from the hotel world, you had Tom Barrack, all these sort of financiers and then they teamed up with people on the ground who knew how to buy a foreclosed home knew how to do a fix and flip to rent, knew how to collect rent. You know, from a lot of different doors. So they hired these people and then of course it was just like a logistical thing where, you know, usually they buy a company and they write a check for a few billion and they borrow a few billion and they buy the company. Same idea here equity and debt, except for this time they had to basically put the money in duffel bags and send individuals to buy a house on the courthouse steps or wherever the jurisdiction sells foreclosed properties. And so yeah, it was just like sort of a big land rush. They would hire teams of people, it was very analogous to what happened in the early days of the shale drilling boom in the US. Yeah, and it was just like, you know try to get the leg up on somebody to get to the auction first, or get the role of non performing loans from the bank first. You know, it’s just a big rush among these folks but yeah they had to buy each one cash, so they’re walking around with duffel bags and briefcases of cashier’s checks. You know, there was always this group of investors that did this stuff but on a much different scale, you know, somebody would walk away with a house or two for their fix and flip remodel business. All of a sudden, here comes somebody buys everything for sale that day.

Greg Lindsay
Can you also talk a bit about the technology plays into this because yeah I mean it was it was assumed until very recently that the single-family home as an asset class was just too unwieldy, right. Like too geographically diverse, too many individual people to deal with. I mean obviously there’s large multifamily investors, but no one had ever tried this with single-family homes and the technology has something to do with it, right. You can have the integrated payment systems, the monitoring, like how else have they done this?

Ryan Dezember
Yeah, you can even just wrangling the sort of army of these homebuyers you know with iPads, right. They sit in there with you know they want to run out make a phone call, they’ve got an iPad. They’re sending emails and texts, you know, for each house they’ve got their maximum bids, they’ve got their specs they‘re looking for. Beyond that, like you said, it enabled them to manage these homes in an efficient way. When they started out they had a lot of doubters. Apartment owners, primarily Sam Zell, thought it was a terrible idea. He was proven wrong, of course. But you know, a lot of the people involved in this don’t think that it could have happened without the technological gains, the cloud, computing ,the iPhone, the iPad, that coincided with the housing crash. And that really just enabled them to both the acquiring the properties and the management thereafter. Like you said, it would be, you know, and then they took this giant, you know when they’re at scale. You make you can buy a whole truckload or a whole train load of kitchen appliances or flooring, or Sherwin Williams paint and make every house, pretty much the same inside, so that when your repair person pulls up to the house for the leaky faucet, they don’t have to go and look and get under there taken apart and then go to the hardware store and come back. They already know what washer is in that closet. They already know what color paint they have to touch up, they already know the flooring. So they really sort of homogenized the interiors of these homes. One of the most interesting technological things they did is they built basically house hunting computers. They took basically what they wanted, and filtered all the listings they could find through these formulas to just identify homes that would fit their bill, you know, at least three bedrooms, at least two baths, attached garage, good school district, you know. Maybe there’s other things like proximity to a Starbucks, which you know, would signify extra money slashing around the neighborhood. They got it down to where they were looking for qualitative things, does this do this home have a sunny kitchen? To where you know they’ve got machine learning stuff going on with listing photos and stuff. And that enabled him to get a jump, even when home prices rose, and when homebuyers came back to the market, where they could, not necessarily outbid, but out buy the regular person you know they didn’t have to go get a mortgage. They knew within seconds of a house you know the realtor, I would talk to realtors who hadn’t even pounded the sign into the front yard before they’re getting offers to buy these things all cash. You want to come see it, no, cuz we’re gonna gut the inside, we don’t care how ugly it is. And that just gives them all these advantages as a buyer over, you know, you or I who, most likely would have to go get a mortgage, would have a lot of emotional weight involved in the purchase of the home.

Greg Lindsay
So what are the implications then for the people who rent this. I believe it was your reporting, or one of your colleagues at The Wall Street Journal who pointed out the rise of the six figure renter, you know the 100,000 households and that there was an estimated 3.4 million Americans who would have otherwise owned homes do not because they exist in these companies. Which has always amazed me. That is a lot of inventory.

Ryan Dezember
It might not be because of the existence of these companies, but that is the target demographic for, especially the two biggest companies, and in some of their smaller rivals. Now, Invitation Homes, American Homes 4 Rent, typical tenant is late 30s, maybe early 40s by now, it‘s been a couple of years. These people have aged, they are parents now, they have really good incomes like usually six-figure household income. I think the average is now about 100,000 for both companies. These people may not have the downpayment to buy a house, they may not be secure enough in their employment to want to commit to a mortgage. When we did that story about the rise of the six-figure renters, we went looking, and we adjusted all this stuff for inflation and, you know, and parse zip codes. And you’re thinking, well, it’s probably a lot in New York and San Francisco, and maybe some Seattle. What we found is it was the population of six-figure earning tenants was exploding and places in Middle America, Houston, Cincinnati, Denver, you know, really middle American cities were seeing this huge rise in the sort of the upper ranks, the upper limits, of the millennial age groups that you were talking about. That’s their ideal tenant, and they just see a wave of those people coming. And when we talk to people, we went to Denver and talked to folks, and some of them couldn’t muster downpayment. And, you know, but some of them, you know could buy a house but it was so far away from where they worked or where they wanted to spend time in the city that they didn’t see it worthwhile. You mentioned, you know, buying as big a house as you can. There were people, I could afford a two bedroom, but if I’m going to start a family, does it make sense if I’m going to have to buy a larger house in a couple years. Will my home appreciate enough to cover the transaction costs? So there was some not purchasing by choice, but, you know, the big rental investors will say, we only have a small slice of all the for rent properties in country, which is true. Probably, you know, depending on which companies you include in that group, you’d probably have a hard time getting past like 6% or 7% of all those single family rentals. The thing is, is they don’t buy them everywhere and they don’t buy every kind of house. They want very specific home in a very specific neighborhood, and it’s usually the same kind of house that that person would want to buy. Your classic, like suburban, subdivision house. And that’s where they sort of meet and the tension is between the buyers the renters. And usually the sort of people if they’re going to bid, if they’re going to buy a house and there were other people that wanted to buy it, those are usually the exact same people they’re looking to rent the house to so it sort of sets up this really interesting natural tension. And you can see it in places like we once went to a suburb called Spring Hill outside of Nashville, Tennessee, it’s where GM is make it Saturn line and now they make other cars there. Big auto town, factories, you know it bounced back from recession much quicker than a lot of other places. It was one of the highest, you know, job growth counties in the country for a while. And all their sort of like purchasing algorithms, led them all to the same place. And you could find, this is just a few years ago, and you could find a place where they own, three or four companies, own 15-20% of the whole subdivision of houses. But then the next subdivision of houses may be too old for their taste, you know, big repair bills, or not the two bathrooms they want to attract the family. Their idea, they really want tenants to come in and stay there for the long haul because their kids are in school and have neighborhood friends and, you know, they make a good salary so they’re okay, paying more rent, or maybe they’re not okay with it, but they do it. And they re-up on the lease because, you know, as unlike the sort of traditional, mom and pop landlord, who you might go to church with or see you know dropping your kids off at school or in the grocery store. They’re a public company with a fiduciary duty to their shareholders, and they’re under pressure from Wall Street analysts to continually boost the numbers, so they don’t have that wiggle room.

Greg Lindsay
That strikes me as one of the most pernicious effects of this, right. Like we’ve never seen you know, obviously, in white hot housing markets I’m sure landlords would like to raise the rents as high as the market would bear but generally there’s been a sort of stair step, right. Like, you know, the rent will rise but not appreciably so. Because these are public companies like there is a definite need to continue to, you know, blood out of stone for some of these renters there. So, I mean, how have the cracks started to show or how were the cracks starting to show before COVID? I mean, the New York Times Magazine, PROPUBLICA, published a big piece into this too about some of the declining levels of maintenance, increasing amounts of fees like, I mean, do these become ultimately slumlords, is that the ultimate trajectory of this or what happens?

Ryan Dezember
You know, I sort of have a little different view of the companies. I think that a lot of it, you know there’s been a lot of these stories. Oh that didn’t get fixed, or the mold in the basement, or the house that went wrong. I think a lot of that probably chalk up to like negligent employees or negligent regional office or something. Ideally these companies want you to stay there forever, or as long as possible. They don’t want you to move, they lose a lot of money and I learned that as a landlord. The worst thing you can have happen is, it’d be better to have your house burned down or blow over in a storm than it is to have somebody move out, make a mess, and then to have to not only repair that, turn it over, but to lose that. You lose one month of rent that might tip you into negative for the year. Now, these companies have much better margins nowadays, so that may not be the case, and they spread it all out over tens of thousands of homes. So I kind of think it’s more on the financial side where, you know people are giving up their, it might be really nice, you can live in this big house, anything breaks you don’t even, you don’t even see people, you can rent these houses without ever talking to a person or seeing a person. You do it all on your phone, which is pretty remarkable and I’m sure some people like it. Every check they’re sending to them, you know Americans, I don’t know about Canadians, but Americans are very bad at saving money. And most Americans really only save money by accident when they pay their mortgage every month. And if you’re sending that to Invitation Homes or American Homes 4 Rent, or any other landlord, you‘re not accruing that equity, which is basically what kept the middle-class afloat since World War Two. Without that home equity,you stripped that out, they don’t hold on to their share of the overall wealth. We the middle class doesn’t have, our pay has stagnated right, as the middle class. We basically don’t make much more than we did 50 years ago when you adjust for inflation. But what we do have is houses that have risen significantly in value. The problem is like you’ve got people that aren‘t getting on that equity ladder, you know, to start accruing that, and then also you don’t have somebody to take out the people who have been accruing equity, you know, in recent years. So you not only have the problem with the millennials, like okay, how are they going to save for retirement if they don’t own homes. You have this more immediate thing with boomers and they need to sell those big suburban houses to somebody. And, of the millennials don’t do it, you know, maybe the Wall Street firms just buy the houses and rent them, maybe that’s how it solves. But you sort of have like the effect on both going both ways generationally this sort of disruption of the sort of system we built of the house as a piggy bank for retirement.

Greg Lindsay>
Yeah, George Washington University’s, Christopher Leinberger‘s written a lot about that mismatch. There’s been a lot of discussion there about what ultimately Issi Romem of MetroSight so a lot about like the huge you know overhang of Boomer homes. What happens to the villages, you know, when the boomers pass on, things like that. To bring us back to the present here with COVID then, and how that has renewed the whole life of this, so you know, Blackstone had exited Invitation Homes, its vehicle for this. These companies were set up. But now we’re in a situation where like, yes, if it weren’t for moratoriums on evictions, you know, we basically have a pent up-tidal wave of evictions, just waiting that‘s going to be crashing through. And then we have at the top of the market, at the top of the k, you know as we saw, all these homeowners who are buying. So what happens on the other side of that eviction crisis and how are these other companies preparing to take advantage of this. If it’s 6% or 7% of the market now, I mean, is this gonna be a defining feature of the housing market on the other side of COVID, does that go to 15-20%?

Ryan Dezember
Yeah, it could, it really could. You know, if you’re an institutional investor, particularly if you have a real estate fund, what else you can invest in right now. You know office towers don‘t look good, malls look terrible, logistics are great, or hotspot you know you have these niches like self storage and timber, or data centers you can do. But there’s not a lot of appealing places for that sort of investor to put their money. And then you have the fact that the general investor can‘t get a return on any savings, or any sort of safe thing. And sort of the next thing down, which may be a little bit programmed into our DNA as Americans, it’s like a safe bet, the single-family home. So you have just billions of dollars, flowing into this. And it’s not just at the top, I mean you have the Koch Industries, you have JP Morgan Asset Management, Brookfield out of Canada, Blackstone’s has picked up a new dance partner and invested in Tricon, they’re sort of like for the income bracket and notch below the Invitations of the world into American homes like that sort of 70,000 earning household. That money is all looking for a place. They see the problems ahead ,like you said, there’s going to be people right now burning through their savings and not going to be able to buy a home, but they might want to have that suburban lifestyle. So, that’s a lot of renters. Meanwhile, you have a lot of people that are having problems paying their mortgages. We see forbearance numbers, I think it was like three and a half million or so, and then there’s millions of people on top of that who haven’t entered forbearance but aren’t making their payments or are late on their payments. So you’re going to have millions of people when these things, like you said, like the moratoriums on these things, forbearance periods, go up, you’re gonna have a lot of people needing to sell a home. What’s interesting this time is that there’s so much demand for homes, and the shortage of for sale homes relative to US households is so low. You could conceivably have a situation where somebody has a distressed sale and walks away with a bunch of money. So these companies are also looking at ways to like maybe do a sale leaseback program like they would do in commercial real estate for a house, you know, any way to get their hands on more houses. American Homes 4 Rent has been one of the busiest home builders in the country this year. Building houses and whole subdivisions expressly just to rent. And then you go below them and there’s all these sort of like local business people who have done this for a long time, that feed them houses. And then you have a lot of imitators, you have a huge amount of money in self directed IRAs and other things, trusts and stuff, buying fix and flip houses around the Great Lakes and so the markets that Wall Street hasn’t dominated. Still you can still get a really cheap house, fix it up, and get that great yield, the landlord’s ideal is like the 1% of the purchase price every month in rent. You can still find that some places, so you have a huge number of individuals, and people in high real estate markets doing 1031 tax exchanges, and refinancing or selling a property in California and buying eight houses in Toledo to reveal cash flow. So, you have this this huge rush for houses right now. And it’s sort of coinciding with the individual homebuyers whose reacting to low rates, and you know maybe a desire to get away from neighbors and small spaces or maybe it’s just you know hey maybe now’s the time to say, the city‘s not what it used to be, let’s move to suburbs and have a family. You have a lot of competition for homes right now. It sort of stands to reason that that demand from the sort of consumer side will wane as we get into like winter and, you know, kids are in school and stuff or registered, I don‘t know if there are schools in every place. But you can see those buyers running out and then you basically have billions of dollars, without even considering what sort of leverage they can put on on this cash, going for buying houses. And again, it’s interesting, the biggest companies have that high-end renter, and those people, they’ve been paying their rent on time. Invitation, Americans Homes 4 Rent basically have the same rate of on-time rent payment now, as it did before the pandemic. They have much higher occupancy, new lease rents have shot up, and now they’re even able to raise rents on release. And they’re retaining people like they never have before. Probably for obvious reasons, you know, now is not a great time to move, or you know these people have had their kids in the schools and why would they, rents going up but where are they going, and also where are you gonna live if they’ve zeroed in on your subdivision. Then you can move but you might just be their tenant again in another house. So I think it’s less about the eviction thing for them, for the big companies, and I think that’s more of a problem for the smaller landlords. I think these companies can weather, stuff like that, they can put people through programs to keep them in. You know the bad publicity alone is probably not worth, a few sort of unsightly evictions or unseemly evictions. And, you know, they want people to stay in the houses and rent and that focus on higher earners really, you know, that’s the people making $100,000 a year, even if it’s combined income. Those are the people who have a home office, who are working from home, like, here we are. But you know, they’re not renting to a lot of service workers and stuff. But I do think they’re going to be able to capitalize on people who lose their homes, who have homes and can’t keep making payments

Greg Lindsay
Alright well we‘re almost out of time, but the last question I have is obviously, we’re recording this three weeks, less than three weeks, before the US presidential elections. Vice President, Joe Biden, not to jinx anyone, but has a very large polling lead so there’s some anticipation about how housing policy might change in the United States. What do you think should be done about this development. It’s certainly not completely positive, there’s a whole progressive left movement inside the democratic party that’s calling for de-commodify housing and de-financialize housing. The Vice President himself has like a proposal for section eight vouchers for the poorest Americans. Having come out of this experiences as an underwater homeowner yourself and having reported on this. What do you think should be a priority for the next administration, particularly for dealing with those millions who face eviction and forbearance on mortgage payments?

Ryan Dezember
You know, I’m not really sure. I mean there‘s obviously going to be have to be something. You can’t just put that many people out on the street. There’s gonna have to be some sort of huge stimulus or jobs creation package. But to get to the root of it, the commoditization of homes, and I learned this sort of the hard way, where I was, you know, I bought a house to live in, a shelter, because I was having such a good time, and having such a fruitful career writing about people who were using homes purely as investments and properties. It didn’t click with me that we’re both buying these properties, but we’re buying for very different reasons, but it doesn’t really matter. If other people are treating homes as financial assets and trading them like that, you’re in it too, it doesn’t matter what your intention is. And, one of the things that happened in the financial crisis, that we can see in retrospect, and there’s been some really interesting economists that have done some interesting work on this that I mentioned in the book. It’s like looking back, you see one wave of foreclosures, that happened early and it’s almost exclusively real estate investors, people with more than one first mortgage, who had a sideways bat on a flip house or a spec house so they walk away. That’s fine, if you have four houses, you can lose three, and still be not homeless right. Um, and they were doing it with borrowed money, right, almost no risk and where I was living in Alabama. You almost have to put nothing down but your signature to get control of about a million dollar condo yet to be built. Um, I think one thing that’s come out of this is, you can, and then of course you saw the second wave of foreclosure which was a result of the busted housing market, recession, job loss, all that sort of standard things that normal people who are living in homes for shelter lose their homes. It might be useful for policymakers to recognize that there are sort of two classes of homebuyer. One might be a lower earner and maybe if it’s your first house and you’re doing it for shelter. Maybe there’s benefits letting most people borrow as much of the price as they can afford to pay back to get a house to live in. Because we know all this sort of good things to come with the stability of like, you know, being in a stable home and you know we talked about the equity but think about young children living in neighborhoods and not moving all the time. And then maybe there should be another class for real estate investors like if you want to speculate on property, go for it. But, maybe you shouldn’t you know be able to borrow 80% of what you need to do it, or more. If you went to the bank and try to borrow a bunch of money to buy a stock, they would laugh at you right and show you the door. So maybe policy has to be tailored to like recognize that there’s sort of two classes of buyers, and to set different rules for each one. And that would probably solve a lot of problems. It might make investors more careful about when they buy and might also free up more inventory for people that want to buy houses. And help those who maybe don’t earn enough, or earn a lot, to get into a house, and to sort of change that for the next generation in terms of wealth creation and stability and all these other things.

Greg Lindsay
Interesting. Well, I’d say, I do think America is ripe for a conversation about whether home equity should be the preferred investment vehicle but I don’t think Invitation Homes and American Homes 4 Rent, are really what we have in mind in terms of discussing that. But, but yeah, in any case, thank you so much for joining us, Ryan. It’s been a pleasure.

Ryan Dezember
Thanks for having me.

Greg Lindsay
All right, thank you all for watching. We’ll be back soon with another episode of The Big Rethink and we’ll be back to cover housing soon with NewCities fellow Diana Lind, who has her own book out, Brave New Home, and so we’ll be hearing her prescriptions for housing as well. So until then, take care, we’ll see you soon.

Transcribed by https://otter.ai