Why Your New Neighbor is Probably a Big Corporation

The unexpected trend that's altering the housing market 

Ric Edelman: It’s Wednesday, July 10th. And Joe Biden is still the Democratic candidate for president.  

On today's show, sky high housing costs. Guess who's buying all those houses? Jean and I were in Naples, Florida not long ago. We were visiting some friends, and while we were driving around, we saw real estate signs for a new community. And Jean said, “Look, new homes for rent!” Yeah, normally when you see new housing development going up in the suburbs, the houses are for sale, not for rent. What gives?  

Well, we all know how unaffordable houses are these days. The average price of a new house is at an all-time high, $500,000 nationally, and mortgage rates are at their highest level in 20 years, 7.75%. If you want to buy a house, you need a hundred grand for a traditional 20% down payment. That number itself is keeping most potential homebuyers out of the market. 

But there are loans that let you do just 3% down. That's only $15,000. Still a lot of money, but a lot more doable than $100,000. But that means you need to come up with a mortgage of $485,000. And at today's interest rates, that means a monthly mortgage payment of $3,500. That doesn't count PMI, private mortgage insurance, since you didn't put down 20%, you got to pay for that, plus property insurance and property taxes. 

And you haven't even bought any furniture yet. Add it all up, and you need an annual income of well more than $100,000 to comfortably afford that house. The average monthly payment, PITI, the principal interest taxes insurance, the mortgage payment is 38% more for the average house than the average monthly rent payment. 

This is why a lot of people are saying, forget about buying a house, you need to rent instead. That's what millions of would-be homebuyers are doing these days. But real estate developers are still building new houses. But they're renting them instead of selling them. Or they're selling them to institutional investors, who buy not just one house, but an entire community of hundreds of houses. 

And then they rent out those houses. That is what generated the billboard that Jean saw. New homes for rent. Last year, developers built 93,000 single family homes specifically for the rental market. That was a record. And 40% more than the year before. This year, they're going to build even more than they built last year. 

At this point, institutional investors, not just hedge funds and private equity firms, but also pension funds and endowments – they own nearly a million homes. To put that into context, there are only 750,000 homes for sale in the US right now. And those institutional investors are going to buy a whole bunch of them. 

Institutional investors see a goldmine, with prices and monthly payments so high and so many people in their 50s, 60s, 70s wanting to downsize, they're considering these houses to be great targets for real estate investors. We're not talking cheap housing here. Some of these rentals have five bedrooms and big backyards. 

One fun company just signed a $235 million deal with the home builder Crescent Communities to build new rental homes throughout the South. Another institutional landlord, Invitation Homes, just signed a deal to buy 500 homes in Charlotte, Nashville, and Jacksonville. Last year, hedge funds bought 17% of all the houses that were sold in Charlotte. Is this good or bad? If institutional investors weren't stepping in, home builders would be out of business. Because individual buyers can't afford houses right now. And even if you can, all you can do is buy one house. When an institutional investor comes along, they buy every house, all 300 of them. In fact, they tell the builder to go make it 500. So the builder has lots of business, and that creates or maintains lots of construction jobs. And you, as someone looking for housing, you get to enjoy lots of fresh new inventory, as a renter.  

Remember when we used to spend $79.99 to buy a DVD? Now we just stream our movies on Netflix. Turns out we really didn't want to own all those movies, after all. We just wanted to enjoy them. Is it the same with housing? We want to live in a nice, new, clean, safe neighborhood. Who cares if we don't own it? Renting lets us leave anytime we want. We've got no headaches if something goes wrong. The landlord takes care of it, right? Not us.  

But there's a counter argument to all that. Homeownership is one of the pillars of financial independence. Without homeownership, your likelihood of enjoying financial security in retirement is greatly diminished. And as a renter, you're always under the thumb of the landlord. With no ownership, you really have no control. We all know that renters generally don't take care of their homes as well as owners do. If you don't believe me about that, let me ask you, have you ever rented a car? Did you treat it like your own? Nah, don't try to pretend you did. This is why cities around the country are fighting back against these institutional investors that are gobbling up all the local real estate. 

My sister-in-law just sold her house in Denver. She got an all-cash offer within minutes of putting the house on the market. I mean, as soon as it was up on MLS, there was a buyer. It was a corporate buyer and they're going to turn the house into a rental. The future price appreciation will belong to them and their shareholders. Not a family raising some kids.  

In California, a bill will prevent corporate landlords from buying more properties. In Nebraska, a bill would ban out of state corporations from buying single family homes. And there are two bills in Congress, The End Hedge Fund Control of American Homes Act, that'll stop institutional investors from buying single family homes and force them to sell what they already do own over the next ten years. The other is the Stop Wall Street Landlords Act. It'll impose such big taxes on large corporations that they would effectively be kicked out of the real estate market entirely. I don't know how this is going to end, but if you're selling your home and you get an offer from a corporate buyer, ask yourself if there are any moral issues associated with selling to them. 

And if you're looking for a new home in the future, be ready to consider renting instead of buying. Not only might it be the economical way to go, you might not have a choice.  

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Ric Edelman: Hey financial advisors, are you fluent in crypto, blockchain, bitcoin, Ethereum, stablecoins, tokenization – and most importantly, crypto taxation, estate planning, and asset allocation? Take the online course, become Certified in Blockchain and Digital Assets. Thousands of financial professionals in 37 countries have enrolled. Become fluent in crypto so you can help your clients and build your practice. Enroll today and get your CBDA designation. 

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Ric Edelman: On tomorrow's show, crypto money laundering – is that a thing? 

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