Sanjay Bhatt, The Seattle Times:
Major investors — defined as buyers who acquired 10 or more homes in a year — overall made at least 7 percent of all single-family home purchases in the Seattle metro area in 2013, RealtyTrac estimates. They bought about 3,100 single-family homes, five times more than the previous year.
Ever since the financial crisis in 2008, there’s been talk that institutional investors would swoop in and rent out single-family homes. With large investors still eager for something that will generate a good return, it looks like it’s finally happening.
Conventional wisdom says that the math of single-family rentals doesn’t work out on a mass scale: detached suburban housing is just too spread out to efficiently oversee the way one might run an apartment building. But that may be changing. Cheap, wi-fi-enabled security cameras, along with errand apps like TaskRabbit, may enable remote landlording on a larger scale. Consumer preference may be shifting as well, as we move from an ownership society to a sharing economy.
If the concept does take off, it could revolutionize not just housing, but adjacent enterprises like public education as well. Want to get your kid into a good suburban school district? You don’t need to be able to put 20% down on a 30-year-fixed; you’ll just need first month, last month, and a security deposit.
Well….that good suburban school might not be so good anymore when the average income levels drop and the local population becomes more transient. I.e. a changing housing market will change a lot of things beyond just the ownership model.
There’s a significant level of parental involvement and care involved in the decision to move house for the sake of children’s education.
Ya. But nowadays cost is just as likely to be the reason driving a move to the suburbs. Things are changing significantly. I’m not making a value judgement about it, but it is what the data shows.
If financial institutions had been required to auction off their inventory of repo’d housing instead of creating artificial scarcity in the market by holding them off market, the housing market might have looked very different as well.
Given that institutional homeowners account for 7% of recent purchases, and started out as roughly 0% of stock, and most of the stock hasn’t changed hands, the institutional owners account for a lot less than 7% of stock. I don’t see them as a major source of artificial scarcity at this point.
But why would someone buy up lots of housing, if not to become a landlord? Could it be that is what re-developers have always had to do before building larger developments where there is no vacant land left to buy? Then the neighbors complain when the owner doesn’t fill the houses with tenants, as if that were a legal requirement to owning the houses. And then the houses continue to sit empty as neighbors stall whatever development plan is in the works, and try to downsize it to the point of minimal profitability without the regulations becoming an illegal taking?
Yeah, some small portion of the institutional homeownership may be a resell or rental (less likely) investment. But it isn’t the institutional homeownership that is driving up the cost of single-family houses. It is the lack of other housing alternatives, thanks to snob zoning, that is artificially inflating the demand for single-family houses, and that is having a much larger effect.
A lot of developers will rent out property they buy with the later intention of re-developing. An occupied building gets you a lot less ill will from the neighbors and local officials. Rental income helps offset the carrying cost of the property.
Lazarus, I’ve got some problems with you assumption that the income of the average person in this country will always remain at current substandard levels, or continue to drop. Also that people who choose to rent by definition will not have enough money to pay for decent schools. It’s perfectly possible that people who do have a good income will decide voluntarily that they have enough money to pay for their children’s education, but not for extortionately expensive housing.
But Frank, your calling the American people’s present financial condition a “sharing economy” is an indecency that calls to mind the Soviet Union’s term “communal apartments” for the decrepit overcrowded pigsties where families were forced against their will to share a room or two total space with strangers.
We’re not talking about cooperatives here, or the healthy density that gives people a more satisfying life than sprawl, as well as workable public transit. We’re talking about the very corporations that destroyed our economy now controlling it, and along with other demonstrations of power, renting homes to people who formerly owned them. And didn’t need a landlord’s camera monitoring the property that used to be theirs.
If you care about the reputation of Seattle Transit Blog, please don’t say anything more like this.
Mark Dublin
Mark, I don’t think Lazarus was saying anything inaccurate. Politically incorrect, sure. But when you boil down his comment, he’s basically saying that lower income rental communities and school districts tend to do less well than middle class, home-owning communities and school districts. The stats back him up.
Then let’s do something to change those stats, Al. Unless you really believe that children are somehow responsible at birth for the economic condition of their parents. Or that poor- or less-than -billionaire’s families are better off left uneducated, so they don’t ever compete with the children of their “betters”.
Perhaps the wisest thing the founders of this country did was to write the Constitution to abolish “titles of nobility.” The associated inbreeding creates idiots by both upbringing and genetics, and ends up with rule by smart, unknown, and generally evil people behind the scenes.
But it’s also true that stupidity has this in common with greatness: Some people are born stupid. Others have stupidity thrust upon them- and I think this accounts for much malfeasance in transit by people who should know better.
But most dangerous are those who achieve stupidity by their own hard work. At least their contract language should forbid overtime.
Mark
Considering how expensive it is to raise a child, children are a major burden (financial and otherwise) on their parents. Most folks who raise children do so willingly and lovingly, of course.
Mark, I think you misunderstand the phrase “sharing economy.” Maybe click the link? It doesn’t refer to the post-2008 economy, but rather the idea that certain assets are better rented than owned, and that technology enables new models for renting that were previously impossible. Think of car sharing services like Car2Go, for example, or AirBnB.
I can’t speak for anyone else, but… I understand the economic and sometimes social advantages of sharing-based services. The convenience of subscription music services, the efficiency of car sharing, etc. But sometimes the term “sharing economy” sounds an awful lot like an attempt to spin consolidation of ownership (and consolidation of wealth) positively. This is one of those cases, and I wouldn’t rush to cheerlead the consolidation.
It’s not that there aren’t some positives to the trend. There are plenty of SFH-heavy neighborhoods and towns that really could use more rental availability, and more large rentals for families that don’t have the savings to buy. And landlords and renters may be more likely than homeowners to have pro-development attitudes in the case of a re-zone (which is a positive in places that ought to simply add density, which isn’t everywhere IMO). But all that could happen without large institutions taking over — I currently rent a unit in a SFH-duplex conversion, and I’ve lived in others, all managed by small-time landlords.
The comparison to the USSR is fairly apt. Under communism the state owns everything worth speaking of. One great anxiety in America today is that some combination of the state and very large corporations will come to own everything worth speaking of. The idea that many people own something worth speaking of is a big part of the Amercian ideal. I’m not sure it’s a perfect ideal, but in general it’s one we tend to feel pretty good about — GWB’s “ownership society” soundbite was a popular one even as it was against contemporary trends.
The comparison to the USSR is fairly apt.
No, it’s not. Choosing to exercise one’s freedom by entering sharing rather than ownership arrangements isn’t at all like an authoritarian state seizing control of virtually all property. The rest of your comment makes some points worth making, but attempting to introduce this analogy detracts from them.
Sorry for not clicking the link, Frank. Could use the excuse that I was only able to get the left lens of my glasses re-installed just before noon- spent three days escaping Microsoft recruiters who thought Bill Gates would give them an even bigger reward for somebody with one lens in their glasses than somebody with tape in the middle of them.
But it’s really an age thing. Links still scare me- years ago the Bulgarian mob took down a computer of mine with something that looked like a grey and yellow shield, possibly the emblem of their province, and a demand for my account number to fix it. I let somebody else do it- no, not the son of the Prime Minister of Nigeria.
Even so, I don’t think the headline story is as about something as widely beneficial as the examples you mentioned. I’ll say it again: the very people whose lending practices did so much damage to our economy are again in a position to dictate terms.
When they should be serving them instead. However, promise I will read every link from everyone in this blog, with a very few exceptions.
Mark
I’m certainly not an unabashed cheerleader for investors coming in and buying every single-family home in Seattle. Obviously it’s a nuanced issue and there are pros and cons. If I ran the zoo, we would have nationalized the banks five years ago and started over.
However, there’s no question that the government’s efforts to promote home ownership over the last 50 years by subsidizing mortgages through the tax code and other means has been a mixed bag at best. If you own a home in a town (say, Detroit) and work the big manufacturing plant (say, General Motors) you’re poorly hedged from an investment perspective. If GM goes bust, not only do you lose your job but you’ve also lost your nest egg, because your home is now worthless since the local economy’s collapsed and you can’t sell it and move. For many people, it would have been better to have rented a home and put any extra money in an index fund or similar investment.
@Frank: The issue of whether a single house is a good savings/investment vehicle is a good point. Parts of Philadelphia are unfortunate examples as well, where individual lot owners largely abandoned their investments, so that many blocks have abandoned lots that drive down value of the other lots and houses, leading more people to abandon and driving away potential buyers. Anyway, I have friends that say they’ll never live in a house they own, even if they do buy property for investment purposes, so there’s that. I’m looking to jump into buying a place to live, myself.
One thing that’s really compelling about owning a home (especially a free-standing house but townhomes and condos to somewhat smaller degrees) is that you own something that you have some meaningful control over. Even if you pour your life savings into voting shares of your favorite public company (don’t do this) you’ll never have a meaningful voice in how it operates, to say nothing of an index fund. When the state owns something that reflects the values of the state, and when amorphous money owns something that reflects the values of amorphous money. I don’t think that institutional buyers’ modest entrance into single-family homes is going to destroy the American way of life and I don’t think that SFH ownership has a magical property that nothing can replace. If financial institutions did manage to buy up a really significant portion of the housing stock I think that would be more indicative of consolidation of wealth than personal desire for sharing.
“people who choose to rent by definition will not have enough money to pay for decent schools”
These are public schools, so the person would not pay more than their taxes. Private schools don’t care where you live so the person wouldn’t be moving in the first place.
I’m not convinced that rental houses would lead to less taxes for schools because the owner would not lower the rent drastically below the purchase-equivalent price, especially in this environment where houses are being held back from the market so buyers don’t have many choices. So the renter would still be affluent, and the tax revenue would remain the same, and so school quality would remain the same.
I was surprised at Frank’s “sharing economy”, and I’m not sure it’s very relevant to ordinary rental housing. Certainly a sharer might rent to avoid distracting stresses and tie-down, but a hardcore sharer would likely be in a cohousing/cooperative arrangement which may just as likely own rather than rent.
There are lots of ways people mean “sharing economy”, and while the hard core of any movement is often influential it never represents much of society. A hardcore sharer might post on Craigslist that she’s driving to Portland and seek to barter off the extra space in her car; the broader trend includes people that, in aggregate, are less likely to own a car but don’t necessarily identify as “sharers” and whose sharing is mediated by institutions like public transit agencies, for-profit businesses like Uber, or in this case Amtrak or Bolt Bus. So while a hardcore, intentional sharer may live in a co-op, the term “sharing economy” is also used to describe the trend toward service or subscription models for accessing things that used to be dominated by ownership, from music to transportation to housing.
“Shared housing” involving ownership by those living in the housing is typically referred to as a condominium. I know a few people living in condos, and none of them speak highly of the experience.
I know quite a lot of people who speak very positively about living in condos. Not in Seattle, mind you. In cities where the choices are condos, apartments, miniscule and badly located houses, or exorbitantly expensive houses, the condos are often preferred to the apartments.
I’ve lived in apartments and a condo, and I prefer owning and living in a condo to renting an apartment.
I also would speak quite highly of the condo experience, if only in comparison to the rental experience.
Calling condos part of the “sharing economy” is also a stretch. A large percentage of condo owners are “squares” who have no interest in sharing, but merely like the convenience of the unit and common building maintenance. Each owner has a separate legal share in the building, so it’s more like owning stocks than sharing ownership. They don’t have close relationships with their neighbors and don’t consult them before selling their unit, the same as with a stock. It’s rare for several people to buy adjacent units to do larger-scale sharing among themselves. Even if they did, the high cost and low liquidity of a condo means they can’t just buy in or sell out whenever they feel like joining or leaving the community. They have to fit the sale to their other life finances, and buying requires a vacancy to exist. So condos are “sharing” only in a minimal sense. Co-ops are more like sharing.
I’ve got some problems with you assumption that the income of the average person in this country will always remain at current substandard levels, or continue to drop
Why not? Real wages below about the the ~90th percentile have been stagnant since the late 70’s. My copy of Piketty’s Capital in the 21st Century* arrived this morning and I’ve spent the day with it. He’s got the most impressive database on national inequality levels that has yet to be created (20 countries, going back to the 18th Century) sees very little on the horizon, economically or politically, that’s likely to change that, barring some radical and politically unfeasible changes to taxation. Sources of protection for stable middle class incomes continue to erode. The half of our political class that’s sympathetic to the problem is willing to work to alleviate the harms of this situation (extended UI, subsidies for health insurance, etc) but not contemplate what it might take to change it. What rational reason would be have to be optimistic about changes on this front?
* Anyone interested in the dynamics of economic inequality must read this book (and prepare to be pretty depressed by it).
Largely correct. The only reason I see to be “optimistic” is that our current elites are deranged and are failing to feed the people, which usually leads to violent populist revolution and forced redistribution of wealth at gunpoint.
Wait, did I say optimistic? I means pessimistic.
An unequal society can be stable — if the elites keep the masses fairly contented — or unstable, if they don’t. Our elites have chosen “unstable”.
It would be interesting to know a bit more about these institutional investors. Some time ago, an article in our paper found that because of the screwy nature of the federal income tax, when people sold their high priced real estate back east or in California and moved here, they would sometimes purchase multiple houses (sometimes six or more) as that gave them the least hit on their federal income tax.
Seattle has a tight market, but could that be happening there too?
Also, what has happened here has been the redevelopment into more dense arrangements. IE, a developer will buy a place with good potential, and wait for the property next door to come on the market, or make a good offer. Eventually two houses get torn down and replaced with five or so “infill” housing units. These are very narrow houses that have little yard, but a fair amount of space inside. Take a look at the house on the SE corner of SE Ramona and 97th in Portland on Google street view, and you can see an example. In that particular case, the developer only purchased one house and replaced the side yard with an infill house, but the type of house is similar to what can be put on other lots as a one house into two conversion. Parts of Magnolia seem to be getting some of this type of thing, as I noticed it last time I went up to Discovery Park, though I can’t find any good examples right now.
Also, with the tightening up of the loan practices that help lead to the recession, there may be fewer people able to buy now.
I don’t know about Portland, Glenn, or what all helped to lead to the current Depression, but the main reason for it was that for years millions of people were loaned money that lenders knew could not be paid back in hopes of gaining huge amounts of property by foreclosure. Violating every rule of their own industry.
When they all simultaneously realized that their fellow financial institutions were probably screwing them as they were doing to others, the entire industry froze like frightened deer in the headlights, bleating for the evil, tyranical Federal Government to bail them out.
Which, to its own disgrace and our country’s ruin, it did. The repeal of the Glass-Steagal Act, which Congress passed and Bill Clinton signed- something he should be more ashamed of than Monica Lewinski- was what the Federal Government did to bring on the 2008 disaster.
What really bugs guilty corporations about the Federal Government is that, however imperfectly, it really is the instrument of us, the American people. If we’d kept our hands on its controls all these years, we’d all have decent homes, rented or owned, and the well-paid employment to pay for them.
When we take the wheel again, what we don’t have now, at least our children will.
Mark Dublin
You’ve left out the parts where the lenders failed to file their mortgages at the local courthouses, “sold” the mortgages to multiple investors (securities fraud), concocted illegal and fake fees to drive the borrowers into default (fee fraud), and then forged phony documents to claim that they had the right to foreclose, which they didn’t, due to never filing the mortgages (foreclosure fraud).
Nests of crime.
Here’s just a small part of the criminal operation:
http://www.nakedcapitalism.com/2014/03/new-lawsuit-alleges-wells-manual-mass-fabrication-foreclosure-documents.html
That sounds like the capital-gains tax. If you sell a house you have to buy at least the same-price amount of property within X days or you owe capital-gains tax on the difference. I’m not sure if that’s a “problem” or how you would fix it. The fundamental issue is that prices are different in different cities, and that’s not going to change. Mitigating that would require some other solution, but I’m not sure what. Again, the main issue is to expand housing as the population rises so that everybody can find something without prices going up.
The problem I see with this situation is that it artificially inflates property values in less expensive markets, beyond the point where wages alone in those communities could support such prices.
It seems one way to solve it would be to either expand the exemption to other assets (ie, the person could also buy stocks in the allowed time frame), or treat real estate as any other investment and pay capital gains regardless.
Either way would end the capital gains preference of real estate over other investments – or at least make it somewhat more equal.
Or, maybe, limit the exemption to one home only? Or require the homes to be in close proximity (e.g. 1/2 mile) to each other? It seems to me like the only significant justification for that exemption is to let the selling price for one home roll over into the purchase of your next, which neither of those limits would affect.
Limiting the exemption to one home might work to some extent.
In one of the examples in the Oregonian article, they talked to someone that had moved here for LA. They sold a 2 bedroom shack with the front porch falling off (the newspaper got photos somehow) for a “undisclosed sum”. When this person got here, they purchased 6 fairly decent sized houses, and didn’t try to negotiate the price at all but took them at the asking price. Due to the capital gains tax situation they decided it really didn’t matter what they paid.
Sure, that is only one example, but it has happened often enough that it seems to have become a significant factor in the high price of real estate here relative to our wages.
This is no longer the case. A person can exclude up to $250,000 of gains (a couple twice that) in the sale of a home, provided they lived in it two out of the last five years. http://www.schwab.com/public/schwab/resource_center/expert_insight/ask_carrie/homes_mortgages/pay_capital_gains_on_home_sale.html
While it is an extremely rare case, some houses have been converted into official co-ops. I lived in one during a portion of my college days. I learned that, from an operational standpoint, the sharing economy starts falling apart when more than 16 people are involved.
Even though my co-op was stridently vegetarian, I learned that I don’t do well with group food. My saving grace was that one of my housemates didn’t eat garlic (which I like) or onion (to which I have an extreme psychological aversion), as it disturbed his meditation.
The co-op owned several converted houses in the “West Campus” neighborhood, all of which seemed to function decently well, and managed to break even. This is separate from the fraternities and sororities, which also owned a lot of former single-family houses in the neighborhood.
There were several apartments in this neighborhood converted into co-ops, owned by a different co-op organization. Some functioned okay. Some were a mess, and under ever-present threat of being sold off to pay the debt.
But again, these are extreme edge-case examples of institutional ownership that have been around for decades.
I had never seen converted-apartment-style co-ops used by families and other post-graduated adults until I moved here. They seem to be all over the place, if you know what you are looking for. Outside of frat row, I haven’t found any single-family houses converted into co-ops around here, but then, I haven’t been looking.
Obviously, lot and lots of houses around here have been rented out to multiple individuals. There are busy services that specialize in helping people find suitable housemates, which is how I found my first living space in Seattle.
I’m quite content living by myself now, in an apartment, and cooking my own meals.
Thing about a cooperative, Brent, is that it generally is run by its members. If a member doesn’t like the dining arrangements, they can either organize with other members to get things changed, or find another co-op- or place of residence. Nobody forces anyone to live there. Or eat anybody else’s cooking.
There was also a time, unfortunately our grandfathers’ time, when farmers and other realistically hard-nosed working people, managed cooperatives very well in numbers exceeding sixteen. Interesting recent personal note: a few months ago, my state representative, Gael Tarleton, told me that the main local cooperatives of her experience were the boat-yard in Ballard, and several fishing boats owned by Norwegian-American fishermen.
All Republicans.
I’ll agree with you on one thing: operating a cooperative is as much a skill as running any other business. Difference being that members have to understand that they are owners as well as consumers, and take responsibility accordingly. And if they don’t already have it, gain the business knowledge they need. Not for everybody- given the many years when people have been given to understand from many quarters that their main purpose in life was to consume.
As I sat at union membership meetings where attendance of twenty would have been four more than your number, I really did wonder about my ongoing belief that our transit system should be run as a member-owned cooperative- as happens in other countries.
Along with the other skills and inclinations required to keep a cooperative, and a country, both democratic and functional, Washington and every other state should put the knowledge and habits of governing right alongside reading and math as a requirement of graduation from high school.
Given present performance by our representatives, nobody can claim this is too high a bar.
Mark
Co-op housing isn’t so rare in some places. New York, for example, has quite a number of them. They are popular enough there that the local industry association there is called “Federation of New York Housing Cooperatives and Condominiums” as apparently quite a number of condominium type arrangements there are actually co-op housing arrangements.
I think there are some places overseas where they are popular as well. I spent some time in Brazil, and one of the places I stayed a few months seemed to operate a bit like a coop, rather than a condominium or American style apartment. Everyone had their own separate apartment like space with a door into the staircase, a kitchen, two bedrooms, a bathroom, and living room. However, the building only had one water meter, and rather than have the water bill included in the rent (per American apartment methods) or be part of homeowners association dues (American style condominium methods) the water bill was one of several expenses that was held in common by every resident, and each payed a share of it. If more water was used then it was more, and if less was used it was less – so everyone had a reason to conserve on things like that rather than it being a monthly bill of the same price.
However, my Portuguese wasn’t too good at that time (it still isn’t that great) so I didn’t quite get a complete explanation about how all this worked, and my two Brazilian companions arranged everything.
Re one water bill shared by occupants: that is how most apartment buildings in Seattle operate today. Apt owner gets one bill, which is turned over to a contractor billing outfit such as Minol, who sends out individual bills to tenants, charge based on the number of occupants in the unit.
“I learned that, from an operational standpoint, the sharing economy starts falling apart when more than 16 people are involved.”
That number sounds about right. After that, it becomes impossible for everyone to be simultaneously involved in management. You can add more people if they’re essentially wiling to not have any direct control… but then it starts getting much less co-op like. At some scale, it becomes an elected democracy if you’re lucky, and falls apart if you’re not.
There’s REI, which follows the legal pretense of being a co-op, but has a self-perpetuating board with sham Soviet-style elections. Sure, anyone can challenge the board-selected slate, as a write-in candidate. Good luck getting the membership list so you can get equal space to the board-approved dear successors. REI is a corporation that has found a clever way to protect those who run it from liability by pretending to be a co-op. They are doing brisk business and show no signs of failing.
This is how stock corporations work too. Soviet-style elections where the shareholders have no ability to put up a slate other than those selected by the board. CEOs protected from accountability because they claim they’re merely employees,
I think I was unclear when I said “falls apart”. I didn’t mean the business falls apart. I meant the *co-operative nature* of it falls apart. So, with the example of REI, it turned into an oligarchy or dictatorship.
In housing, it would turn into a plain landlord-renter situation, regardless of what it was officially called.
English is my sixth language, so I’m not sure I’m completely understanding Frank’s conclusion, but his last paragraph puts a puts a positive spin on this story. I’m sorry, but I don’t think institutional investors snapping up a large quantity of homes then renting them out to people is a good thing.
अपने निराधार विचार साझा करने के लिए धन्यवाद.
Discovery had a show all about this: Property Wars
REO conversion to institutionally held rental has been a notoriously bad investment.
Many of these companies are selling out after failing to make enough profit on rent.
Vacancy rates higher than expected in first REO to rental deal
http://www.reuters.com/article/2014/02/19/markets-structuredfinance-idUSL2N0LO2A820140219
I guess the market has spoken. People don’t want to rent single-family houses. Maybe we should heed the market and build more apartments, which people seem to like to rent, given the low vacancy rates.
Seattle-area apartment rents may stabilize, even dip in 2014
http://seattletimes.com/html/businesstechnology/2022578166_apartmentrentsxml.html
I guess the market has spoken.
Nice article John.
I guess we can fix high rental prices from the supply side.
Yes, more apartments, but also fast transit from the jobs centers to further flung residential areas in the region!
At least 500 apartments coming to market this spring in QA/LQA.
Also Belltown –
131 unit – Joseph Arnold Lofts (50%+ leased)
300 unit Dimension by Alta is pre-leasing
137 unit Art House Seattle (spring)
It’s still cheaper to pay a mortgage in Seattle than to rent in Seattle, which is kind of a litmus test as to whether rental properties are a “good” investment (rather than just as a holding pattern for real-estate speculators).