Latest / Real Investor Radio Podcast / Ep 46 | Institutional Ownership: Impact on Housing Affordability and Legislative Challenges
Transcript
- Craig Fuhr (00:12) Hey, welcome back everyone to real investor radio. I'm Craig Fuhrer joined again by Jack Bevere. Jack, good to see you. Jack BeVier (00:19) Absolutely sir, good morning. Craig Fuhr (00:20) Hey, we're just doing some quick hits today, Jack. You sent me an article a couple days ago, or I'm sorry, an email a couple days ago with sort of an update from around the country on legislatures that are passing, or trying to pass laws against large operators, Jack. As we know, you don't have to be the most informed guy in the world to understand that we have Wall Street in the business of... owning houses these days. And while that still Jack, the total number of houses owned by Wall Street and still in aggregate, you know, a very, you know, low percentage of the overall, you know, housing stock, I think there are a lot of you know, we've got Jack, we've got California here, we've got Minnesota, we've got Ohio, at least those three states, Jack looking at sort of banning large entities from owning in one case, it was 1000 plus houses Jack in California, which I'll get to in a second. But in another case, it was 10 in Minnesota. So Jack speak to quickly what the NRHC is. And I know you're a member. And then we can talk about sort of what they're what they're looking at around the country for their members at legislation that could affect some of the large institutional members of this council. Jack BeVier (01:47) Yes, the National Rental Home Council is a trade organization. We mentioned this on a previous episode as well, that was formed by the largest landlords back when there wasn't a trade organization. So whatever it was seven, eight years ago. And, and I think, you know, invitation homes, American homes for rent, they, uh, formed the, this trade organization to, so that there was some advocacy on behalf of single family rental operators. So they started with the biggest guys. They're kind of working their way down to Main Street. And I think the biggest issue that they have been focused on, frankly, is this concept of the evil landlord, right? So the emergence of hedge funds and public REITs buying what was previously starter homes, right? That gets a lot of people's blood up, right? Because they're dry, you know, the argument is that they are driving up or they're, they're They're another source of competition. As a result, they're driving up price pricing for those, um, entry level homes. So they're making it a harder for entry level home buyers to get to buy their first home because they're now competing with a cash buyer at the same price. And, and so there's a lot of politicians around the country that think that is bad for the fabric of neighborhoods, bad for America, and, uh, it's a very Craig Fuhr (02:59) Mm-hmm. Jack BeVier (03:14) hotly contested topic. There was a, gosh, I think it was a 60 minutes that hit piece, frankly, about a month ago, where they had one of the one of the executives from one of these large institutional owners on there. And he didn't realize it was a hit piece, but it turned into one. And they were really painting him in a very negative light and Craig Fuhr (03:34) Oh, it certainly did. Jack BeVier (03:38) you know, pushing this idea that institutional ownership of houses is, you know, is bad for America. Um, and so, and our, it's one of the, I would say that's probably the major issue, the most, most significant issue that NRHC is focused on combating and they're having to combat it on both the national level. Uh, there was a, I believe in Biden's most recent, uh, budget proposal, there was a, um, there was one of the line items in there was that the interest, that institutional owners of real estate wouldn't be able to deduct interest on their taxes. And while that didn't make it through, you know, a politician wrote that in there. So NRHC is combating that both on the national level, as well as on the state level, as we've seen in these in these legislative updates from the NRHC. Craig Fuhr (04:27) Yeah, so California, the finance community of California Assembly will hold a hearing to consider AB 2584, a bill that bans companies from owning 1000 or more homes nationwide from owning houses in California. Jack, they don't even have to own 1000 in California. They have to own 1000 nationwide to be banned from owning any additionals in California. Jack BeVier (04:44) Period. Right. Craig Fuhr (04:55) One more, Jack. Minnesota House Bill 685, legislation banning corporate entity from owning more than 10 homes in the state, Jack, was excluded from both the House and Senate housing omnibus bills. So it doesn't look like it passed, but the bill is now has to advance to standalone as standalone legislation. And then let's see here. Jack BeVier (05:20) Yes, that one in Minnesota didn't pass. Sorry, didn't make it. It didn't basically didn't make it across the legislature. So unlikely that it's going to pass this time. But the thing about these bills is like they don't like they don't die. Right. Like the philosophy behind the bill doesn't die. It's going to get reintroduced again next year. And it's going to get it reintroduced again the year after that, and the year after that, and the year after that. And that's what we've seen as we've gotten a little bit more aware of politics in Maryland is that I start I pay attention to it. Not because not One, because I don't want to be surprised by what's coming down the pipe, but like two, I want to be able to think about that from a multi-year planning point of view, right? Like if you see, if you pay it, like it's, I've found it very valuable and I think it's something that not very many folks do to pay it, to actually pay attention to what the builders and landlord, in my case, multifamily landlord associations are fighting against, even though they don't. Craig Fuhr (06:13) Yep. Jack BeVier (06:15) you know, because they win a lot, right, and get a lot of bills thrown out. But those bills come back the year after and the year after and the year after and eventually some form of them gets passed has been my experience, right? Like, the world is by and large moving slowly to the left, right? Like that's just, I think, you know, a thing about society. And so like, you want to know what bill is going to hit get passed five years from now, like pay attention to the trends of the bills that are failing right now. and make sure you're planning your business for what might be coming down the pipe. Craig Fuhr (06:47) Yeah, I think the mentality is, is they come out, you know, shooting for the stars, and then they just if it doesn't pass, they'll either find additional sponsors, they'll find additional lobbyists to fund, or they will just keep taking a bite at the apple to see where it can land, you know, so, Jack, it's a front and center issue, this target that these large institutional home buyers, and frankly, you know, look, If you're listening to the podcast and you don't own a thousand homes or 10,000 homes or 50,000 homes, that's fine. However, you know, Dominion owns about 800 and I still think that there's a target on your back. If bills like this pass, I mean, we're already talking about California that's saying you can't own a thousand homes nationwide and buy another home in California yet in Minnesota, it's 10 houses. And there's plenty of people that listen to this podcast, Jack, who have 10 houses plus. And if you don't think that type of legislation can come to your blue state, what we're trying to suggest here is it might be time to wake up. And so, Jack, I was looking at an article this morning in the Wall Street Journal, just dated from a couple of days ago, and this is from Oakland, California. And the author of the article takes a bit of a contrarian view on how these bills would help homeowners, he actually believes that it will exacerbate the issue. And it says against the backdrop of national shortage of affordable housing, due in large part Jack, to the government policies, California lawmakers want to restrict corporate investment in single family rentals. And so the conjecture here is that, you know, he ends the thing by saying progressive California politicians say they want to restrict corporate investment into single family rental markets because they think doing so would help everyday renters and homeowners, I'm sorry, because they think doing so would help everyday renters and home buyers. Instead, their proposals would force financial capital out of the market and reduce future stock of rental housing and increase rental prices. Well, look, if the idea of the country is that, you know, by 2030 will own nothing and be happier for it. Then, and frankly, Jack, when you talk to younger, you know, sort of millennials and younger, there's 40% of them, they've been, there's been polls that say that 40% of them have no desire to own a home. They see renting a home as the better option. And so, you know, I probably disagree with that. However, you know, this guy is the author of this article is just saying that that, you know, these types of laws will only exacerbate the problems for homeowners and renters and I frankly don't agree. Jack BeVier (09:37) I don't agree that what. Craig Fuhr (09:38) I don't necessarily have a problem with large institutional buyers owning thousands of houses, but I'm not so sure that prohibiting them from doing that exacerbates the affordable housing crisis for Americans. Jack BeVier (09:57) Oh, really? I'll take the other side of that. I think that the author's point is that, and that I tend to agree with, is that we need, is that restricting supply, like, restricting or cutting off a source of capital means that fewer houses are going to get built for those economic purposes. And the supply shortage that we have of housing Craig Fuhr (09:58) All right, here we go. Jack BeVier (10:22) It doesn't matter if you had a house for rent or at a house for sale, it's a place for someone to live. And so anything that is going to restrict capital coming into building more houses keeps the supply of housing down. And, and as a result adversely affects affordability. And so what we want is more houses being built by anybody, right? Like whoever can get their hands on land and building houses, like just do it. Craig Fuhr (10:38) But are these? Jack BeVier (10:46) put more housing supply into the market, because that'll make it more affordable for everyone. It'll be because, you know, more, you know, increased supply of houses should drive prices down. Craig Fuhr (10:56) Are these institutional landlords actually the ones that are funding, are putting up the capital to buy houses, Jack? Or isn't it really, you know, larger home builders who are selling essentially, you know, sometimes wholesale, or sometimes less than retail, we'll say, in larger lots. So I'm a home builder. I'm going to build, you know, a thousand houses. And do I want to sell? you know, 500 of them quickly to one buyer? Or do I want to sell 500 of them more slowly to individual home buyers? And so my question to you is, isn't it the case that these guys are not really putting up the capital to buy the houses? They just have the capital to buy the houses in bulk when they're being built. Jack BeVier (11:41) Yeah, but when a bill to rent buyer comes into the market and calls up Dr. Horton and says, Hey, I want a thousand houses there. Dr. Horton doesn't say, all right, I'm going to take my thought. I will argue that the Horton doesn't say, all right, I'm that thousand houses that I was going to sell to homeowners. I'll sell it to this guy. He says, you know what? I'm going to buy more farmland and I'm going to build 2000 houses. And that's what we need. We need, we need, we need the builder to be more and more comfortable. We need all the builders to be the most comfortable that building as many that there is demand for all the houses that they could possibly build and that they should pay more for land for farmers to sell it to them. They should hire more labor, buy more materials to build more houses because they can both sell it, sell this thousand to individual homeowners as well as sell another thousand to a build to rent institutional owner who puts an order in. And so I don't think, I think the pie gets bigger. in terms of the supply of houses when there is more demand for them. And given where affordability is, I think that that's just a net good thing. You know, it's everything you see in the short term, like in the short term, like, you know, people just point to like, Hey, look, you know, a homeowner would have bought that house. But like, you got I think you got to zoom out to, you know, to understand to solve the problem, you got to zoom out and real and I, in my opinion, realize that more capital. Craig Fuhr (12:47) Yeah, I mean, obviously. Jack BeVier (13:07) coming into this space should increase the number of houses. And given a fixed number of people, that'll improve affordability for everybody. Craig Fuhr (13:18) You know, home affordability is not just a problem here in the States, it's a problem in Canada. It's a problem really in the sort of the entire west, if you look across, you know, many different countries, all of Europe. And so I don't know if and by the way, it's not an as a phenomenon for bill to rent and institutional home buyers. That's not only happening in America either. And so if Jack BeVier (13:31) Europe, all of Europe, yeah. Craig Fuhr (13:46) We obviously have constrained supply, and I don't think that's just COVID related. But if you look at sort of the trend of, at one point we were building 3 million houses a year, I think we'll be just over a million this year, Jack. And so, I don't see how the institutional buyers coming in, buying in bulk has done anything to lower home prices. and make things easier for average Americans who want to buy that first home. I can understand where they're putting more rentals on the market, but I don't see how it benefits homeowners or home buyers. Jack BeVier (14:25) I hear what you're saying. I get it in the short term. I guess my hope though, or my expectation though, is that the national builders should be increasing starts, right? That's what we want to see. We want to see more starts of single family houses. And I think that build to rent orders contribute to builder confidence to do more starts. Craig Fuhr (14:41) Sure. Jack BeVier (14:50) And so on any given house, yeah, it looks like competition on a micro level, but I think that since it encourages more starts, it is ultimately, there is a net effect on the whole housing market that is positive for affordability. And without the build to rent bid, so my argument is, without the build to rent bid, housing prices would be even higher than they are today. Obviously that's not something that you can prove, right? Like that's just like. an economist's argument, but like, I think that's true. Craig Fuhr (15:22) Yeah, I think it's an issue that doesn't go away anytime soon. In fact, I think it only gains more spotlight over the next few years. Because I, you know, Jack, I just think that Wall Street is here to stay in the single family market. And so I think folks should absolutely keep an eye on it, not only at your micro level, but at your macro level as well. Jack BeVier (15:44) Yeah, by the way, just to contextualize this, like the institutional amount of ownership is still less than 5%. Like of the of the single family rental properties owned in America, institutional, those who own more than 1000 only own less than 5% of those. So like, it gets the most press, right? Because it's like easy to pick on. It's like great fodder for politicians. And it moves and it does, by the way, it does move certain markets, like in certain counties and outside of Atlanta. Like, yes, it's their 30% of the market in those counties. But as a nation, it's less than five. But I do respect the fact that like in certain markets, they do move the market, that's fair. Craig Fuhr (16:16) Yep. Yeah. Well, let's have a- Let's have a quick two minutes and then we'll wrap up this quick hit on Jack. I still maintain that the DSCR loans that we do are an awesome product. We basically took what a local bank has been doing traditionally for decades for real estate investors. Well, I've got a house. I had a hard money loan on it. I'm going to turn that into a buy and hold, and I need some sort of long-term financing. I would walk into my local bank, they would probably give me some sort of investor grade load. It would probably be maybe a percent, percent and a half above what I would pay as a retail, you know, 30-year mortgage. But it would more than likely have been a 20-year mortgage with like a five to seven year call. And I think that's probably still the case today. Wouldn't you say if you walked into your local bank, Jack? Jack BeVier (17:13) Yeah, 25 year AM, 10 year term, five years of fixed rate interest with a reset after five was like the classic consumer bank product. Craig Fuhr (17:21) Exactly. And they would have taken that stuff all day long. However, you know, several years ago, Wall Street decides that that's an interesting space to be in. And so they developed what we call the DSCR product, right, Jack? All right. My conjecture is, if you really wanted to own a lot of houses, Jack BeVier (17:34) Mm-hmm. Craig Fuhr (17:41) Why not be the bank? So, come on, Jack. Oh, it's crazy to think, Craig, you must be out of your mind because we didn't live through 2008 when there was a massive amount of foreclosures and banks were taking back properties at a pace that like someone lost the recipe. And I'm just gonna, so if you don't think that could happen again, Jack, let's play a game. Let's just. Jack BeVier (17:44) Oh my gosh. Craig Fuhr (18:11) I'll play one side, you can play the other. We have a, let's just say there's a significant downturn in the economy. We'll stipulate, you know, let's have fun. Significant downturn in the economy, I'm, I'll pick one, Blackstone, and I own, if you had to guess, Jack, how much paper do you think they own on 30 year DSCR notes right now in terms of- Jack BeVier (18:13) I don't. Oh, it's tens of billions. Craig Fuhr (18:36) tens of billions of dollars, which represents hundreds of thousands of houses in the United States, correct? Jack BeVier (18:42) Yeah. Craig Fuhr (18:44) That would be an interesting way to gain more property. Jack BeVier (18:48) It, I, uh, I hear what you're saying. They, and they're taking a 70% loan to value position in that real estate, right there. It's below market. Uh, the underwriting is light, right? It's based off of the income. So if you can operate it, if you can operate that property, well, you're good. It's a nice, nice loan and they make a nice return. If you can't operate that property, well, your lender gets to foreclose at 70% of value. I hear what you're saying. I hear where you're going with this. Craig Fuhr (18:56) Yeah. Okay, so look, man, I mean, the owners are I'm sorry, the CEOs of these, of these companies and I have nothing against them, Jack. I mean, if it's a business model, it's a business model. However, you know, when they all show up to Davos, and they say, you know, we're going to own nothing and like it by by, by the by 2030. This would be an interesting way of owning a lot of assets in a hurry. Jack BeVier (19:44) I mean, I actually, I actually like kind of like the theory because it's, it's like devilishly brilliant, right? Like you, like is DS, your question is, is DSCR just loan to own for Wall Street? Um, like let's make the underwriting light. Let's make the attachment point attractive. There are a bunch of investors. So if they go South, it's not like we're kicking homeowners out. Like it's just a bunch of investors who took business purpose loans. So fuck them. But I, I hear, I hear you're going with that. It's not. I mean, the vast majority of this paper is landing on right now insurance company balance sheets. It's not like Blackstone owns it. Craig Fuhr (20:19) Well, let me stop you there. Let me stop you there if I might. In what world 10 years ago, Jack, 12 years ago, 15 years ago, would you have ever said to me, Hey, Craig, you know, it's funny. All of a sudden, the largest insurance companies in America who always Jack have traditionally owned a class assets, have they not? Jack BeVier (20:41) Yeah, yes, yes. Craig Fuhr (20:42) Okay, now Craig, they're really interested in owning crappy houses in post industrial cities in America, Jack. And I don't understand that model at all. I don't get it. Jack BeVier (20:55) The, I'm going to just add fuel to your fire. I wasn't intending to like feed the conspiracy theory here. But so the, and by the way, the insurance companies are, are vehicles that are owned by like Predium is one of the biggest. They're a humongous asset manager. You never heard of them, but they're, they, they own tons of stuff and they both own tens of thousands of houses in a subsidiary as well as the insurance company. because they're a money manager. So they also have an insurance company vehicle that, you know, writes it, writes life insurance annuities and then buys DSCR loans. So yes, like if they end up foreclosing on that, they do have a sister company, you know, Predium does own a sister company that owns a lot of houses. You're not wrong about that. You're not wrong about that. If that's by design, I kinda, I kinda like that's, it's could be smart, you know, like that might've been, that might've been brilliant. Craig Fuhr (21:42) I just. good way to go from a thousand houses to 50,000 overnight. And so, we'll wrap it there, Jack. And I always love to play this sort of like the what if game and this sort of looking into the future. I'd be interested, we'll wrap this episode here. Thanks for listening folks, Real Investor Radio. Hope you enjoyed it. Love to hear your comments on this or anything else. I'm Craig Fuhr with Jack Bevere. Thanks for tuning in. Jack BeVier (21:51) Okay. I hear you man, that's an interesting theory.