David Dayen, a thoughtful analyst of housing issues, is concerned that no good will come of the move by private-equity firm Blackstone Group to raise $479.1 million by issuing a new type of bond backed by rental payments on more than 3,000 single-family homes. Where Dayen goes wrong is assuming that these securities will help fuel another bubble and crisis, or breed “absentee slumlords.” The less exciting reality is that the rental market for single-family homes will probably remain a niche business that will be profitable for some people and make little difference to the rest of us.
To see why, it helps to compare the big problems caused by the housing bubble with what Dayen is concerned may happen with the single-family rental market. Here are four bad things tied to the housing bubble, in descending order of badness:
1. Millions of people assumed debt they couldn't repay, which is still depressing consumption years later
2. Trillions of dollars of bad assets were treated as if they were safe, until everyone suddenly realized they were toxic and we had the worst financial panic since the Depression
3. Seemingly limitless investor demand for subprime mortgages encouraged fraudulent behavior
4. Excessive investment in housing and excessive employment in the construction industry
Meanwhile, this is what Dayen is worried about:
1. Investors may lose money buying securities that some ratings companies have graded AAA
2. Tenants in homes owned by private-equity firms will get worse customer service than those in other rental properties, including sleazy lease terms with teaser rates
3. Private-equity owners might depress housing prices if they ever sold large blocks of homes in certain communities all at once
4. Private-equity owners might demand property tax breaks, depriving municipalities of needed revenue
Let's deal with concern No. 1. Even if investors lose money buying the bonds, the size of the rental securitization market will probably remain too small to be systemically dangerous. Private-equity firms, hedge funds, and real-estate investment trusts have only raised a modest $20 billion so far and there are signs that investment may be slowing.
When the strategy first developed in 2011, investors could buy and renovate thousands of foreclosed homes on the cheap and rent them out for after-tax yields of as much as 8 percent. At the same time, they could position themselves to benefit from any rebound in housing prices. That made single-family houses attractive to investors hunting for returns of as much as 25 percent.
But then places such as Phoenix became saturated with investor capital, house prices soared and yields fell. Investors moved on to Atlanta. As the housing market recovers, the opportunities for big gains will diminish. Some early entrants have already cashed out. So far, the big investors have yet to buy even 200,000 houses. At this rate, it's inconceivable that this market will get anywhere near as big as the subprime and Alt-A mortgage-bond markets during the go-go years.
The most optimistic estimate, which seems to be based on the assumption that investors will accumulate more than 10 million homes, is that the rental securitization market will be worth a little less than $1 trillion.
Dayen's three other complaints are even easier to dismiss. Big companies often run apartment-rental operations far better than individual landlords. There isn’t much reason to think private-equity firms would be systematically worse than anyone else at renting out single-family homes. It would be self-defeating and unlikely that institutional owners would voluntarily devalue their holdings by selling them all at once. And remember that these big investors are much less likely to dump large numbers of homes on the market than many highly leveraged individuals. Finally, it’s hard to see how lower taxes constitute a systemic risk, even if you dislike them.
There are plenty of things to worry about in finance. The emergence of a few private-equity landlords in the single-family rental market isn't one of them.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)