If you can remember all the way back to pre-Flu Manchu 2020, housing prices were soaring and there were a raft of articles decrying how commercial investors were snapping up housing as fast as they possibly could, pricing ordinary Americans out of the market.
Now, some two years later, it’s evident that a lot of those commercial investors kept buying right up through the peak of the market, and are now proceeding to lose their shirts on those deals thanks to the Biden Recession.
Take, for example, OpenDoor, the company that sends out those endless “We want to buy your home” letters. They promised investors they were going to use the Internet to revolutionize home-buying by flipping homes at scale and cut out the middle man. How well did they succeed?
Now that they’ve had a while to run their system, the answer is: Not so well.
Takeaways:
The end of the video touches on how Zillow lost $881 million by trusting an algorithm that had them paying above-marker prices. We covered that briefly here some nine months ago. Here’s a video with more details:
But it’s not just OpenDoor and Zillow. Here’s a video that explains why all the large-scale commercial buyers of residential real estate (including those buying to rent it out rather than flip) are screwed by rising interest rates:
Takeaways:
Because their lender, their bank, is going to do something called a margin call. At a certain point, they’re gonna say “Hey Wall Street buyer who I’m giving money to, the value of the homes has gone down and now you can barely afford to pay interest. You’re gonna have to now just pay us off, or pay us down,” and when the bank does that margin call, these investors are then going to be forced to sell off their portfolio, because they’re going to need the cash, causing a massive, widespread dump of inventory onto the U.S. housing market.
(In another video covering some of the same ground, he mentions BlackRock, one of the biggest boogeymen in public perceptions of buying residential real estate. Guess what? “BlackRock is not a big player in terms of owning, managing and buying real estate in the U.S.”)
Like the fear of Japan buying everything in the late 1980s, fear that institutional investors will make owning a home impossible for ordinary Americans turned out to suffer from the same recency bias, assuming that what is going on right this minute will continue for the foreseeable future.
Like assuming that the giant ants are unstoppable, or that Hispanics will always vote for Democrats, assuming that housing prices will always go up and that credit will always be cheap are categorical mistakes that the market will eventually punish you for making, and the companies that made it are now bleeding red ink.
People who sold during the bubble made out like bandits, and people who bought during it got screwed, but what can’t go up forever won’t. Bubbles pop. Absent government distortions of the market*, supply and demand have a way of adjusting.
Anyway, if you need to buy a house, nine months from now is probably going to be a great buyer’s market…
*And yes, lots of cities and states try their damnedest to prevent new housing from being built. I’m looking at you, California.