A different set of private-equity firms, at the peak of the market, as brokers constantly blame low inventories of single-family houses for sky-high prices.
The first wave came during the housing bust when large private-equity firms acquired tens of thousands of single-family homes out of foreclosure for cents on the dollar. The biggest players have since been sold off to the public as REITs, such as Blackstone’s Invitation Homes which owns about 48,000 rental houses.
Blackstone was the trailblazer in financializing rents. It issued the first rent-backed structured securities in November 2013. This has become a common funding mechanism. And shortly before the Invitation Homes IPO, it obtained Fannie Mae guarantees for $1 billion in rental-home mortgage-backed securities.
This second wave is different. PE firms are paying prices at the peak of the market, amid ceaseless complaints that there isn’t enough inventory of homes for sale, for folks who actually want to live in the homes they buy.
And these are just the biggest players. There are thousands of smaller players. And all but mom-and-pop investors pay cash and then fund the purchases with leverage at the institutional level.
Here’s the new wave of Big Money:
August 22: Amherst Holdings, which bills itself as a “financial services holding company with expertise in the real estate, mortgage and related structured finance markets,” is planning to raise $1 billion to buy single-family homes and rent them out.
The new fund has a term of over 10 years to allow it to stay in this business over the longer term, the sources told Bloomberg. A fund with a shorter term, which are typical, would exit the investments after a few years via an IPO or sale and return funds to investors. This term of over 10 years could also be an indication that the next housing downturn is being figured into the plan, and the duration of the fund is designed to extend past it in order to avoid having to exit at a bad moment.
The fund may be in addition to the $600 million Amherst raised for a single-family rental fund that recently closed after fundraising goals had been reached.
According to its website, Amherst has already raised “more than $2.5 billion” since 2012 to invest in single-family rental homes and related activities. According to Bloomberg, its subsidiary, Main Street Renewal, already operates over 20,000 rental houses.
August 20: Cerberus Capital Management is said to be raising over $500 million to buy single-family rental homes. This fund doesn’t have a term date at all, perhaps for similar reasons as above, such as getting through the next housing bust without having to exit possibly at the worst time.
A subsidiary of Cerberus, FirstKey Homes, already operated 11,000 rental homes at the end of 2017. In February, FirstKey CEO Martin Esteverena said the company wants to build a portfolio of over 40,000 single-family rental homes.
Most recently, Cerberus also bought about 200 homes in Miami-Dade, Broward and Palm Beach in July from Property Investment Advisors Group, a Miami-based PE firm, for $47 million. Property Investment Advisors, incidentally, will use the proceeds to buy multifamily properties.
August 9: Front Yard Residential Corp., a publicly traded REIT (RESI), announced that it acquired HavenBrook Partners LLC and its portfolio of 3,236 homes from PIMCO. These kinds of deals are heavily concentrated in some areas. For example, this deal includes 325 single-family rental homes in Broward County, Florida.
The deal was facilitated by a $509 million loan that Berkadia, a joint venture of Berkshire Hathaway and Jefferies Financial Group, originated and subsequently sold to Freddie Mac, a GSE.
“We’re growing the size of the company… and one of the GSEs gave us the money. That’s a good day,” explained Front Yard CEO George Ellison.
Front Yard was tangled up in the investigation by the New York Department of Financial Services of Ocwen Financial, the largest servicer of subprime loans in the US. At the time, Front Yard was called Altisource Residential. Ocwen’s founder, William Erbey, was also chairman of Altisource. In 2014, Ocwen entered into a consent decree with the New York Department of Financial Services that named Altisource as “related party.” Erbey was forced to resign as chairman of Altisource. As part of the consent decree, Ocwen agreed to pay $100 million in fines and $50 million in restitution.
July 9: Pretium Partners – a PE firm founded in 2012 that now has $10 billion in assets – announced that it had closed its new fund after reaching its fundraising goal of over $1 billion. The new fund will acquire, renovate, and rent high-quality single-family homes. It said that over 5,000 homes have already been acquired by this fund.
A prior fund, which had raised $1.2 billion in 2013, is also in this business. Pretium says it’s the largest private landlord of single-family rental homes in the US, operating over 26,000 homes in15 markets. The largest landlords are publicly traded REITs.
June 28: Tricon Capital Group announced a $2-billion joint venture with the Teacher Retirement System of Texas and Singapore’s sovereign wealth fund, GIC, consisting of $750 million in equity ($250 million from each) and $1.25 billion in leverage, to buy 10,000 to 12,000 single-family rental homes over the next three years, to be managed by Tricon’s American Homes platform.
Bernanke started it.
This big business of buying massive numbers of single-family homes and financializing rents got started in late 2011, initiated and supported by the Federal Reserve as part of its efforts to “heal” the housing market. Then-chairman Ben Bernanke pitched this in various talks. The Atlanta Fed, while lamenting soaring eviction rates at some of the mega-landlords, summarized this beautifully in January 2017:
In unwinding their bank-owned properties, the GSEs [Fannie Mae, Freddy Mac, etc.], U.S. Treasury, and Federal Reserve innovated new structured transactions for disposing of hundreds of thousands of bank-owned homes, also known as real estate owned (REO). The Federal Reserve was the first to suggest that private equity firms were the one group with cash on hand to invest in foreclosed homes (Bernanke, 2012).
In 2012, the Federal Housing Finance Agency (FHFA), conservator of the GSEs, issued a pilot to develop structured transactions that could be used to sell its REO homes in bulk. The private market followed by developing and standardizing financial instruments to allow broader market investment in converting foreclosed homes into single-family rentals. Rental housing, traditionally the purview of mom-and-pop landlords, caught the attention of large financial firms.
This Bernanke-triggered first wave of PE firms ended up buying about 350,000 homes, concentrated in a relatively small number of markets. After that wave, activity subsided somewhat. But now the second wave is washing over the housing market, but under entirely different conditions: peak home prices and rising interest rates.
This is how inflection points show up at the subcutaneous level in all housing markets. Read… Anatomy of the Housing-Market Inflection Point in the Bay Area’s Sonoma County: Insider View
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My God, this is happening at the peak? Surely this is the peak.
Granted I live in a backwater of a backwater, but I see poor people living in travel trailers to avoid paying rent beyond small pad fees. They probably won’t do well in a hurricane, but at least you can latch on to them and drag ’em away as needed.
“Surely this is the peak”.
You are correct. A blow off top.
A prime indicator has shown dark clouds cometh.
The US Treasury’s 2 yr & 10 yr slope is just 21 basis points apart.
This is back to the 2007 level just before the crash.
A big difference from 2010 when at the 300 level!
If this continues to flatten, then a crash will be imminent.
The Fed is forcing this through their interest rate actions and tightening the purse strings by “normalizing” their balance sheet.
Once the crash occurs (and it will) the Fed will be forced to reverse directions, with the consequent loss of credibility.
Its then we may expect high inflation, leading to a crash in the dollar.
Which portends hyperinflation. Since inflation is purely an economic condition, while hyperinflation is purely monetary.
Loss of currency confidence. Look at Venezuela.
The other possibility is the long rate increases and expands the yield curve. Why does everybody assume the long rate will not increase with the short term rate? The long rate hasn’t moved for six months, but that doesn’t mean it won’t move soon in tandem with the short rate.
Fears that the economy can’t handle a higher long rate are overblown. It doesn’t impact most existing mortgages because they is fixed rate 15 to 30 year debt. It also doesn’t impact existing corporate debt because that is fixed rate as well.
Further, corporate profits are at all-time highs. Corporations can handle higher interest expense.
Government will have to cut back or increase taxes taxes.
The long rate could move to 4% very easily with little economic displacement. My bet is that it will happen.
21 bps b/w the 2 yr and 10 yr means market participants expect the Federal Reserve to raise the federal funds rate in the near term. Which is the exact signal the Fed is sending. No *risk premiums* in the near future for sure.
For the first time since August 2007 the UST 2s 10s spread is below 20 at 19.442
The 30 Y yield has fallen to new low of 2.969
The US yield curve is now below that of Japan’s for the first time since November 2007
One more rate hike and the curve will invert.
Its not “different” this time!
Every hedge fund on the planet is short the ten year – what happens when they cover?
I think the same. However, if you have inflation or hyerinflation, then building materials will rise.
One could argue that cash invested in a tangible asset is safer than cash in a bank (look what happended in Cyprus – https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis.
If there really is a shortage of buildings and buildings need to be built then the existing properties will also increase in value.
I am in the UK and I have been looking at terrace houses (2 bedrooms) for investment. They are for sale for about £25,000 (US$33,000) in poor state. It costs big building companies US$70,000 dollars to build new and that doesn’t include the cost of the land to build them or the cost of the the services (gas, electric, water and sewage) that are already in these houses.
With massive immigration into the UK from the Middle East and Africa (seeking UK state benefits) there is going to be demand for housing and therfore it would seem logical that there will be both capital increase as well as income from such properties.
What about the “little” problem of your owning the structure but NOT THE LAND IT SITS ON???
Or does that not apply to the ones you are looking at?
I don’t live in a backwater but I avoid paying rent like the poor people you see.
I will never pay rent in the U.S. again. I work hard to earn my pay and when landlords started asking $3500/month I decided none of them would ever get one more penny from me.
Paying ridiculous sums for simple shelter is a stupid scam. Don’t pay those clowns. Live in your van man. Live where you please when you please and let the affluent land owners pay all of the taxes.
Home-free not homeless.
Do you have an emergency fund for when, not if but when, something fails on your van or you get some kind of “cascade failure” where it makes the most sense to just buy another van?
Nomads survive when civilised people crumble…..
Real estate investing should be banned. It is good for the investor but bad for society overall.
Yes, and I would add that both Marxists and free-market Capitalists agree on this one point.
Although the media constantly tries to show these two camps at odds with each other, both sides consider “rentier” behaviour as “dead-weight loss” and frown upon it.
So what is it really then? Simple: it’s feudalism.
Your average Joe Blow Normal doesn’t know theory whether Marxian, Keynesian, or anything, but he knows a fair deal from a raw deal.
Rentier-ism, usury, theft both of material things and ideas, etc Joe Blow doesn’t forget these things, or forgive them if he has the power to make things right.
There is money. There is a home where people live. We are not so uncreative or dumb that we can’t develop all kinds of ways to “make” money. Mistake we made was make a place to live, eat, sleep , and be with loved ones as a place for investment vehicle. How stupid , unimaginative and just plain lazy?! And how destructive of the family.
The Russians tried that by banning all speculation (of anything) and putting (non party) speculators in prison. Granted, housing should not be an investment item as housing speculation directly and immediately harms society, but when there is nothing else to invest in, where does the money go? I suspect that we are reaching peak technology where there there are now only minor refinements and no big scientific breakthroughs as seen in the past (such as refrigeration, radio or cars). The stockmarket was once the main place for speculation. Somehow that has changed. The use of housing (and other essentials: Enron) for speculation indicates that the system itself is failing and we will even start to see food and water speculation as money tries to find places for return. There is simply too much money and too many people. Maybe the Chinese mix of Commercial Communism might work in the long run (over 100s of years), because capitalism seems to be failing the “average Joe”. If enough people don’t have adequate housing or food, then you will have a revolution.
If there is nothing to invest, let’s rent seek the working people. It is a sure thing because everybody needs a place to live.
I am fine with this.
But please do NOT print money to price force working people out of their houses. When things go bust, please do NOT TAX working people to bail it out.
I’ve just started reading “Progress and Poverty”.
There’s no need to ban investing in RE, just charge rent for monopolistic use of a plot of land (Land Value Tax). We wouldn’t tolerate anyone having a monopoly of the air waves, or some finite bandwidth, why treat land any different?
 http://www.henrygeorge.org/pdfs/PandP_Drake.pdf, a version edited and abridged for modern readers by Bob Drake. I found the original hard going.
I subscribed to Henry George Society publications over 30 years ago. Their ideas on land taxes seemed to make sense.
They were housed in a run-down old terrace house in a poor part of the city and after a while they shut up shop and ceased publications.
Progress & Poverty?
This article talks about a handful of REITs and other players in the house renting market, owning thousands of houses. What has been described, and what is reality, is far, far from monopolistic behavior/conditions. There are industries where less than 10 companies own 100% market share…sometimes as few as 2 or 3 companies…and generally they are not subjected to a specific tax to their industry. Maybe you think they should be, but I think not. All taxes trickles down to the consumer in a truly free market, and does not accomplish it’s intended purpose. The housing market what find it’s occupants participating in this charade, and the monopoly isn’t even existing, IMO, so is unwarranted anyways.
Good idea, but in our “money denominated” society you can’t do that. That is the problem with the “capitalist” centered living. We have problems determining generally over all what is “good” and what is “not so good” for humanity as a whole. I’m a “capitalist” basically, but always have felt there must be a “firewall” between the “free flowing” forces of global capital and the true needs of a forward looking progressive society. That firewall is “rules of the road”.
There are parts of this country that are doing very well, for example the West Coast (generally), and parts that are not. Long term who is going to come up with a “capitalist plan” to replace the tens of millions of good manufacturing jobs lost and continue to be lost because of “advancements in the application of the global money system(s)?” In my opinion no one has a clue on how to cure that disease.
And, the loss of housing basic to existence (no matter how you define ‘housing’) is a big one. Destroy one part of the system and the other(s) wither and die.
“What is to be done?”
Edit and addition:
We as a society have to have better conversations and come up with better ideas.
Banned? What is worse for society than RE investing is the govt interfering with private citizens about what they can buy and sell and at what price. Freedom of expression, movement and speech in a free society that supports a TRULY free market is the most reliable avenue for equal opportunity….which is the only thing that matters.
Private equity buying tens of thousands of houses at the climax of the mortgage finance crash put a floor under house prices particularly in areas where bottom feeding ‘flippers’ and speculators had been wiped out.
It was a simple plan with a clearly defined aim, with cheap credit it worked: house prices stabilized in 2010 and have been rising steadily since.
This business right now is more a matter of finance believing its own propaganda. They are setting themselves up for another round of losses … leading in turn to begging for more ‘help’ from Uncle Sam to sort themselves out.
Steve Not everywhere Take a look at Zillow for many towns in Eastern North Carolina and you will see a definite trend towards lower prices And according to them many of these areas are barely up to 2007 levels Same thing in SC and Georgia Its only the big cities like Atlanta, Raleigh and Charlotte that are truly doing well from what I see I fully expect those locations to turn down shortly
How many times do you have to be told. This time, it’s different, would you like Ben, Alan, Hank, Tim, and Janet to all come over to your house and serenade you with a song “it’s different this time.”
Question about GOLD and SILVER:
Cashboy suggested in a comment under an article from yesterday that I should write an article about gold, and why the price is “crashing,” and if this is related to the rise in interest rates.
So I’m reposting my reply – with a question to see if readers are interested in my views on gold and silver to justify a whole article.
I wouldn’t say gold is “crashing” — in terms of the moves of the past few days. It’s down about 3.5% over the past month, though since its peak in 2011, it looks a little different.
In my observation over the past few decades, there is practically no correlation between PM prices and interest rates. So I would take that off the table.
I’ve talked about gold and silver on some of the radio interviews I posted here. I have a long-term theory of why gold and silver prices are where we are, and where they might go. It’s just a theory, and I have not tried to flesh it out, but it has held up pretty well.
My first big loss as an investor was with silver in the early 1980s though I did everything that you’re supposed to do, including buying after it had plunged over 30%. But I ended up losing 50% over the next couple of years. Since then, I looked at PMs with a different eye and came up with my theory. The key element is time.
Beyond this theory, I think it’s a good idea to have some PMs among your assets, not for the catastrophist reasons many people cite, but because PMs have proven to be countercyclical since 2011, going down when EVERYTHING went up, thus being among the very few assets that aren’t part of the Everything Bubble.
Today there is very little real diversification possible because almost all assets went up together, and they might all go down together. The exceptions since 2011 are PMs.
I don’t know if readers here are interested in my views or rather my theory about the movement of gold and silver prices, but it seems to hold up pretty well.
My theory and views about gold and silver prices are somewhat outside the target range of WOLF STREET, but if there is interest in a full article, please let me know.
By all means, let us hear your views. I purposely ignore the talking heads and keyboard claptrap; almost to a man (ands women), they are all promoting, be it a stock or an organization that stands to benefit from the sale of PM’s. Why else would they do what they do? Time and the cycle of world economics have been the torch bearer leading the way for the price of silver and gold. I wish it were otherwise, because the alternative is going to the casino and rolling the dice or spinning the wheel.
Of all the BS out there on the subject of PM’s, you have miraculously kept quiet which has served to raise you credibility baseed on some of the pithy replies you level at people from time to time. I fear that your view may be similar to mine, which is a bit boring, but there maybe some nuggets that I can chew on and thus expand my limited perception of where PM’s are going – especially if they include some insight into the Chinese involvement.
Thank you Wolf for providing an opportunity to request your views.
Wolf, I would be very interested in your PM views. I have never owned them but have been considering them as of late.
Most of the small buyers of gold and silver do so as a way to save money. To protect themselves from currency losing value.
That being said I do wanna know if all these currencies losing value has affected gold and silver for real or not.
I’d be interested in a gold/silver article. Anything Wolf writes is usually worthwhile reading
I agree Love to hear what Wolf has to say about gold and silver manipulation using paper derivatives by the Wall Street crooks( bankers)
Wolf, I would love to read some articles on your thoughts on gold and PM’s. I think its especially helpful that you had the loss in the early 80’s, so you don’t have rose colored glasses like some gold bugs. And your analysis and research is excellent and detailed on pretty much everything you write.
My issue with PM’s is they are just pure speculation like other commodities. They do not produce any cash flow or growth in cash flow. And its hard to get a valuation on them (i.e cap rate, pe ratio). With physical gold you have to pay commission when you buy and then storage costs (so there is actually a negative cash flow). And over time, you can get a much better return than gold with productive assets like businesses, land, buildings, debt… that produce CF (as long as you do not OVER PAY for those biz, land, buildings, debt).
With gold, its more of a “macro type bet” that the ranks of the fearful will grow, people lose faith in the currency, etc…. Macro bets are difficult as we have seen this recovery…I started being really conservative with my investing in early 2014 and sold some assets bought cheap post crash at that time, but this thing has run on another 4.5yrs! So I realized this cycle I am a terrible macro forecaster! And I know some people probably have never got back into any investments in any meaningful way since 2008, b/c they think every year a huge crash will come.
Also I’d like to hear your thoughts on buying gold ETF’s vs. real gold.
Count me in, Wolf. I’m in my early sixties and still learning. I do hold some physical gold and silver, just in case, and always wondering if I should buy more.
I think the key element to PMs is utility. The use of jewelry in the first world is visibly down which may be related to income and/or crime. The new status symbols are smart phones and smart watches. Everybody says that this is counter to the traditions of the third world where women hold their wealth in gold. Just to test the theory, I watched some videos of Indian and Muslim weddings, where the brides show off the real family jewels. To my surprise I saw a lot of clearly fake jewelry being used. Since these events were posted on the internet, I have to assume they were heavily invested in technology.
While govts may be buying gold to skirt the established financial systems, I think the rest of us are not on that bandwagon.
BTW, the historic spread between gold and silver was 16 to 1. Because our financial markets are so manipulated and there is no real price discovery, the spread between the metals is also distorted. Either silver is really worth $75oz. or gold is really worth $192oz. Who knows.
“While govts may be buying gold to skirt the established financial systems, I think the rest of us are not on that bandwagon.”
While it’s not to “skirt the financial system” exactly, some of “the rest of us” acquire PM as a store of value independent of its price in fiat currency (which price, incidentally, is rigged: http://investmentresearchdynamics.com/lbma-ceo-admits-the-gold-market-is-rigged-by-central-banks/ ).
“Back in 1964, a gallon of gasoline cost about 25 cents in the United States…Now fast forward to this week.
“The national average price for a gallon of gasoline is approximately $3.50 per gallon. Meanwhile, the melt value of a 1932-1964 Washington quarter was hovering around $5.88 — which means that a silver quarter that was used to buy a gallon of gas in 1964 still has enough value to buy a gallon of gas (and then some) almost fifty years later.” – https://lenpenzo.com/blog/id16252-silver-and-gold-the-superheroes-of-wealth-preservation.html
Speculation in the fiat price of PM is another matter entirely.
It wasn’t really an historic ratio. The distortion in the spread was caused by market forces because the government attempted to ‘fix’ the ratio between gold and silver.
The 16:1 gold:silver ratio was a fixed ratio, or in effect, a fixed price of gold relative to silver set in the Coinage Act of 1792. The silver dollar was the standard currency unit of the US.
The ratio soon got out of whack, as all price fixing does, the silver coins were shipped overseas for melt to buy gold, and the ratio was changed to 15:1 in 1834. Later again, in 1853, the silver content of coins was reduced due to imbalance in world market prices, until eventually all US coinage had no precious metal content.
As far as price discovery is concerned, today you can buy all the gold and silver bullion you want, at the price quoted, at the time you want to buy. So that’s what they’re worth, relative to each other, at the moment you wish to buy, in the currency you use to pay.
That said I don’t believe it’s EVER been 80 to 1 as it is presently Not even close
Being married to a Turkish woman, how much gold does she hold in her own right, as jewelry or otherwise?
I had previously indicated my interest of a PM article, but my interest goes through the roof if you wear a leather jacket and aviator sunglasses (I love those commercials with William Devane pimping PM for Lear Capital.)
I am very interested to see this proposed article.
Please enlighten us with your observations Wolf. If you have insights on other metals besides gold and silver, such as platinum, I would also like to read them.
The story behind PE firms buying up single family homes seems to me to be as simple as economies of scale; enabled by the Fed and executed by the GSEs and FHFA. The second paragraph of the Atlanta Fed’s January 2017 statement sums up the result of, “… developing and standardizing financial instruments to allow broader market investment … traditionaly the purview of mom-and-pop landlords, caught the attention of large financial firms.”
There are a fair amount of starter homes on the market selling quickly in my 55406 Minneapolis zip code, but from what I can tell, there’s not a large PE player involved. Mostly buyers who will live there and a few renovating flippers. However, density is increasing near the light-rail as developers and construction firms have the go ahead from city hall to build out along the transit line.
Yes, please. Could you also inlude on why platinum is down so much compared to gold. Platinum is at the level about equal to $500 gold, I think.
Yes please. Would love to know how to best hedge against the everything bubble
Gold is always a good article topic when it’s from an unbiased source. Gold articles always seem to be slanted, towards the favorable side, by peddlers of the yellow rock.
Yep. What everyone else said. :)
Ditto to dat! I’m quite sure that gold will shine gloriously one day. Good for the grand-kids.. they might even add an epitaph – in gold – on the grave: “The old bloke was right. Eventually”
I would really really appreciate your views/opinions, and that of the commentators on PM. I just don’t understand the trends and distrust the hype. I have friends who have gone all in, and have subsequently been divorced by their financial advisors because of it. They have also lost a great deal of money as oppsed to the stock market.
I’m a land and tangible asset guy including savings that doesn’t make anything beyond having F U appeal.
Security is local and very personal. :-)
Thanks in advance.
Gold is still massively inflated from it’s parabolic spike earlier in the decade. When Bush-Cheney took office and caused an inflationary panic (remember Cheney’s claim that Reagan proved deficits don’t matter) gold saw panic buying and it’s taking years for the price to revert to something resembling a mean.
That being said I still enjoy hearing informed opinions on the subject of gold investing (if the term investing can be applied to gold). I think the Fed and Trump will create another inflation panic, it will be interesting to see how gold reacts.
Gold is genuine investing for the long-term – what you do (putting your money into manipulated stockmarkets in the belief that the manipulation will continue, and that genuine company value and fundamentals are therefore no longer a concern) – is SPECULATION.
Just to clear that up for you – self-delusion, after all, is a tragic state of mind.
I have to agree. I like cash and gold better than the stock market now.
There are too compelling factors pointing to a stock market crash (i.e.,, namely historical valuations and divergence).
I read this morning that Powell said he will “do what it takes” to avoid another financial crisis, even if inflation isn’t a concern. Powell obviously views financial stability, including high stock valuations, as a risk to financial stability. He is correct on this, and he’s the first central banker in a long time to show evidence of a spine and a regard for long-term aspects of the mandate. Bernanke and Yellen neglected their duties by sacrificing the long-term health of the economy in order to artifically pump things up the short term. In doing so, they violated the mandate. Those were two of the biggest can-kickers in history, while Powell appears to be more of a problem solver.
Gold is much more speculative than cash, however, so you’d obviously want to limit the amount of gold in a portfolio.
I have to correct a typo. I meant to say “Powell obviously views financial instabilities, including enormously high stock valuations, as a risk to economic growth”, rather than the nonsensical sentence in the original post.
Massively inflated? NO not when you consider the amount of money printing that has gone on since 2008 It’s actually vastly undervalued Especially Silver
Yes, please … interested in your perspective on all investment related matters including gold.
Lol I was thinking “I better reply to say yes please because I doubt anyone else will”’…no sweat!
Don’t forget about Chinese and Russian reserves. I also gather that PM ETFs are manipulated and useless in a panic.
Looking forward to it.
My own uneducated take on PMs (precious metals), based on my own scant but real experience is, buying PMs from your local PM store and stacking them away is OK, but expect swings in value.
This makes sense if you assume that paper, fiat, whatever you want to call currency, is going to decrease in value in some kind of coming hard times.
If you don’t have a lot of money to salt away in this way, then the only way PMs make sense is to get into the game of buying them for far below their value, like gold and silver chains etc from garage sales, or become a pawnbroker, or in some way acquire your PMs where even with a 50% drop in value you’re still coming out OK.
I’m interested in your views on gold.
My current theory is that the dollar is strengthening due to higher Fed rates and QT, while yields at the ECB and BOJ remain zero to negative. This has caused investor money to flow back to the US and out of other markets, causing emerging market currency trouble.
Some emerging market central banks have been big gold buyers, and now they are in defensive mode propping up their currencies instead of buying Gold. This includes China.
Gold trends can take a while and we’re on a down leg. It will probably shift after the next round of Fed easing following trouble in the stock market and/or thehousing market. I don’t expect gold to go up as stocks drop though – more likely it will climb at the beginning of the next “reflation” cycle as cash once again looks for a new place to park.
Disclosure: I’m somewhat heavy on gold and silver, both in physical in a safe and in gold mining and gold streamer investments over the past 8 years. I’m currently ignoring my position- not buying or selling- as I see significant near-term downside risk but I remain long-term bullish. My most recent investment was a big chunk in a 1-year CD at 2.45% which I could purchase from an Ameritrade account … basically I’m waiting for something better to stick it in next year.
Yes Please Wolf!
I would love to see your views on PMs detailed in a dedicated article. Please do.
Yes and please start with the very basics. I have never been able to get my head around the concept that someone wants to sell something that they say is better than dollars, in exchange for dollars.
Yes, definitely. Lets hear your gold story. I’m guessing there’s a good chance you get close to a comments record on that one.
Yes, Wolf, I would like to hear your views on PMs!
I would value your considered views and theory very much.
I began my career working on the Comex trading floor in the early eighties in the Platinum ring. I would bet I have made more mistakes trading the Metals then even you have, Wolf :-)
“I would bet I have made more mistakes trading the Metals then even you have, Wolf :-)”
I would bet too. I have never traded metals — or anything else — like you have on a daily basis professionally. When real pros and insiders talk about mistakes they made, people should listen.
I would be interested, I lost money in sliver in the eighties also. Thank you very much.
I’m definitely interested in your theory and views. Count me in.
Yes, I would like to hear your theory/ies. As for me, I simply follow 200 day moving averages to get in and out of PMs.
Yep, please do the article on Gold and Silver.
Good idea an article on your views on gold or PM’s and their influences/relevance to our economies.
My view: In the age of fiat monies PM’s (Gold principally) will again become “relevant” when “mailed fists'” inabilities to back up those fiat monies become irrelevant. When generally world economies collapse and fiat monies become worthless. It’s like having that “spare part” for a most important piece of machinery that pumps oxygen/clean water to your home for survival.
I would be interested in your thoughts on PMs
This makes no sense at all. I understand why the funds rolled in with bags of cash and bought up bushels of properties back in 2010 & 2011. The market was crashing, REO’s were everywhere, and the market bottomed in January of 2012. But now, prices are high, inventory is low, and there are virtually no REO’s to be had (there’s like 60 on the market now in the entire Las Vegas metro area). Why the hell would they be buying now? Unless, they know something we don’t know, like, maybe, lots of current homeowners are gonna be turned back into renters in the near future. Anybody have any ideas?
The main reason I see is that rent increases are one of the few things that can reliably beat CPI growth… assuming fiscal legislation is favorable enough when it comes to maintenance and depreciation.
This seems confirmed by how many of these funds are buying in Florida, whose population keeps on growing at a fast pace and which as a whole is generally on the landlords’ side when it comes to rent controls.
With inflation heating up even in official data it’s becoming harder and harder to find good yield. Stocks give nice returns, but they aren’t fixed yield and would you buy 12-months Italian sovereign bonds yielding all of a juicy 0.678%, or half the official CPI growth? There isn’t really a whole lot left outside of rents.
Rents are totally out of whack with purchase prices in many areas I can’t see how rents can go much higher short of a huge devaluation in the dollar Maybe that’s what they are anticipating
The new tax law might have something to do with it. Pass thru passive investment income, (rents are considered passive income) will receive favorable treatment. 20% of that income will be tax exempt at the Fed level. Make $100k in net rental income, pay tax on $80k. The $20k is yours. This is after depreciation, taxes, interest, utilities and so on. RE is a very lucrative investment vehicle as the govt needs investors to provide housing. Without housing, there is chaos and with chaos there is risk to govt in charge.
I am interested in your views on PM, especially gold. Gold has value or the centrak banks would not store it and use it for collateral.
Holy Moly!!! It’s capitalism run a muck!!! — What’s left? The air? The rain? The oceans? The sunlight? The clouds? Have I left anything out?
These folks should buy in Sonoma County , rents are high and inventory is low…
And July had the fewest resales of homes in 9 years, it would be nice to see more transactions at nosebleed prices!
I’m sure I’m not the only local Realtor who feels this way.
Tongue in cheek, more or less.
It’s like Hemingway saying he wants to write something about a talking toad and asking if I think it would be interesting.
Might be terrific. Could be terrible. I wouldn’t know.
But one thing is definite. I’ll read the freakin’ piece!
Definitely interested in your ideas on PM’s
Wolf, I read and mull over every article you write. You have a prodigious intellect and your sharing it with us enrich us. I’m extremely grateful for that.
It appears that there’s plenty of interest on what you have to say about PM. Personally, I think that the utility of PM as an investment is like a painting. Their valuation is based entirely on what other people think it is worth. And while one could say the same about all kinds of investment one could argue that a bond, share, condo, or a business, have an intrinsic value that is somewhat independent of the public’s opinion.
What I would love you to share, and I’d gladly pay for it, is your views on the similarities between today’s society and the roaring twenties.
According to the NYT:
“In 1928, the peak year of that decade’s boom, the top 1 percent took home 24 percent of the nation’s income. In 2013, the top 1 percent nationally took home 20.1 percent of all income, while in five states (New York, Connecticut, Wyoming, Nevada and Florida) the income share for the top 1 percent exceeded the peak from 1928.”
I believe -correctly or incorrectly- that everything that is happening today, good and bad, awesome and awful is rooted in the polarization of wealth. No one knows when and how this will end but if we are about to repeat the 20s, may the Gods have mercy on us.
An article on PM would be wonderful but your thoughts on that comparison would be true gold!
You are spot on Old Dog. Wealth concentration is the root cause. It is a deflationary force that leads central banks to counteract it via reduced interest rates and debt growth, just to keep the economy from dipping into recession. Problem is, the debt growth is outpacing GDP growth and isn’t sustainable. Another debt crisis (a government debt crisis) will occur unless wealth is dispersed more sensibly through progressive tax policy. We’ve been going the wrong way on tax policy for 30 years though, and we just made a huge error with recent tax cuts, that added another $2T of debt.
I also would be interested in Wolf’s views on gold and any other precious metals. Thanks, Wolf, for asking.
Regarding the “Buy-to-Rent” scheme, persons wanting to rent a home now in some areas find the corporate landlords have — not surprisingly — raised the rents sharply. I have also read that in some places prospective renters find that every home for rent has the same corporate landlord.
In California a number of cities implemented rent controls. That hammered the investors. So they should use some caution, but they likely know or believe they can buy off enough politicians.
Wolf, I’d also like to read your views on metals. My take is that they are and have been heavily manipulated.
This truly concerns me. Like the first wave, this is government sponsored attempt to control the price of residential houses. The first wave was for the banks, this wave could be for the votes. These “strong” hands will do the biddings of the .gov and make sure the price has legs. This will protect the ones who are mortgage slaves and force more people to become mortgages slaves or forever be rent squeezed. I do own my house but I am sick of these moves to enslave the mass.
Real estate investing should indeed be consistently and effectively disincentivised through tax policy. In this case sounds like GSEs were and *are* still actively facilitating the financialization of rent, which should totally not be their mendate! As to potential losses: since the funds being set up with GSE backing are retailed as REITs it would be the buyers of those shares to suffer in the event of a housing correction, not the geniuses putting them together.
Explains why prices in in many major cities in FL the price per square foot is reaching that of secondary areas in CA and NY.
Long Beach, CA vs St Petersburg, FL.
Could these PE firms maybe be positioning themselves for the demographic changes, higher rate of baby boomers retiring there with money… etc etc.. Lower chance of a major swing state increasing taxes..
Wolf, Thanks for the article.
I am a 20+ year real estate broker in a suburb of a medium sized Midwest town. None of my local associates who have been in the business going back 40 years or so has ever seen crazy housing prices like the last 2 years. We are accustomed to a 2-3% annual inflation in values.
A family member asked about selling his home this summer. I did the market research, gave him a projected sale price and told him to expect to pay about $1000 in repairs from a buyer inspection. Two “West Coast” rent to own corps had a bidding war on the house, and the “winner” paid nearly 15% more than I anticipated-no repairs requested. Neither the buyer’s nor their Realtor visited the home-the offer was based on photos in the MLS. The buyers paid cash, and had a 7 million dollar written line of credit from a major US bank.
To me, this is another market top indicator. I am advising my clients to sell.
Buying “sight unseen” is a definite Top, or Topping, indicator. Think 1920’s Florida RE etc.
Buying unseen is also indicative of an experienced investor. One can factor in any likely repair issues. No need to waste time viewing the interior let alone the seller’s life style.
“And all but mom-and-pop investors pay cash”
When my X sold her house that she bought in 2006 (for less) in 2016 the person that bought it paid in cash but rumor had it that the “cash” was really a 2nd on his primary residence. Last time I was in her little hood it seems that 30% of the homes were rentals.
I have read most of the gold blogs for the last 6 years. Believe me, there is only ONE out there who makes any sense and who backs it up with sound intellectual reasoning and well written prose. That is FOFOA. (It was a random comment like this somewhere 6 years ago that led me to him).
The trouble with the gold space is that it attracts nutters/conspiracy theorists/gold bugs et al, who turn off sensible people from considering gold any further. One thing I have learnt is that yes indeed, it can take a lifetime to understand gold. A fascinating topic.
Damn, the comments went all metals!!!!
BTW didn’t anyone notice this little gem.
“We’re growing the size of the company… and one of the GSEs gave us the money. That’s a good day,” explained Front Yard CEO George Ellison.
Damn, I wish I could get someone or something to give me money
THANKS. The “GSEs gave us the money” was such a CEO gem, and no one commented on it until just now!!
I felt ill while reading that snippet of the article. I really think the best approach for sanity to return in housing is to get the government out of it. No government “we’ll buy it” guarantees or special no-or-low down payment packages. Lenders must keep loans they issue. No piggyback loans.
Agree…One might argue that the temporary suspension of “free market capitalism” was justified to keep credit from freezing up during the GFC, but ten years later guess this system is standard operating procedure.
Like new roads being financed with tolls, which will cease being collected once the road is paid for. Yeah, right…
If I understand this system correctly, I should be able to qualify for $1 billion loan. The properties are the collateral and GSE status eliminates risk. Not a rhetorical question…
Govt has always been involved in the business of real estate and it always will be.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”
Hands down my all time favorite quote right there.
Maybe you could do a CEO stupid comments hall a fame…..wait…..make that shame.
LOL! “…….I don’t hear a thing!” Movie: “Margin Call” Jeromy Irons making the statement during major board/upper meeting to determine how much “music” was still playing……GFC movie. Yes, is the band winding down or still in full melody???? Good “Q”!
Your thoughts on the topic of gold, Wolf, would be welcomed. A few of mine follow.
I am continually amazed at how even smart observers, like several on this thread, think about gold only through a Dollar-centric lens. Even in the relatively recent past, it has performed exceptionally well (as a store of value) against the currencies of Venezuela, Argentina, Russia, etc.
This is, of course, a pattern that has been repeated over thousands of years, as fiat currencies are inevitably abused.
With regard to its Dollar value, there has been an obvious, concerted effort to suppress gold. This has been happening, on and off, for many years, and there is evidence in the form of admissions, as well as mountains of circumstantial evidence. GATA has done a methodical job in recent years exposing rays of truth on the topic.
Now, if one believes that the U.S. is on a healthy and sustainable economic path, and that rates will actually be “normalized” over the next couple of years, then there would be good reason to be skeptical of gold in the near to mid-term horizons. But in the much more likely event (IMO) that bubbles in stock, bond and property markets burst, coupled with demographic “headwinds”, and compounded by tight feedback loops between important countries worldwide, then gold will likely to be seen, in retrospect, as having been one of, if not the most important safe-haven investments that one could have possibly made.
As Bernard Baruch once said, “Gold has worked down from Alexander’s time. When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory.”
So I pose this question: During a period in which debt levels are far higher than anytime in history, with record amounts of capital invested in paper markets that sit at or near all-time highs, while crucially supported both directly by “money” created on Central Bank keyboards, and indirectly by years of low cost borrowing due to artificially suppressed interest rates, will a long proven store of value that is deeply etched into the psyche of billions of people around the world, cannot be conjured out of thin air, is currently priced barely higher than its production value, and is hoarded by Central Banks, fail to perform as it has for thousands of years when the next serious crisis unfolds in earnest?
During the last crisis people were thunderstruck by what was occurring, me included. The next crisis will be met by much more push back. I doubt they realize the amount of anger that is still out here. It is closer to 1932 than 2032.
Historians have found a novel way of tracking the instability or break of the Roman Empire by mapping the buried hordes of coins found over time. In times of trouble, Romans fled without their hordes, having first buried them, but then never returned. I think this will still be true today.
All sounds “plausible” but the weakness of the arguments is that they are all at the layer of economy and markets. Let’s say the civilization has 3 layers. Violence(military and police), money/currency, and then on top of these two layers are the economy (production and distribution) and markets based on persuasion as opposed to violence.
Gold is good except when the ruling class point a gun at your head and say “use my paper”. If you get this, then you would understand gold is against “control”, the question you ask yourself is “are the government and central banks” still in control?” If the answer is yes, any arguments on economy/market is NOT sufficient to justify gold’s value.
The one fly in your ointment is that the government requires your full identity to be retained by sellers of PM when you buy some (at least where I live) and in a real SHTF scenario I have no doubt gov. will issue an edict that all gold (PM) belongs to them, and it will be confiscated (mandatorily exchanged for dollars at a price set by the government) as was done in the 1930’S here. To get an idea of how this might play out read the fiction novel: The Mandibles. Governments never “go quietly into the night.”
You state these fundraisers are complete but are they in high gear purchasing or are they waiting for a downturn to start? I’m still amazed at the newswatchers I speak with who are somehow unaware of the re-inflated housing bubble and don’t understand what a housing affordability index shows. They just think the economy is great.
In regards to PM’s, I’m also interested. You are may favorite read, so I go here at home. On the road I listen to Peter Shiff’s podcast. He owns a gold company so he is going to be biased but his commentary is interesting. With the USA’s unsustainable debt trajectory he predicts a currency collapse along with hyperinflation that with make gold a good spot to park in. I don’t have enough cash for it to make a difference it what I invest in but the history of gold interesting.
when you’re “connected” like these private equity boys are you basically have a license to print money! It’s so simple really. Borrow at 1/2 to 1 %, buy the foreclosed houses directly from the banks at 40 cents on the dollar( the banks were glad to get it). Then rent them back to the poor souls who lost them. Yes Wolf I’d love to get your take on the metals. My take is the top in 2011 will stand for a while
Cap rates in Florida in desirable locations now stand around 5% (this is outside S. Fla.; not sure what’s going on down there, I expect it’s worse).
5% is low by historical standards and barely covers the cost of financing. In such a scenario landlords count on price appreciation to make an investment worthwhile. Not smart though when RE values are already about 20% above fair value.
I agree with Wolf’s assessment that this scheme appears to be fueled by “dumb money” flows. A buy-high, sell-low type of move.
I talked to my insurance salesman about flood insurance in Florida and she said since Irma rates on homes along the Pinellas beaches have doubled. One homeowner’s rate was now $1000 per month for flood. Then add in the taxes and home owners insurance for wind coverage and investing on beachfront property is no longer a good investment let alone being affordable over the long term as all these rates will continue to climb. These properties will require about $3000 per month to cover just insurance and taxes.
I doubt any of these homes are insured for flood or anything else. Why should they insure the homes, it’s not their money.
You wrote: “This second wave is different. PE firms are paying prices at the peak of the market, amid ceaseless complaints that there isn’t enough inventory of homes for sale, for folks who actually want to live in the homes they buy.”
Yes, it’s different by buying at the peak. Cap rates are low due to high prices. The only way this makes (financial) sense is if these investors see the peak and are waiting for the crash from housing bubble 2.0 to swoop in and buy at the next bottom (again).
More housing does not lead to affordability
From Niccolo Caldararo
August 20th, 2018
“As Robin Harding notes, citing several recent studies (“ Planning rules are driving the housing crisis” August 15), there is a lack of neither housing nor building.”
“There is an oversupply and huge supply of vacant units held off the market. But this is due to the commodification and financialisation of the housing industry.”
“…building more housing does not result in affordability in the market. Since dwellings are seen by investors as assets they are no longer homes.”
“A solution is obvious: pass a law so that no one and no corporation or partnership could own more than one dwelling unit. Then dwellings could again become homes.”
They would just create an LLC for each home they buy. You can create an app for that.
I’ve tracked a few of these REO-to-Rental companies that have gone public. They all continue to lose money on an operational basis, as the industry experts predicted at the time. They are purely speculative, which means that if (when?) prices fall again they will sell as quickly as possible to lock in their gains.
Too bad that the GSEs are once again Ponzi financiers. Doesn’t bode well.
Are these outfits buying new or existing homes? Will they pay a premium over ‘book value’ for existing homes?
Or are they just looking to buy any home, anywhere to create a portfolio?
They were all buying existing homes. But now there is a new move underway to build homes-to-rent and sell them directly to these PE firms. I’m not sure about the differences in homes, but I imagine they’re trying to keep costs down such as with kitchen and bathroom finishes, fixtures, and equipment — in other words, nice looking and durable, but lower cost.
Wow…its just gets crazier and crazier. I want to get into multi-tenant real estate rental as income generator but at not at these prices.
As someone else noted earlier, all we need is gov to start being passive and let the market do what it needs to do.
The persistent message they’ll jump in to protect business means business will ignore risks.
It’d be better to support actual individuals effected and let businesses pay for their bad judgements.
But while socialism really rules, or crony capitalism, the majority of individuals pay.
That’s not to say renters/landlords are inherently good or bad.
I rent and also rent out a property and we’re all happy so to speak.
Both well made new ish renovations, modern high quality fittings like aga, Bosch and neff etc, underfloor heating, solars etc.
No one needs help, or are slaves to a system, it’s all fair in this case… so good can exist in the rental space.
Markets that can self correct are what are needed!
– “Low inventories & High prices” ??? High prices does NOT automatically that inventories are “low”.
– A good example is Australia. In Sydney in some neighbourhoods/suburbs houses/aparments are valued at 12 times household income. This is the result of australian banks lending australian households (up to) 12 times their income. If those banks would have limited the amount credit to say 8 or 10 time income then those houses would have been valued at “only” 8 or 10 times household income.
When Argentina melted down, gold you can bite could indeed buy you and your family food.
However, gold coins will get you tortured and murdered – far too dangerous in a Crisis. Too great a value, too.
A stash of gold wedding rings (‘How can I bear to sell it, my wedding ring!) can serve you well. But you will always have to go to a new buyer for that trick to work more than once.
Junk gold; much smaller value than a coin, and very convertible, bit by bit: sell the junk, get the cash and spend it asap.
But, do you think the guy buying won’t be mafia? And that they won’t try to track you if they suspect a stash? Does having bits of your body removed, slowly, with garden loppers, appeal, or with knives?
Or your wife or child raped in front of you so that you reveal the rest of the stash.
That is what a real Crisis is. The rest is fantasy.
You want ‘security’?
There is none in this world.
Get that straight.
An example: a man was horribly tortured and murdered in Argentina for……one gold coin, hidden in a flower pot.
All he had.
But they thought he had more.
They were sure he had to have more.
“But I shot a man in Reno
Just to watch him die”
So-called “junk silver” (old 90% silver content U.S. coins) mitigate much some of the risk.
THUD will go real estate.
BOOM will go precious metals(industrial metals as well).
the real question, as always is WHEN???
Gold is for savers.
I remember seeing a bid recently on eBay for a nice, orange, crisp new 1000 dollar Canadian bill encased in plastic for 1300 can. Canadian dollar was worth about 1.50 us dollar, so at that time one could have bought and saved about 42 ounces of gold. Today 42 ounces of gold is worth about 50,000 usd and about 67,000 cdn.
In 1954 you could have bought a Volkswagen beetle for that orange bill, but today the gold would buy you a Porsche Cayenne S
Gold is for savers.
How much would a C$1,000 investment in 1954 in the overall stock market be worth today? That’s one of the other questions you’d want to ask… to compare assets.
Good point but don’t forget to add in capital gains due on the stocks.
I’m a little surprised at the number of comments supporting regulations limiting home ownership (or perhaps lot-suitable-for-building ownership) to one per person …or is it one per household ? guess we need to define “person”, and then perhaps “household”, for starters, yes, let’s put the same crew that wrote the Obamacare legislation on this.
And let’s forget that different people need and/or want different amounts of dwelling-and-land-ownership.
Will we legislate special provisions for family farms (they do still exist; I know a number of family farms…..or wait, do we still romanticize the family farm as a Good Thing, or is that romance over ? Special allowance for larger families ?..2nd home as winter retreat, or cabin on the lake for the summer ? This is starting to look like a dream job for those who make a living writing legislation….
If we can just raise Tolstoy from the dead, to write a new, updated version of How Much Land Does One Man Need, I think we’re in business here, folks. Once we get him up and running, we engage him to write Part II, How Much House Does One Man Need.
Think about it: the government did such a great job of, first, legislating the Affordable Housing Act, remember, to increase the level of home ownership in the U.S.; and second, fixing the foreclosure-REO problem in the aftermath of the 2007- 08 crash (thx, Wolf, for spelling this out in the post, above, of August 23, 2018. complete with Fed quote):
that we should certainly trust them- the government, that is, again , this time to legislate home/land ownership. ….
more questions: do we let people like Blakeslee own enough land to bring their own homesteads into meaningful production, or should we just go to a commune model ?
Would love to rave on here, but to have enough time to do justice to my comments on WS, I will probably have to raise the rent on the dwelling place that I own but no longer live in. If I think of gouging to the max (Airbnb ??), maybe I can hire a full-time housekeeper, not to mention gardener, and I will only pull weeds when I feel like it……….evidently I have gone very wrong as a landlord, and how many of us are there in the USA today anyway, I mean landlords who have, due to circumstance, ended up owning more than one dwelling place, and think in terms of looking after our tenants, not to mention the land itself……I must be the only one left.
Closing clarification: I view with distress and discouragement, the buying up of housing, to serve as rentals, by big corporations,. The fact that government regulations, policies, and genius ideas, have largely brought this into play, convinces me that they are not the ones likely to remedy this situation.
the other topic: would love to read any column/s on PMs that you write, Wolf. IMHO, they seem to be a holding best suited to the very patient, those able to buy low and think long-term.
I think an article on gold should be followed by an analysis of “The Fourth Turning”. I see a connection.
I do not support raising taxes on residential homes (new or existing) so long as its a home to live in not an investment property.
I do, however, see these bubbles and I strongly think that a lot of this bubble is foreigners directing their manipulated and inflated currencies into the US real estate market and various forms of REITs profiting from boom/bust cycles. This says to me that taxes need to be increased and deductions reduced for real estate investment. The goal should be to damp down speculation.
You can put me in the camp that speculation is the enemy of the poor and middle class investor. These people scrimp and save to put savings into a few stocks or put a down payment on a home, then they are destroyed when the market crashes. We once had policies that kept speculation from getting out of control. Today we don’t just encourage speculation but we expect to drive our economies with pedal to the metal not just for stimulus in down markets but pedal to the metal 24/7/12…