The Problem with Real Estate Speculation

- As you may have heard, we are in a bit of a housing crisis here in America.

Median home prices and rental rates have been skyrocketing across much of the country.

If you happen to already own a home, congrats!

You've probably seen your equity get a good bump in the last few years.

- But if you're like the millions of Americans who rent or are trying to get into the housing market, this, for lack of a better word, sucks.

- This surge in home prices, as we explained in an earlier video, is mainly the result of having too few homes for sale.

New construction never really recovered from the 2008 market collapse.

And that, coupled with strict zoning laws and pandemic-fueled shortages of supplies and labor, has created a drastic housing shortage.

- But this problem is exacerbated by the unprecedented rise in real estate speculation.

The housing market is so hot that it's attracting investors across the economic spectrum, from mom and pop landlords, to huge private equity firms, It's driving prices even higher and making it harder for ordinary families to get in the game.

(upbeat music) - The last time we had a housing boom, it didn't end well.

The bubble burst in 2008, largely because of subprime mortgages, poorly structured loans given out by reckless lenders to borrowers who could not afford them.

But recent findings suggest that real estate investors played a greater role than previously understood.

- According to a study by three professors of finance, areas that had a lot of housing speculation saw prices climb higher during the boom and plummet lower during the bust.

This had a ripple effect throughout the economy.

Unemployment, wage stagnation, even closures of local businesses were all worse in areas that had a high level of housing speculation.

- To be clear, real estate investment did not cause the Great Recession, but it seems to have exacerbated the damage.

"In the absence of speculation, the size of the boom and bust would have been about a third smaller," said one author of the study.

- Why did this happen?

Well, if a lot of speculators descend on a certain area, there are fewer houses to go around, which drives up prices, but no one's actually living in these houses.

So when the market turns south, you end up with too much inventory, pushing prices lower.

- Though the speculators didn't see this coming, some financiers did.

A handful of savvy investors predicted the housing crash and made a ton of money betting against the market in a move that's come to be known as the Big Short.

One of the most prominent of them was a Goldman Sachs executive named Donald Mullen, who right after the crash pivoted to becoming a speculator himself.

- Mullen started an investment firm called Pretium Partners, which raised over a billion dollars from foreign investors to buy up foreclosed homes across America and turn them into rental units.

Today, Pretium is the largest owner of single family homes in the country, and a lot of other mega corporations are following their lead.

- In the competition for limited housing, these firms enjoy several massive advantages.

The average American home buyer will have to find a listing, visit the property, negotiate with the owner, put in an offer, and secure a mortgage from a bank, all before a sale can be made.

If you've ever bought a house, you know it can take a while.

- But giant real estate firms like Pretium have sophisticated algorithms that can scan the market for the best deals and automatically make a cash offer within hours of the listing.

The ease and speed of the transaction is so attractive to sellers, they're even willing to take less money.

Researchers estimate that investors like Pretium actually pay around 10% less than individual home buyers, thanks to this advantage.

- They tend to target majority black neighborhoods at a rate almost three times higher than other zip codes.

Why?

It may be because their algorithms perceive these houses as artificially undervalued.

In other words, prejudice keeps prices lower than what they should be.

If the neighborhood can be gentrified, there's a potential for a larger profit margin.

- Pretium's property management subsidiary, Progress Residential, doesn't have many satisfied customers.

Families that rent from them complain about the shoddy maintenance and ever-increasing rents and fees, and they are far more aggressive about evictions than mom and pop landlords.

One housing advocate called their standard lease "about as punitive as we've seen..." - Defenders of such corporate landlords argue that they offer single family residence living to many people who'd otherwise never be able to achieve it.

They also claim that private equity firms buying up foreclosed homes is what helped the housing market recover from the collapse.

And does it really matter whether a family is paying rent or a mortgage?

After all, "the reality is most people don't own a home.

They rent the home from the bank.

From the outside, it really looks the same."

- That quote was said by Pretium's head of real estate, Dana Hamilton, who is definitely smart enough to know the enormous difference between renting and owning: equity.

For 80 years, home ownership has been the number one way for ordinary Americans to save for the future and start creating generational wealth.

- That's what makes real estate attractive to firms like Pretium, which is why some housing advocates call their business practice equity-mining, stripping neighborhoods of the pool of investment potential that used to be accessible to the general population.

- Well, there are other ways to build equity, you might say.

In fact, the stock market has seen overall better returns than real estate over the last 80 years.

True, but you can't live in your portfolio.

A house is that rare kind of purchase that doubles as an investment and a shelter.

- Also, mortgages offer far better terms than personal loans.

No bank is gonna give you $200,000 at 4% interest so you can go buy a bunch of stock.

They'd get a better return just buying the stock themselves.

The government deliberately started the mortgage program to offer ordinary people the chance to build equity.

It's widely credited with creating the middle class, and the tacit exclusion of black Americans from the program is why today they suffer from a vast discrepancy in generational wealth.

- Now, we are not saying there's anything wrong with investing in real estate.

In fact, we've often recommended it as a reliable way to grow your money, but we're not talking about someone taking out a loan to buy a rental property to save for retirement.

This is a corporate-backed takeover of America's suburbs at a time when housing is in short supply.

- The government could try to discourage the trend through taxation, but rent is not considered capital gains.

And companies like Pretium are run through offshore havens, protecting them from most U.S. taxes.

At the end of the day, the government can't really tell someone who they can or can't sell their house to.

- Many housing advocates concede that the most hopeful path to making home ownership accessible again is to simply build more houses and fast.

Increasing the inventory of available homes will lower prices and make the market less attractive to speculators.

Many states are currently changing their zoning laws to speed this up.

- In the meantime, if you're one of the unfortunate buyers competing with mega firms, don't get discouraged.

It may take more time and effort, but owning a home is still worth it.

And unlike the last price increase, we're far less likely to see a massive bubble burst that will leave homeowners holding the bag.

- Also, renting doesn't have to be a dead-end street.

As we've explained in a previous video, there are some advantages, as long as you find other ways to build equity and save money, so you can possibly have a down payment when you're ready to enter the housing market.