Entry Level Real Estate

One of the biggest problems facing real estate today is the annihilation of  entry level buyers.  Youth unemployment, $1 trillion student loans and low entry level pay are all factors delaying the purchase of starter homes.  In addition, members of the lower level working class, regardless of age, are finding it difficult to save up a meager 3.5% down payment for an FHA loan.  

In the meantime, the Blackstones of Wall Street are gobbling up the same products with their massive wealth with cash, squeezing out entry level buyers who are typically stretched to qualify for financing.  Adding insult to injury, the entry level buyers are not only squeezed out, they are forced to become permanent rent slaves to the same parties that squeezed them out of their dream homes.

I need to pause here and repeat once again that I am not a bleeding heart liberal, nor am I advocating any Robin Hood schemes.  I am not singling out Blackstone.  They have volunteered to be the poster child of Wall Street entry into this arena.  I want to point out how the system favors the rich and that it is not healthy, not even for the rich.

Just imagine if you have a house for sale and you have two offers, both at exactly the same price.  One is all cash, closing in 20 days, while the other is contingent upon buyers obtaining FHA financing, termite clearance, appraisal, physical inspection and closes in 60 days.  Which offer would you take?  In fact, the cash offer may be smaller and still be better than the uncertain financed offer.  

If the sales price of this product appreciates, it becomes even more difficult for first time buyers to qualify while the Blackstones simply writes a bigger check for new purchases as the net asset value of the existing pool increases accordingly.  If sales prices depreciate, the Blackstones have to pay less for most likely the same income, resulting in a higher cap rate.  Now that Wall Street has entered the single family arena, it is not a one time event.  It has carved out a section of the entry level market indefinitely.  

 

There is no monetary policy that can prevent this phenomenon from continuing.  In fact, it is likely that the Fed's aggressive QE operations contributed to the imbalance. There could be some drastic fiscal measures but the likely balancing forces are going to come at the local level and this is already happening.

Last week, an unheard-of small time Congressman from California named Mark Takano sent a letter to the House Financial Services Committee.  Included in the letter was a report entitled "Rent on the Rise in Riverside".  In the report, he pointed out the rise in rent and the increasing number of households that are paying over 50% of their income on rent.  His numbers were slightly dated, back to 2012. 2013 data are likely to be far worse. 

In my opinion, these municipalities all over stressed areas are one election away from some form of rent control, or the introduction of rent related ordinances.  Would that shut down the profitability models of  Blackstone and similar outfits and force them to put their holdings back on the market?  Today, most of the rent control districts such as NY City, San Francisco and Santa Monica all suffer from land constraints.  What would be the effect of rent control in areas where land is less scarce?

If the harebrained idea of eminent domain can garner enough support to appear on the agenda of a few cities, some type of rent control ordinance should be easy. All it would take are a few angry renters and it could be on the ballot of these smaller communities.

In summary, I have never experienced a real estate market where the entry level is so devastated.  Without the entry level, the up level trade cannot go anywhere.  Low mortgage rates have proven to be ineffective in stimulating demand while the supply from new home builders is shifting away from low margin entry level homes.  How long will it take for policy makers to notice?  More importantly, will there be any political grandstanding on this subject during the midterm elections?  Finally, is this what they call a sustainable recovery?

 


 

 

 

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2 Responses to “Entry Level Real Estate”

  • I think it is even worse than you describe Ramsey. Blackstone not only had the inside track through the political system to acquire these properties, they have the assistance of the Federal Reserve zero interest rate policy and the use of derivatives that allow them to borrow money at near zero. Their cash isn’t their cash any more than the home buyers is.

    The best way to defeat this is to open the door for more construction of new product. If the interest is for people to own a home, new supply would undermine the current price on housing. Of course, the local politicians can not only control rents, they can make the provision of new supply quite a bit more expensive than it otherwise would be.

    The true aim of reserve banking isn’t to acquire the money, but the property of the broad population. We are going to end up a feudal society. Even if they put in rent controls, they won’t hurt the outfit that is paying next to zero for their money, but those that as small investors, need to make more. Blackstone will merely add one more layer of Wall Street asset stripping servicing to their game plan. The best thing for the locals to do would be to boycott renting from that outfit and go to others instead.

  • Kreditanstalt:

    The market has got its head up its rear…between a rock and a hard place. If the powers-that-be insist on ever-rising asset “values”, affordability can only be maintained with ever-cheaper “money”. And we all know that ZIRP is not sustainable.

    The result will be a shrinking market: fewer people are able to “buy”, even with a subsidized cheap-money mortgage. At the same time the rich will trade houses like monopoly counters with their fake money as bait, while the peasantry live from hand-to-mouth in rented accommodation.

    This will not end as long as fiat currencies allow these games to be played. But that’s a CONSPIRACY THEORY, right? :)

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