Blackstone Denies It Is the Cause Of Housing Bubble 2.0

Following widespread discussion of the impact that Wall Street investors (gorging on the Fed’s free-money extravaganza) have had on home prices, today’s final straw for Blackstone appears to be the New York Times’ editorial suggesting/blaming them (and others) for driving up the prices of single family homes and reducing the supply of affordable housing for first-time home owners. Blackstone decided to hit back with some of its own version of real estate truthiness via its’ blog and why it is “proud of what it is doing in the housing market.” So here are the six reasons that Blackstone believes laying the blame for housing bubble 2.0 at their (them being Wall Street) feet is wrong (and a few short responses to their perspective).

Via Blackstone:

While we share the NYT’s concerns that affordable housing is an important matter of public policy, to blame Blackstone for the rise in house prices is wrong and ignores the positive good that private capital plays in the housing market. We want to make the following points:

First, Blackstone is not buying houses in sufficient numbers to make an overall difference in house prices. Blackstone, through its subsidiary Invitation Homes has bought 29,000 homes, representing three hundredths of one percent of all US housing (out of 115 million total units). We have acquired 25,000 of those homes over the past 12 months, representing only four tenths of one percent of home sales during that time (5.6 million total home sales). We have also purchased homes in just 13 of the more than 300 metro areas across the country.

[ZH: (as discussed here) First, it is not simply the number of homes that Blackstone is buying but the entire cohort of Wall Street. Second, it is not simply the number of homes that Blackstone has successfully bought but the number of homes it has bid on – by simply bidding with considerably lower costs of capital, the ‘auction’ process of final purchase price is exaggerated. Third, the marginal buyer is all that matters – just as if 1 person bought 1 lot of AAPL shares at $1111 then he sets the ‘price’ and in real estate, transactions are both sticky, time-consuming, and apply broadly to the comps that house is in – thus lifting entire regions on the basis of one over-cheap credit provided home bidder.]

Second, prices of homes are rising simply because the country has not built enough homes. Over the past 4 years, the US has added only 700,000 homes annually (single- and multi-family) on average, while population growth and obsolescence require an estimated 1.5 million units to meet demand.

[ZH: (as discussed here) This is simply false – there is a 12.6 million home overhang based on the latest data; there is no home shortage, there is an inventory shortage since banks are unwilling to release inventory since it is 1) appreciating in the bubble, and ii) maintaining the illusion of a healthy recovery]

Third, home prices remain well below long term trends despite their recent increase. New home prices nationally are 37% higher than existing home prices, as opposed to the long term average of 13%. Home prices are still 22% below the long-term price trend from 1951-1999. This is why home prices are rising even in cities where Invitation Homes is not buying, like Detroit and Salt Lake City, where prices have risen 19% and 10% respectively year over year.

[ZH: (as discussed here) These data points are simply incredulous. Prices are screaming higher; these trends that they mention are apples-to-carrots comparisons and simply put, as Fitch notes, “the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse.”…]

Fourth, Invitation Homes’ purchases have little to do with first-time home buyers or existing home owners. Invitation Homes only buys post-foreclosure homes, after all attempts at loan modification and other measures have failed. Moreover, these homes are often sold at auction for cash, requiring settlement in three days and often significant capital expenditures in fix-up costs. Few, if any, first time home buyers can do this.

[ZH: This completely ignores the chain-of-buyers that produce homeowners. First, buying any home with artificially cheap credit (cash in their case sourced from a credit market willing to lend willy-nilly to the big banks and managers for negligible yields) impacts the price at the margin, raises comps across entire regions as we mentioned above, and prices ‘out’ the first-time homebuyer – who could potentially have afforded one of the post-foreclosure homes.]

Fifth, foreclosed homes are usually abandoned and a blight on the neighborhood, contributing to a downward spiral of home prices. Cleaning and fixing up these houses and putting in stable long term renters improves neighborhoods and the value of everyone’s home. We have 1,000 employees and 10,000 contractors fixing up the homes we have bought and have to date invested around $500 million in home improvements in addition to the cost of the homes. When neighborhoods improve and house prices stabilize or rise, this is a good thing – fewer homes are underwater  and homes are easier to sell, which is good for both sellers and buyers.

[ZH: We are here to help… it’s for your own good… this is as close to Goldman’s “doing god’s work” as it gets.]

Sixth, increasing the supply of rental housing is a good thing.  Before Blackstone started buying homes, there were already 13 million single family homes for rent in the US. This is an important part of the housing market. Renters should have the opportunity to live in a good neighborhood and send their children to good schools. Invitation Homes offers a national platform providing quality homes and a high level of service. Moreover, our houses rent at affordable rates – average rents per square foot in our single family homes are approximately 30% below comparable multifamily rents.

[ZH: Having been priced out of homeownership, being forced into renting often means paying more monthly than a mortgage (for equivalent residence) or downscaling. With broadly oligopolistic landlords this also sustains the rental price market. Are we simply to lay back and see the nation’s real estate now taken over by the banks and asset managers thanks to a Federal Reserve providing them with relatively free-money that squeezes out the normal ‘real’ buyer? It seems that if their argument is taken to its logical conclusion, we will all become renters until the banks decide to dump the ‘trade’.]

We welcome this discussion; we are proud of what we are doing in the housing market.


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