Computerized House Flippers and Conflicting Interests

New Orleans       It was bad enough when Wall Street sharpies like Blackstone started buying tranches of foreclosed houses in the suburbs to paint, rent, and then cash out.  Now, algorithms are being deployed for house flippers.  What could go right or wrong with this picture?

A story in the Wall Street Journal claimed that metro Phoenix is ground zero for the future of home purchases.  More than 5% of the home sales in 2018 involving 5000 properties were made by companies launching computer driven, algorithm powered approaches to the market.  Opendoor, a San Francisco startup, Zillow, the listing and area pricing web giant, and Offerpad are breaking this ground.

The Journal walked the reader through the new world:

“At the edge of the city’s stucco sprawl, a beige, three-bedroom house with a gravel yard sold last month for $240,000.  The seller, Opendoor Labs, Inc. paid $215,000 for the house in January, replaced carpet and repainted, and put it back on the market.  A computer told the company what to offer and how much to ask.  There was no need to schedule a showing with a real-estate agent.  Prospective buyers of Opendoor homes can download an app to unlock the door.”

Wham, bam, thank you Alexa, Siri, or whatever they call their thing!

What is it about Phoenix?  The city can’t catch a break.  First, the sketchy boom and then the bust over a decade ago, and just as things begin to even out again, here come the techies.

Sadly, real estate agents and realtors are a bit like taxi drivers in the love-hate relationship they maintain with consumers.  There are over two-millions of them and 1.3 million are actually licensed realtors with access to multi-listings and supposedly a code of ethics.  Even if you like your person, you know she only gets her slice if you buy or sell, so her self-interest and yours are always in conflict, and her advice always comes with many grains of salt.

Many consumers would be delighted to bring the Airbnb model to home buying, although that’s sobering for more than just the loss of jobs.  Airbnb now slants its algorithm to favor listings at its demand price and destinations.   What is there to keep Zillow from favoring the houses it owns on its listings compared to the rest of the field?  Nothing!

Add to the mayhem this disruption will bring is the fact that algorithms will undoubtedly not be limited to purchase and sales prices, but also to rents, which is surely what Blackstone is doing for its 80,000 properties.  Tell me that won’t accelerate gentrification and community mayhem.  Is there a better argument for rent controls? I can’t think of anything else off hand that will stop predatory practices.

Looking at the Uber model, we would have to predict that it would just be a matter of time before the fixed agent price of 7% or whatever would fall like a house of cards.  The companies win and base their business model on volume, which almost always favors price cutting, and that’s the easiest piece to cut.

Hey, you might say, it can’t happen here.  Opendoor is now in 23 cities and is targeting another 27 by next year.  Zillow claims it will be buying 5000 houses per month. Think again!

We need to get ahead of the e-world coming to home and apartment purchase and rental or the consequences could be huge.

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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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