Inside Financial Services

Hooray For The Housing Investors

They helped jump-start the market. A congressman's move to curb their activities is wrong-headed.

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A Congressman objects to a pending bond issue by a big single-family home landlord, and wants Congress to look into the matter:Representative Mark Takano, a California Democrat whose district was hit hard by the foreclosure crisis, said Congress should hold hearings to weigh regulating the new securities, because they’re helping increase the competitive advantage investors have over ordinary home buyers. The deals show “a clear pattern for investment groups who are looking to gain from these questionable financial instruments,” Takano said in a statement after Bloomberg News reported the Goldman Sachs-American Homes 4 Rent deal. [Emph. added.]Rep. Takano is insane. One reason housing markets in places like Arizona and California recovered so much faster than many expected is that private investors, seeing a bargain for what it was, swooped in when prices were low, and turned the properties into rentals. They correctly judged that prices would eventually recover and that, in the meantime, the rents the properties would command would cover financing and investment costs. If not for this surge of private money,home prices in many markets would still be languishing, many banks’ assets quality would still be dodgy, and the economy in general would be in a lot sorrier state than it is.Plus, many stressed neighborhoods would still be blighted. After the funds made their initial investments, they often poured more money into the properties (by, say,replacing copper wiring that had been ripped out, or replacing boarded-up windows). The effect of it was a recovery in many markets that was astonishingly strong and came astonishingly quickly. At one point in Phoenix,for example, median home prices rose by 35% in a single year and have continued to go up from there.This is all a good thing, not a bad thing, and presumably helped Rep. Takano’s district in particular. He is simply wrong to want to slow it down. Single-family home investment funds have been among the unsung heroes of the housing recovery.When virtually everyone else seemed to think that housing had somehow become an obsolete investment alternative, they were willing to put substantial capital at risk. Good for them. As for the notion that bonds backed by property rents should face some sort of special regulation, that’s preposterous. These are likely among the most straightforward fixed-income securities imaginable.Rep. Takano’s goal of making it easier for individuals to buy homes is entirely laudable. If he wants to make a real difference, he might, for instance, find away to get regulators to ease up on their (ridiculously stringent) underwriting guidance so that people could actually qualify for loans. In the meantime he should lay off the SFH funds. When things were at their worst, they stepped up and actually did some good.What do you think? Let me know!

4 Responses to “Hooray For The Housing Investors”

  1. rivvir

    You give too much credit to those who promulgated the crisis. Just as you gave bernanke too much credit, overlooking his part in formulating the crisis. Yeah, they can get credit for speeding recovery, but it’s a recovery from a situation they had a big part in making. Maybe if we don’t let them it won’t happen again. I don’t like regulating it but it’s like who was it, the bass brothers i think, trying to corner the silver market and sending prices artificially sky high, only to see them come crashing down when the fever subsided. Only this one hurt a lot worse.

  2. Mark Alarik

    Milton Friedman — the government needs your wisdom! Plus, they need to become Deming-Systems-Thinkers.

  3. c smith

    And how is it a good thing that house prices have risen 40% or 50% in certain markets, and are now priced way out of reach of the average family? When asset prices “must” rise by such huge amounts just to keep the banking system viable, the system is beyond repair.

  4. DSB

    Thank you Tom for you have identified the great force behind the so called housing recovery – extremely low interest cost financing seeking out battered assets. While these investments by institutional investors have lifted house prices benefiting banks and some former underwater homeowners, as “c smith” notes above the effect has been to price out of markets certain first-time home buyers. The level of all cash transactions is multiples higher than one would evidence in a normal housing market, while first-time buyers is a fraction of normal. This is an example of the mispricing of assets taking place throughout the world. It is a sign of dysfunction. Markets need to find market based clearing prices to wash the excesses out of markets. That was not allowed to happen. Yes, as a result there are more banks around today and homeowners with equity, but is this sustainable? If not, what is the source of demand that will underpin these elevated prices when the institutional investors reduce or stop the flow of purchases?

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