what people mean when they talk about the “financialization” of housing

May 2, 2023 11:38 AM

"Homes or Cash Cows," Shelterforce's on-going series, includes Hands Off the Houses: Can We Stop Speculative Land Grabs?: "According to a report by Americans for Financial Reform, 1.6 million housing units in the U.S. are now owned by private equity, including over 1 million apartment units, 275,000 manufactured home lots, and over 239,000 single-family rental homes." Most recent article is on how NYC's land speculators use LLCs to evade legal responsibility while sitting on vacant property.
posted by spamandkimchi (37 comments total)

Thanks for this. A lot of great stuff here to go through.
posted by Mchelly at 12:03 PM on May 2, 2023

I feel like at a certain tipping point we'lll get a big political push to implement higher property taxes and/or a land value tax to be almost punitive against speculators. Especially speculators who sit on vacant lots. It could be conjoined with a universal basic income or senior assistance to make the burden on seniors lower. We're not there yet in California I don't think. Which markets if any have less than 50% home ownership?
posted by BrotherCaine at 12:27 PM on May 2, 2023 [1 favorite]

I feel like at a certain tipping point we'lll get a big political push to implement higher property taxes and/or a land value tax to be almost punitive against speculators

Push from who? The people who would lose money if supply went up and prices went down (existing homeowners)? The people who would lose profit if they paid more in taxes ("speculators")? People who would see a hit to their property tax funded budgets (public schools)?

"239,000 single-family rental homes" might sound like a lot to people here, but that is less than two days of US single-family home sales. And before rates went up, it was close to a single day's worth of sales. Over four million single-family homes sold in just March 2023.

Private Equity is the latest bogeyman (unless you live somewhere with a wealthy immigrant population, then the bogeyman is the elusive Foreign Buyers™️), but it's just regular people making slightly more money at their regular jobs that making prices higher.
posted by Back At It Again At Krispy Kreme at 1:20 PM on May 2, 2023 [11 favorites]

Yep private equity is a symptom of a market out of wack(artificial scarcity), not primary cause. However they certainly aren’t helping by taking supply out of an already constrained market. Banning private equity or foreign buyers is one of those things that sounds great, but we I think we really need to increase non-profit built housing the meets the needs of the middle class on a more European model
posted by CostcoCultist at 1:34 PM on May 2, 2023 [1 favorite]

You know, if you liberalize zoning to make it legal to build more working class housing units, greedy developers will be more than happy to pop the bubble made by these speculators, and solve homelessness at the same time.

Leopards eating other leopards's faces, and homes for the homeless. I want.
posted by ocschwar at 1:38 PM on May 2, 2023 [10 favorites]

I feel like at a certain tipping point we'lll get a big political push to implement higher property taxes and/or a land value tax to be almost punitive against speculators.

There's far too much bored money out there.
posted by mhoye at 1:48 PM on May 2, 2023 [1 favorite]

but it's just regular people making slightly more money at their regular jobs that making prices higher.

It's not the same dynamic as the overall national affordability problem, but where I am living now, the housing affordability issue is from people with outside money (meaning, they earned their money in, say, New York or Houston or San Francisco, or inherited it) buying houses at prices far above what most local salaries can cover. (For full disclosure: I am personally in that category, able to move here and buy a house thanks to previously living in places with higher wages). There are a ton of second (or third, fourth...) homes here that sit empty most of the year and function in large part as a good place to park money for the owners. Meanwhile people earning regular/median level wages have to live further and further out, or give up and move away entirely.

My point is really that there are a bunch of very local dynamics that seemingly all result in constrained supply and high prices. Private equity and other investor housing purchases are one piece of the problem, though not at all the full story.
posted by Dip Flash at 1:50 PM on May 2, 2023 [7 favorites]

if you liberalize zoning to make it legal to build more working class housing units, greedy developers will be more than happy to pop the bubble made by these speculators, and solve homelessness at the same time.

I wish that was how it worked. Zoning laws support the present, untenable situation but changing them won't fix the problem. Greedy developers want high returns to attract capital in a world of high returns and you don't get that by building inexpensive rental units.
posted by praemunire at 1:51 PM on May 2, 2023 [5 favorites]

I wish that was how it worked. Zoning laws support the present, untenable situation but changing them won't fix the problem. Greedy developers want high returns to attract capital in a world of high returns and you don't get that by building inexpensive rental units.

Changing zoning away from primarily single family towards denser development is a piece of the solution, though. It's not a panacea and like you say, it doesn't magically create an incentive for inexpensive housing, but it does change what is possible and what is profitable, and results in more housing units overall.
posted by Dip Flash at 1:57 PM on May 2, 2023 [5 favorites]

If you want to check vacancy rates for your area, the census bureau does track that. (And, note: my understanding of their definition of vacancy is that a second home that someone only visits for vacations is counted as vacant, so their vacancy rate should include those units.)

My understanding is that in general these days, as you'd expect when housing is scarce, vacancy rates are low.
posted by bfields at 2:07 PM on May 2, 2023 [1 favorite]

Push from who? The people who would lose money if supply went up and prices went down (existing homeowners)? The people who would lose profit if they paid more in taxes ("speculators")? People who would see a hit to their property tax funded budgets (public schools)? Push from people who cant afford homes. Turns out that only DC has more renters than homeowners though, so my speculation is premature.
posted by BrotherCaine at 2:24 PM on May 2, 2023

Turns out that only DC has more renters than homeowners though, so my speculation is premature.

Nearly every major city in the US is majority renter. Seattle used to be an outlier, but it flipped in 2021. I think San Antonio Texas might be the biggest city in the US that is majority home owner, at 52%. Now metro areas including suburbs? That's different, but major cities are almost all majority renter.
posted by The_Vegetables at 2:38 PM on May 2, 2023

Colorado is having the density argument right now.
posted by SunSnork at 2:43 PM on May 2, 2023 [2 favorites]

Changing zoning away from primarily single family towards denser development is a piece of the solution, though.

Montana (of all places) is about to test that theory with the most housing progressive rules passed at the state level in the US.
posted by The_Vegetables at 2:48 PM on May 2, 2023 [4 favorites]

Private Equity is the latest bogeyman

Latest? In my area, Private equity has the muscle, data, and the cash to flip homes, to inflate prices by 100,000 without contributing value, ruining 'comps'.

Private equity has always done this, but historically it was more confined to commercial real estate, with the bad results confined away from housing needs
posted by eustatic at 4:14 PM on May 2, 2023 [7 favorites]

Okay, so maybe only about 1% of housing units are owned by private equity (1.6 million according to the FPP, and a quick search shows there are about 140 million units in the US), but the article says,

In 2019, 15 percent of all rental properties in the United States were owned by an LLC and that number has steadily increased as the financialization of housing continues unabated.

The article goes into some of the problems associated with LLC ownership, including how they are more likely than other owners to forego maintenance and to keep vacant land vacant.

I feel like there must be some way to heavily tax these properties to make this kind of anti-social behavior unrewarding: maybe some kind of calculation involving local median income, affordable housing zoning compliance (like that recent change in California), and rental income, so that over the course of, say, 5 years, luxury rental properties would actually become cash negative (because of the extremely high taxes). I'm obviously just spitballing here, but I feel like better minds than mine who have been thinking about this for years must have some good ideas floating around.

Anyway - the Shelterforce article in particular is very interesting to me, and I am really glad to have more data, and more to think about. Thanks so much for posting this, spamandkimchi!
posted by kristi at 4:22 PM on May 2, 2023 [2 favorites]

> if you liberalize zoning to make it legal to build more working class housing units, greedy developers will be more than happy to pop the bubble made by these speculators, and solve homelessness at the same time.

lenders lend to the developments with the highest rate of return. before supply reaches the point that it starts to reduce prices for mortals, that money shifts to more lucrative locations. note: i have stolen this argument. specifically, i have stolen it from opponents of affordable housing set-aside requirements for new market-rate developments. if there are set-asides, that makes development marginally less profitable, which in turn results in lenders fleeing.

the presence of sufficient housing for most people, much like the presence of affordable housing set-asides, reduces profitability and scares off lenders.

with regard to the question of what impact a larger percentage of renters might make on the outcome of elections, do remember that we don’t live in a democracy or even a democratic republic. the actions that are thinkable for governments here to enact are largely unrelated to the actions preferable to a majority or plurality of the population.

any scheme like georgism or whatever is a dead letter under extant governments, because our methods of selecting office-holders select the office-holders preferred by property holders. as such, solving the problem of housing doesn’t require economic solutions related to tax rates or subsidies, but instead requires political-economic solutions that shift political power away from the ownership class — which, uncomfortably, means not just the big property owners who everyone knows to hate, but also the little property owners who draft behind the big fish, profiting in their own small way from the market crunch the big owners have engineered.
posted by bombastic lowercase pronouncements at 5:14 PM on May 2, 2023 [4 favorites]

i have stolen it from opponents of affordable housing set-aside requirements for new market-rate developments. if there are set-asides, that makes development marginally less profitable, which in turn results in lenders fleeing.

Interestingly, most new rentals in NYC in the past few years have been, as I understand it, built with the tax credits from set-asides for affordable housing. Like, even the one that was built to rent to NBA players. That's how profitable the tax credits are. But that is quite different from "clear the field and let the market work its magic."
posted by praemunire at 7:22 PM on May 2, 2023

Landlords can't write off the opportunity cost of lost rent, so it isn't clear what sitting on vacant properties does for a portfolio.
posted by grumpybear69 at 7:49 PM on May 2, 2023

THings to realize about housing is that you can't toy so much with demography. If you want to build for the 1%, you have to realize that they are just 1% of the population, and everyone wants to build for them. If you don't have a plan-b to cut your losses to sell your units to the lower tax brackets, you're screwed.

The next thing to realize is that the insane housing prices we see in many cities are driven by professionals seeking jobs in those cities. The lack of brand new luxury housing won't cause them to find other cities to move to. They'll just move to older stock apartments and really displace working class residents. I moved to Boston for college and stuck around, programming for a living. At no point would I have considered moving elsewhere just because available apartments weren't comfortable enough.

SO the idea that significant swathes of housing are being held as speculative assets and thus uninhabited is just fallacious. Toronto started taxing vacant apartments, and the tax got them enough data to show that they don't actually have many of those.

However, yeah, LLCs are worse landlords than old school landlords. The whole limitation-of-liability is the original sin of modern capitalism, and so it's time to tax the living shit out of the limitation of liability so it's not a viable way to escape legal responsibilities such as housing and fire codes.
posted by ocschwar at 8:22 PM on May 2, 2023 [6 favorites]

SO the idea that significant swathes of housing are being held as speculative assets and thus uninhabited is just fallacious.

During a worsening housing affordability crisis, New York City landlords are keeping tens of thousands of rent-stabilized units off the market — a phenomenon tenant activists call “warehousing.”

Landlords can't write off the opportunity cost of lost rent, so it isn't clear what sitting on vacant properties does for a portfolio.

There is substantial room for accounting tomfoolery, but the most basic point is that most big commercial mortgages these days contain covenants concerning the rent rolls. If the rent revenue drops below a certain level, it may actually constitute default on the debt. If you do not rent the space, you can kick the can on this for quite some time. Furthermore, lower rent rolls lead to lower valuations, which leads to comps getting lower valuations, so if you have buildings in the vicinity of each other, you have an incentive not to lower rents to fill empty commercial space. I understand that such dynamics are taking hold in the residential space for larger players, as well.

I'm really not trying to impugn your personal knowledgeableness, but people often think they can just look at a particular category of economic transactions and reason out the dynamic from first principles, and they absolutely cannot, because they don't know about the existing, often incredibly complex, structures and the regulatory and financial concerns they are built around. But as a first cut it's generally safe to say that, whatever a landlord is visibly doing, they are doing because it's the most profitable thing for them at any given moment. You just may not be able to see where the profit is coming from.
posted by praemunire at 9:06 PM on May 2, 2023 [12 favorites]

Which markets if any have less than 50% home ownership?

Better question, perhaps, is which markets if any are not currently driving as hard as possible in that direction.

Financialization is a tool of the very wealthy, so if there's more financialization happening in any market, that's a pretty clear indication of which way participation in that market is moving.
posted by flabdablet at 9:12 PM on May 2, 2023 [1 favorite]

people often think they can just look at a particular category of economic transactions and reason out the dynamic from first principles, and they absolutely cannot, because they don't know about the existing, often incredibly complex, structures and the regulatory and financial concerns they are built around

This is an alternative to the default Metafilter response, "because capitalism", but when you actually have an idea about how stuff works.
posted by 2N2222 at 5:21 AM on May 3, 2023

The single family homes that private equity is buying aren't the scarce (expensive) ones. They are buying houses are cheap enough that they can be profitably rented out to middle class families - and those houses are very plentiful.
posted by MattD at 7:07 AM on May 3, 2023 [1 favorite]

This is an alternative to the default Metafilter response, "because capitalism", but when you actually have an idea about how stuff works.

It's still not much of a national explanation, because all the terms of specific to NYC rentals, it's 60k out of approximately 900,000 units (an increase of 30,000 from the previous year), and there is no explanation in the article how long they are vacant at the median. Just like the foreclosure thing, sure fix it, but it's small potatoes. NYC builds on average about 90,000 new units a year, so as a comparison, it's even smaller potatoes. Fill every single one, and that's 9 months of new supply.
posted by The_Vegetables at 7:33 AM on May 3, 2023

Also the mechanism described only works because there is an expectation of rising rents, which is only true when the vacancy rate is freakin' low, which is only true of retail and residential. Yes, retail store fronts, the sector everyone declares dead, and of which the US has about 3X the square footage of the rest of the world on average, is 95% occupied across the entire US.
posted by The_Vegetables at 7:37 AM on May 3, 2023

It's still not much of a national explanation,

I don't offer it as a national explanation, but as an example from a sophisticated market. Property owners will absolutely use such tactics if they think there is profit in it.

Also the mechanism described only works because there is an expectation of rising rents, which is only true when the vacancy rate is freakin' low, which is only true of retail and residential.

There is a significant population of lenders willing to lend on terms that can only be met if rents continue to rise, legally or otherwise. Another local example: "Madison’s $89.7 million first mortgage [on a portfolio of residential properties] required monthly interest payments at a minimum of 6% annual interest rate (while accruing additional interest at a 3% annual rate which would be due at the end of loan term). ... These loan terms required monthly interest payments of at least $448,000. Monthly interest payments could increase to as much as approximately $520,000 per month if Toledano [the landlord] also drew down funds set aside in the BuildingLoan and Project Loan for “hard costs” (such as construction) and “soft costs” (such as tenant buyouts). ...However, according to Signature Bank’s analysis of Madison’s loan, the rent rolls for these properties only produced an NOI of around $260,000 per month at the outset, far less than was needed to cover these monthly payments."
posted by praemunire at 8:10 AM on May 3, 2023

There is substantial room for accounting tomfoolery, but the most basic point is that most big commercial mortgages these days contain covenants concerning the rent rolls.

Definitely a problem with storefronts right now.

That's why you see so many bank branches with hardly any foot traffic in American cities, and why all the quirky worthwhile stuff that used to define locations like Harvard Square in Cambridge is now found in suburban strip malls. When the bank opens a branch, it can pay itself whatever rent it charges itself, and so pretend the storefront bubble hasn't popped yet.

But housing? I don't think a commercial landlord getting loans to buy up housing is going to be bound by the same perverse incentives. Lenders KNOW that they painted themselves into a corner with commercial real estate.
posted by ocschwar at 8:16 AM on May 3, 2023 [1 favorite]

"That's why you see so many bank branches with hardly any foot traffic in American cities"

The explanation I've seen is rather different: https://www.bitsaboutmoney.com/archive/why-is-that-bank-branch-there/.

TLDR based on my understanding: once people choose a bank, they tend to stick with it, so the potential future income from one new customer is huge. Bank branches are therefore billboards optimized for attracting new customers and signing them up quickly. They are willing to pay for prominent real estate and leave it underused most of the time, just to guarantee short waits when new customers show up.

Also, note that article claims the real estate is generally rented from someone else.
posted by bfields at 8:58 AM on May 3, 2023

By the way, the infamous Signature Bank had a bad reputation in New York for doing just these kinds of deals (even beyond the Toledano one): "Signature has been the second-biggest commercial real-estate lender in the city, holding $33 billion in loans last year that were mostly given to the landlords of multifamily apartments, according to Bloomberg. Some of those loans were for rent-stabilized buildings, but they didn’t look like loans for rent-stabilized buildings. Instead of accounting for current rents and an incremental increase in those rents based on rates set by the rent guidelines board, some loans were calculated with the expectation that rent rolls would rise 15 percent a year, with some units flipping to market rate. As one housing lawyer discovered, some of Signature’s loans were even configured to provide a separate pool of cash to buy tenants out of rent-stabilized units."
posted by praemunire at 9:20 AM on May 3, 2023

The economics of commercial real estate have always seemed strange to me, since you see so many commercial landlords choosing to let properties sit empty for very long periods, and they are clearly choosing the option that is economically better for them (versus dropping rents to get it occupied). If the same thing is becoming increasingly the case for residential properties, that's a clearly bad outcome.
posted by Dip Flash at 9:23 AM on May 3, 2023 [2 favorites]

Let me introduce you to RealPage and its product YieldStar: "RealPage discourages bargaining with renters and has even recommended that landlords in some cases accept a lower occupancy rate in order to raise rents and make more money."
posted by praemunire at 9:38 AM on May 3, 2023 [5 favorites]

"The economics of commercial real estate have always seemed strange to me, since you see so many commercial landlords choosing to let properties sit empty for very long periods, and they are clearly choosing the option that is economically better for them (versus dropping rents to get it occupied)."

I think that's partly the way their financed, but it's partly just inherent to commercial real estate.

Imagine that when you're looking for a new apartment, your requirements include that, say, it has to be at ground level on a busy street downtown. And you expect to spend the first three months of the lease renovating the space to your requirements.

That kind of thing only makes sense if you plan to stay there for many years. The matching game between landlords and tenants is therefore much higher stakes, there are many fewer players on both sides, and there's more waiting to find a good fit.
posted by bfields at 9:52 AM on May 3, 2023 [1 favorite]

That kind of thing only makes sense if you plan to stay there for many years.

Standard commercial real estate lease in the U.S. is ten years, though obviously there are all sorts of variants. That does potentially act as a drag on leasing activity, but...I remember all the vacant storefronts popping up in my NYC haunts in 2008. Understandable that landlords did not want to sign new ten-year leases in the midst of the worst real estate market in decades, I thought. It did not require imputing a lot of complex financial motivations to explain their waiting out the worst of the downturn. But some of those storefronts were still empty six or seven years later. That's one of those hints the universe gives you that your understanding of the market is incomplete.
posted by praemunire at 9:58 AM on May 3, 2023 [4 favorites]

Yeah. Somebody pointed me to this article for an explanation recently--though to be honest I don't completely understand the argument yet.
posted by bfields at 10:27 AM on May 3, 2023 [2 favorites]

That’s a great article with more to read!

While this system allocates capital efficiently, it does not allocate land or public resources efficiently. It optimizes one variable—the efficient distribution of capital—to the detriment of many others like unaffordable rents, unstable neighborhoods, vacancy rates, strained local government budgets and many more.

With a historical comment suggesting that in the US a lot of this derives from the S&L scandals. And a hypothesis about what kind of interventions could help.
posted by clew at 11:41 AM on May 3, 2023 [1 favorite]

Landlords can't write off the opportunity cost of lost rent, so it isn't clear what sitting on vacant properties does for a portfolio.
If it's vacant land and the tax framework is tied to the value of whatever is built on the land, it may be cheaper and less risky to leave the land vacant and just pay the tax on that much lower value than to spend a lot of money building something and end up paying many times the amount in tax. Leaving land vacant when property prices are skyrocketing is a no-brainer because the value is increasing fast with no risk and next to no cost. Setting taxes on the market value of the unimproved land instead would change that equation, because then the annual cost eats into the profit (or potential future profit) by a much greater margin and this creates incentives to develop the land.

If it's vacant homes, it's harder to see the benefit, except that, again with the skyrocketing property values, the real profit may not be in renting homes out but in the actual buying and selling them, so complicating things with being a landlord may not be worth it. While they can't write off opportunity costs they can write off financing costs, so a property not making any income presents a useful tax saving for a corporation that owns many properties and uses buy/sell speculation as the main vehicle for profit.
posted by dg at 10:31 PM on May 3, 2023