Corporate / private equity / STVR investors are all fair-weather owners of housing.
Let’s indulge in some basic logic:
1. All credit-asset bubbles burst.
2. U.S. housing is a credit-asset bubble.
3. The U.S. housing bubble will burst.
The only variables are how and when Housing Bubble #2 will burst. That’s today’s topic.
I’ve been writing about housing since 2005, as Housing Bubble #1 was inflating. I’ve participated in / observed housing rising sharply in the late 1970s and the late 1980s, followed by deflation / stagnation. Housing Bubble #1–circa 2003-2008–was characterized by all the classic signs of a mania:
1. Participants denied it was a bubble. When greed displaces prudence, this isn’t a bubble doomed to pop, it’s the New Normal.
2. Fraud, malfeasance, misrepresentation, speculation and leverage were all rampant. In the euphoric ascent to ever higher valuations, why let foolish little things like income, risk management and credit ratings stand in the way of reaping more profits?
Housing Bubble #2 has rolled over into the decline phase, but this is discounted by the consensus which holds that higher mortgage rates dented the market; once they drop a bit, housing will resume its ascent to ever-higher valuations.
I see a different set of dynamics in play:
1. The 40+ year cycle of interest rates / bond yields has turned. Rates will not go back to zero and stay flatlined for years. Risk and inflationary forces have changed and are not returning to The Great Moderation.
2. The Federal Reserve / federal government effectively nationalized the mortgage industry post-2009 Global Financial Meltdown as the means to stop the decline of housing valuations and re-inflate them via super-low mortgage rates. The Fed bought a staggering $1.2 trillion of mortgage-backed securities in 2009-2010, up from zero–a monumental manipulation of the mortgage market that soon exceeded $1.6 trillion.
How the housing/mortgage market managed to survive without Fed nationalization prior to 2009 remains a mystery.
For its part, the federal government effectively nationalized the quasi-governmental mortgage agencies (Fannie Mae, Freddy Mac), using these agencies to guarantee most mortgages in the U.S.
3. The incentive (lower mortgage rates) to commit fraud by claiming to be an owner-occupant rather than an investor has pushed mortgage fraud to levels that Federal Reserve researchers declare “rampant.” Owner-Occupancy Fraud and Mortgage Performance (A 46-page PDF report is available on this link.)
The study’s authors found that “in most years, fraudulent investors make up roughly one-third of the total pool of investors.” Fraud rates in excess of 13% were found in some states states.
The frenzy to buy and convert houses to short-term vacation rentals (STVRs) took off in the post-pandemic “revenge travel” boom. Corporate purchases of houses as rental properties had taken off in the post-2009 era of mass foreclosures, a trend that accelerated as private equity sought new markets to exploit.
Combine corporate / private-equity buyers with small investors flooding into STVRs and the post-pandemic panic-buying frenzy, and it’s little wonder that investors–declared and fraudulent, large and small–now own huge swaths of housing in the U.S.:
An estimated 26% of Fort Worth’s single family homes are owned by companies, city says
(Yes, family trusts and households can own housing as LLCs, but the study linked above paid no attention to the type of ownership; it paid attention to A) if the owners have multiple first liens, and B) whether they moved following the origination of their new purchase mortgage or not.)
4. The risks created by this preponderance of investor ownership are high. The Federal Reserve researchers found that fraudulent investors pose a much higher risk of default than declared investors and real owner-occupants.
As “revenge travel” shrivels up, property taxes and insurance rise and inflation ravages household budgets, STVRs are quickly shifting from income-producing assets to loss-generating liabilities. Investors either sell before they’re under-water or the risk of default rises accordingly.
Professionally managed corporate and private-equity owners will start unloading properties as rents sag and vacancies rise. STVR owners who realize the tide has reversed will also rush to sell before the price slide gathers momentum.
