Contracts for Deed Dominate Midwest LMI Housing Purchases

New Orleans     Ann Carpenter works with the Federal Reserve Bank in Atlanta.  Her work in understanding the challenges and predation for lower income families trying to buy homes has been outstanding.  Almost exactly two years ago, the ACORN Home Savers Campaign met with her in a conference room at Georgia State University in an amazing meeting in which she shared her insights from the data research, and we shared what we had learned on the doors as organizers with the help of GSU social work students.  We have eagerly awaited seeing her full report which has now been released with co-authors Taz George of the Fed in Chicago and Liza Nelson with the Cleveland Fed.

In their report, entitled “The American Dream or Just an Illusion?  Understanding Land Contract Trends in the Midwest Pre- and Post-Crisis,” they invaluably look at the prevalence and impact of land contract sales by individual families rather than institutional investors in communities of color, low income communities, and distressed housing markets.  Accessing a huge database, they were able to focus on the years since the recession in six states:  Michigan, Ohio, Wisconsin, Minnesota, Indiana, and Iowa.

You’re not going to read their full report, but here are the highlights:

  • Land contracts are still the wild west where families without access to other credit sources have little protections. They found that Florida, Maryland and Oklahoma have protections equivalent to standard mortgages, while Texas, Illinois, and Ohio offer some level of protections after a certain percentage of the contract is fulfilled including return of down payment and repair investments in some cases.
  • Their database showed that 69% of land contracts were in these six states with Michigan holding 25%, Ohio 13%, and Wisconsin 11%.
  • They caution that though these states require recording, this data likely understates the level of land contract activity, reflecting perhaps at most only 25% of actual transactions.
  • The median level for land contract sales was $74,000 with more than 70% at less than $100,000.
  • 45% of the sales were less than half of the price of standard mortgage sales in these markets after the recession.
  • In Wayne County, containing Detroit, 49% of the contract land sales were less than $53,000 in 2005 and increased to 57% in 2016, and credit narrowed.  A report chart showed that contract sales where overwhelming compared to banks’ sales under Home Mortgage Disclosure Act (HMDA) reporting.
  • The report shows that land contract sales are dominating the market for $50,000 or below sales price homes.

You get the message.  This is bad business.  Carpenter and her co-authors were Federal Reserve careful in coming to rash conclusions, but even the most cursory reading underscores the fact that lower income families trying to access home ownership at the lower end of the market that they can afford are still being deserted by the banking and normal credit system and herded into land contract sales lacking better, cheaper, and more secure options.

 

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Corporate Ownership is Squeezing Rents in Some Cities

Source: the Coalition for Affordable Housing Protestors in front of Blackstone Group’s office in Santa Monica

Milwaukee       Looking city to city, part of what is driving rents up to record highs and exacerbating the affordable housing crisis is the critical intrusion of large corporate ownership of single-family homes in some markets in addition to larger developments where they have always been a factor.  The ACORN Home Savers Campaign has monitored this development in Memphis and Atlanta, but a recent piece in Bloomberg by Noah Smith confirms our deepest concerns.

The backstory here is the one we all know well.  The housing meltdown in 2007-2008 as part of the Great Recession led to millions of foreclosures of single-family homes.  The rate of homeownership in the United States plunged from a record 69% before the crash to as low as 63% in 2016-2017.  Fannie Mae and Freddie Mac dumped these homes in auctions.  Some of these tranches were acquired by bottom feeders who wanted to off load them with various predatory contract for deed or rent-to-own schemes that have been the primary target of the ACORN Home Savers Campaign.  In other cases, big private equity and corporate players bought the homes, perhaps originally hoping to flip them, but later coming to the conclusion that with minor repairs and upgrades they could milk them as cash cows for significant returns.  Furthermore, in some markets where they were able to achieve density, despite still being a relatively small player in the overall US housing market, they could trigger significant rent increases in entire neighborhoods.

As the Amherst Capital chart in Bloomberg shows, we are talking about some big boy operators here starting with Blackstone, which is huge in Memphis for example, and including the notorious Cerberus among others like Tricon.  Furthermore, the buying frenzy in this part of the market is increasing with researchers finding almost 9% of the rental housing market now under corporate control, even though the biggest dogs have less than 1% they are consolidating.  Frighteningly, reports indicate that they have also begun to securitize these rent-bearing properties for investors which triggers a cycle that bears no good tidings for renters, affordability, or the cities where they are concentrating, particularly in the Sun Belt.

If you think I’m Cassandra here, then wrap your minds around Smith’s warning signals in Bloomberg that corporate control…

could contribute to the rent crisis now afflicting many of the nation’s big cities. Wall Street landlords may also compromise quality. Their local dominance may afford them the luxury of simply ignoring tenants’ needs, especially in cities without strong protections for renters.  But the most troubling impact could be on the American Dream of homeownership. Increasingly, young Americans looking to buy houses will be competing with big corporate landlords. There are a number of reasons that competition will not favor the aspiring homeowner. Big landlords have cheap financing at their disposal — securitized bonds, REIT share sales — while individuals have to rely on mortgages. Big landlords may also value a house more, due to the high rents that their local market power lets them to squeeze out of tenants.  Most Americans tend to have the bulk of their wealth in their houses. If fewer young Americans are able to buy homes, they’ll miss out on house price appreciation, and the gains will go to corporate shareholders, who tend to be rich people. Thus, the rise of the Wall Street landlord model may put a damper on U.S. middle-class wealth accumulation.

For tenants and potential homeowners, none of this is good news, and I would argue with Smith that these developments pose real national dangers.

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