Much has been said about the relatively recent “intrusion” of corporate or institutional homebuyers into the US single-family rental (SFR) “asset class”. The unprecedented swallowing-up of residential assets has gotten so severe that the House of Representatives Subcommittee on Oversight & Investigations is holding a hearing today called “Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods”. Extensively citing Brett Christophers’ excellent article on the corporate practice, “How and Why U.S. Single-Family Housing Became an Investor Asset Class” along with Adam Travis’ equally essential piece “The Organization of Neglect”, the Memorandum for the hearing offers up a clear assessment of the situation (tailored for the feeble minds of US Representatives). Some highlights: SFR ownership has a higher concentration in neighborhoods with a higher population of people of color, the institutional landlords of the SFRs have a higher tendency to evict as opposed to “smallholders” (68% more likely in Atlanta in 2018), and are less responsive to tenants with respect to complaints and repairs. A 2021 survey of the 5 largest SFR owner-operators in the country (Invitation Homes, American Homes 4 Rent, FirstKey Homes, Progress Residential, and Amherst Residential) revealed that these grew their stock of SFR assets by 27% since March 2018 (a total of 76,235 homes), acquire through a variety of channels but almost always in cash, and finally have engaged in an aggregate 40% increase in rental fees over that same time period. Clearly, these 5 SFR giants are not good for renters, or shall we say, “people”, and their reign of terror will likely continue unabated save a #darkbrandon style intervention.
But what enables these capitals to act in such a manner within the SFR market? The typical explanation – this is another example of monopoly capitalism – is woefully insufficient. It is a tautological argument: monopolies behave monopolistically because they are monopolies. A pseudo-Marxist approach may extend this argument by claiming that these corporations have monopoly status within the sector because of some sort of spatial fix type argument: a massive amount of capital was generated elsewhere and bequeathed to asset managers (which is all the Big 5 really are) into the SFR land property form due to landed property’s unique function as a “sink” for “sopping up the surplus”. This, too, is insufficient – the real reason for investment is not due to some automatic treading of capital from one circuit to another, but must be analyzed from a perspective that sees land property investment as one of many investment choices presented to a capital holder looking to see the greatest possible rate of profit.
Longtime travellers of Realm of Kevin know that I think monopolistic explanations are bullshit, and spatial fix ones only slightly less so. So, yet again, I will turn to Shaikh et al.’s “real competition” (as opposed to pure market explanations or, more relevant here, “imperfect” or “monopoly” competition) as it has far greater explanatory power.
Christophers cites Blackstone CEO Steven Schwarzman’s memoir, What It Takes: Lessons in the Pursuit of Excellence, wherein he explains, rather lucidly, the simple math behind landlordism:
These apartments were producing a steady flow of cash. They were almost new, so we wouldn’t have to spend a lot of money fixing them. If we added some debt to the acquisition, we could lift the return on our investment to 23 percent a year . . . In addition, we thought we were close to the bottom of the real estate cycle. In 1991, we felt real estate had bounced off the bottom. As the economy recovered, the vacant 20 percent of apartments would fill up, lifting the 23 percent return to 45 percent. And rents would then rise, taking the 45 percent to 55 percent.
Schwarzman is describing here his reason for entering the rental market in 1991 following the mid-1980s Savings & Loan (S&L) crisis. A little bit of history here is crucial: in 1980-82, stratospheric interest rates (thanks to, of course, our boy Paul Volcker) caused the relatively stable S&Ls, of which there were then thousands, to undertake dramatic multiple billion dollar losses year over year, as they were constrained to hold only low-yield mortgages. During this period there were 493 mergers between S&Ls as government regulators and predators survivors sought to preserve and capitalize upon this crisis period. The Federal Home Loan Bank Board, established in the 30s to oversee this sleepy little coterie of mortgage purveyors and money lenders, suddenly saw itself completely overwhelmed and tanking enormous losses as more and more S&Ls continued to fail regardless. The Reagan administration responded by deregulating the S&L’s asset powers (to make it short and reductive), allowing S&Ls to function more as banks in the typical money market, and, crucially, to engage themselves in speculative real estate purchases. From here, the crisis deepened as a new rash of “moral hazard” (utterly fraudulent) type investors flooded into the market and the percentage of S&L holdings in mortgages dropped to 56%.
Anyway, by the 90s, Congress had passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and established the Resolution Trust Corporation to liquidate the holdings of failed S&Ls in a mammoth attempt to re-regulate. The RTC held repossessed properties and delinquent mortgages that were then offloaded in fire sale type conditions. This is where Schwarzman enters the picture, with his quote above. With housing at a historic low, Blackstone bought several properties with the help of a RTC consultant, Joe Robert (aiming to set off on his own), and future US Treasury Secretary Robert Rubin. Moreso, they bought with the assurance that valuations would once again rise and new residents would move in, resulting in a rather dramatic increase of profit above his initial investment.
This little detour into the S&L crisis is essential here to set up a feature of capitalist competition – namely, that it is a war. Competitors look for any advantage at all times and seek to capitalize on every scrabbling handhold for greater purchase. The S&L crisis was merely one facet of what Kim Moody calls “one of the most extraordinary waves of business consolidation via mergers and acquisitions (M&As) in the history of US capitalism”, attempting “to resolve problems associated with falling rates of profits leading to recessions and to take advantage of the resumption of profitability to increase efficiency and market share through mergers”. This is precisely what institutional home buyers are doing: capitalizing by moving into market sectors (such as the housing market post-2008) armed with a) the desire to displace others and expand themselves and b) the promise that such an integral asset class will not be allowed to fully collapse.
The current wave of consolidation (happening since 2003, based on wave of M&A analyses by Shaikh, Gaughan, and Pautler) in real estate and SFRs begins to make more sense when we consider that prior to 2009, home ownership could be said to be almost classically “competitive” in the pure sense – a gigantic number of small capitals (homeowners) with almost zero desire to engage directly with each other, and content simply to be left alone or uniting occasionally for causes of mutual benefit (for example, in zoning issues, contending with local government, etc. (basically NIMBY shit)). In this light, the rise of an Invitation Homes has several salient ramifications with respect to market behavior as a whole. First, Invitation Homes and the others of the Big 5 have established themselves as regulating capitals within the sector. This means that given the size of their portfolios, they are able to engage in price-leading behavior; that is, as they raise rents, an individual owner may ask for higher rents and selling prices. This means that the activity of the Big 5 in the market is actually beneficial to (white, affluent) homeowners on the whole because it serves as an adrenaline shot in prices to the local housing market at the expense of other homeowners, who have already been cleared from the market and had their previously-owned homes incorporated into a growing real estate portfolio. The “market logic” particular to homeownership in the United States does not require Invitation & Co. to necessarily engage in “predatory” behavior with respect to individual homeowners (as Christophers notes, such a process is costly and time-consuming) but to simply capitalize on “market failures” elsewhere as homeowners, strangled by high interest rates on mortgages or other failures to pay, lose ownership of their assets, which are then turned around by S&L institutions at auction into the waiting hands of the Big 5.
The Big 5 are able to do so because they can pay in cash, and they can pay in cash because they are able to temporally distort the taking-on of debt (or creation of credit) which defines the purchase of a piece of residential property in the form of a mortgage. Where a single homeowner (or ‘smallholder’) will likely not possess the entirety of the capital requirement (house purchasing price) at the time of purchase and have to take a loan, the asset manager or equity firm engaged in homebuying has already gone through its process of capital accrual either by holding funding calls, lending elsewhere, or obtaining equity from its shareholders. It’s all on credit, but the point in which the credit is obtained is perhaps the number one weapon in the institutional buyer’s arsenal, notwithstanding the obvious and hilariously lopsided question of the amount of credit.
Anyway, last thing. What does this mean with respect to “monopolies” or “spatial fixes”? Well, the question re: the former is not quite right. With respect to the market as a whole, the Big 5 are not necessarily monopolies (in the sense that they can make unilateral choices that effect the entire SFR market) because there are still many more homes to take in and they also must, crucially, combat each other in a gigantomachic war that never ends. However, where they do enjoy a monopoly is over the individual renter in the individual SRF unit, and they bilk these poor souls out of money every which way they can in order to fund their war in heaven against their competitors. Every fee raise, every rent increase, every ignored repair, etc. all becomes money in the war chest further used to buy up more and more homes, which are both the terrain and weapons for this war. And as far as spatial fixes are concerned, this is by no mean a permanent condition; capital is not coming here to be “fixed” (indeed, I would argue the most important quality of capital in itself is it is never fixed) but rather lease-ownership has become a valuable use of and for capital due to the specific conditions of the market at the moment. So there we go! Lets end on a positive note: no monopolies and no empires last forever :)