Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Wall Street is now America’s Slum Lord

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Private equity firms have become America’s biggest slum lords, two fascinating articles by Bloomberg’s Prashant Gopal revealed.

Private equity firms; such as Blackstone, Pimco, BlackRock and Colony Capital, spent $25 billion buying up more than 150,000 foreclosed or unsold homes between the Great Real Estate crash of 2008 and 2012, Gopal’s research indicates. The houses are managed and rented out to working class families.

The hedge fund operators and private equity investors cover their tracks by having the homes managed by companies with such folky sounding names; as American Homes 4 Rent, HavenBrook, All Single Family Owners and Invitation, Gopal found. Only one large home investor, Colony Capital, even bothered to operate under its’ own name in the Atlanta area. It calls its house-rental business Colony Starwood, perhaps in hopes of implying a connection with the hotel operator Starwood.

Disturbingly data uncovered by Gopal; and Georgia State University Professor Ben Miller, shows a pattern of behavior among these Wall Street investors that resembles the actions of a slum lord. Like a classic slum lord, the next-generation investors are quick to evict and slow to perform maintenance.

Wall Street is Now Acting like a Slum Lord

Even though Gopal refuses to use the term in the articles, some of the behaviors described are those of a slum lord. The investors’ questionable actions include:

  • One private equity firm, Colony Starwood, was 33% more likely to file eviction notices in the Atlanta area than a typical landlord, research by the Atlanta Federal Reserve found. Its competitor American Homes 4 Rent was 25% more likely to file eviction notices than a normal landlord.

 

  • Corporate owners were twice as likely to evict tenants as mom and pop landlords.

 

  • Private equity firms are making the housing crisis worse by slowly squeezing the poor and working class out of homes.

  • Evictions were more likely to take place in working class and minority neighborhoods.

 

  • Renter Juliana Spence told Bloomberg that Colony Starwood failed to make basic repairs to her home, even though it was willing to give her a $1,800 credit for rent. The company refused to fix a broken pipe and a defective air conditioner that ran up Spence’s utility bills.

 

  • Tenants complained that corporate landlords were only doing cosmetic repairs; such as repainting units and installing new appliances, while ignoring serious maintenance issues like defective plumbing.

 

  • Renters like Spence often have a hard time getting maintenance. Instead of a local landlord who will come out in the middle of the night and fix a broken toilet. They call a call center or visit a website and hope that a plumber gets dispatched. One reason corporate landlords take this approach is to reduce maintenance costs by making it hard for tenants to get repairs done.

  • The rent on many of the homes is paid for with Section 8 housing vouchers from the federal government. Many of the vouchers are sent directly to owners; giving them little or no incentive to maintain properties or monitor tenants’ behavior.

 

  • Many of the homes rented are in states like Georgia where tenants have few legal protections. When property values rise landlords can take advantage of this to kick tenants out for as little as $105; and have the home empty and ready to sell within a month.

If that does not sound like a slum lord I don’t know what would. People that wonder why Americans hate Wall Street so much and question capitalism need to read Gopal’s articles.

If such behavior continues class warfare and organized revolts of renters are likely. These articles also cast serious doubt on the future of the American Dream of home ownership and economic independence.

The Danger from the Renter Economy

Home ownership is now at a 51 year low in the United States. That’s leading to a society of renters and a sellers’ market for slum lords who can charge higher rent but perform less maintenance.

It is also contributing to income inequality, around 21.3 million American households spent more than a third of their income on rent, The Harvard Joint Center for Housing Studies estimated. Another 11.4 million households spent more than half their income on rent.

One has to wonder how the economy is supposed to function with a large percentage of the population spending all their money on rent. If that was not bad enough there is evidence that the new renter economy is destabilizing communities and ruining families. An eviction can wreck a family’s credit which makes it harder to find a new place to rent, get many jobs or a get approved for a mortgage, Atlanta Fed researchers discovered.

There is no way this situation can continue, if it persists, civil disobedience riots, left wing political action and populist demagogues are inevitable. Hopefully the market will correct this situation before local governments start imposing such destructive measures as rent controls.

Perhaps it is time that our leaders in Washington took some action to get Wall Street out of the slum lord business. Such as a GI bill type loan program to give working families; or small investors, the funds to buy all those homes and put them back in local hands.

If nothing is done, the situation will continue and the housing crisis will explode sooner or later. When it does both the private equity investors and the tenants will feel the pain. The renter economy is bad for families, bad for Wall Street, bad for investors, bad for our communities and bad for America.