Then: Commercial Investors Are Sucking Up All American Housing! Now: They’re Losing Their Shirts!

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:

  • One thing I was unaware of: Commercial investors in residential real estate fund their purchases through variable interest rate debt.
  • OpenDoor’s outstanding debt balance “has ballooned from $271 million to $6.1 billion.”
  • Every point rise in interest rates costs OpenDoor $40 million more in interest rate payments.
  • “OpenDoor is truly a modern day house of cards. The company’s revenue grew from $1.8 billion in 2018 to over $8 billion in 2021. To grow they scaled, going from 18 markets to 44 markets in the U.S. In those four years, the company went from flipping 7,000 homes a year back in 2018 to now flipping 21, 000 homes most recently in 2021.”
  • “Despite OpenDoor’s top-line growth, the company has incurred loss after loss after loss, each bigger than the last, even in a strong rebound year in 2021. Where the company sold a record number of homes, OpenDoor incurred a record loss of over $600 million.”
  • Some math snipped. “OpenDoor would need to sell roughly sixty thousand homes a year just to break even with how much it costs the company to exist in its current burn rate. Every time the interest rate goes up a single point, OpenDoor needs to sell an additional 2,000 homes in order to offset that additional $40 million.”
  • 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:

  • The Fed “is now committing to not only continue increasing interest rates, they’re committing to keeping interest rates elevated for the foreseeable future.”
  • “These real estate investors are going to be losing money in the housing market on their investments, and that they are going to have to fire sale their portfolio as a result.”
  • “Over the last year, the investor profit or the cap rate in America is about 4.5%, which was pretty good in 2021, when interest rates were zero, but now that interest rates are projected to go to 3.8%, we can see that investors who buy real estate in America are basically getting very little premium over buying a short-term government bond.”
  • “As this investor demand continues to go down, home prices are also going to continue to go down in America, because in many markets investors were quarter of the demand, a third of the demand for homes over the last of couple years, and in some neighborhoods investors were 50—60% of the demand.”
  • “A lot of people think [commercial buyers pay] cash, but folks, it’s never cash, it’s always a bank in the background giving these hedge funds and private equity funds money to buy single-family homes.”
  • “They’ll give these hedge funds maybe 70—75% percent of the money to go do it, like a normal loan. The thing is, the loans that these Wall Street investors use to buy homes are often adjustable rate loans, where every time the fed hikes interest rates, the Wall Street investor has to pay more in debt service and interest on their existing portfolio.”
  • “We’re gonna get to a point soon over the next six months where these Wall Street investors are having to pay more to their bank and their warehouse lender than they’re going to receive in income and rent from their tenant. Like, literally, these Wall Street investors not only are going to see the value of their property going to go down, they’re going to begin losing money in terms of cash flow.”
  • So not only will investors have to sell, but frequently they won’t have any choice.

    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.

  • He doesn’t mention Austin by name in this video, but he does in another pegging it as the #5 market most likely to see price drops. “This is a market in absolute freefall.” “In the span of just five months, the number of homes for sale in Austin has increased from 1460 and February to nearly 8 000 in July.” He thinks home prices could down by 40%. Naturally, as an Austin-area home-owner, I think that’s way too much, but I do expect significant retreats from the highs reached early this year.
  • He also thinks inflation is going to get worse (which is probably a good bet).
  • (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.

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    11 Responses to “Then: Commercial Investors Are Sucking Up All American Housing! Now: They’re Losing Their Shirts!”

    1. Kirk says:

      Arbitrage within an economy doesn’t always work out the way the people doing it think that it will. Sometimes, there’s a bit of a quantum effect to it all, once other people note what they’re doing.

      The WEF geniuses might want to reconsider much of their program, because the sad fact is, once the general population discovers that a.) the WEF types really mean what they say, and b.) they’re actively going about putting those things into effect, actually affecting day-to-day life of the masses? Well, those masses may not be so happy to “own nothing and like it”.

      They might also want to consider the age-old problem typified by the issues behind the whole “tragedy of the commons” issue. All those homes that the WEF guys are planning on renting out to the unwashed masses of renters that they’re creating? They might not be such wonderful bets, after all, ‘cos those renters aren’t going to take care of the properties, and they might just vote in some really nasty and onerous requirements for the landlord class that said wannabe landlord class members didn’t factor into their oh-so-careful calculus of profit and loss…

      Property and ownership are basic psychological factors motivating much of humanity. Take those away, and you likely won’t enjoy what ensues. Soviet Union was a good example of how poorly that worked out–What is public property is nobody’s, when it comes to taking care of it.

    2. Steve says:

      I am a real estate investor and believed that local investors knew the market better than the “big boys.” If you are investing for cash flow instead of appreciation, you pay attention the the “cap rate” of the property. Prices were going so high that the cap rate of properties was approaching 2%. Time to sell, right?

      I sold six properties from January to August. The last one, in Georgetown, Texas, lost some “appreciated value” because I couldn’t sell until the tenants moved out in July. I still more than doubled my investment because prices are still “stupid.”

      Invest in a property when the cap rates go back to 10%. You will pick up one cheap from the “big boys.”

    3. Mike Young says:

      Housing, especially single-family housing, is a good for consumption, not investment. Apparently, this is too simple, because the evidence is overwhelming that people believe the opposite.

    4. Jim O'Sullivan says:

      “The company’s revenue grew from $1.8 billion in 2018 to over $8 billion in 202 [sic].

      I’d like to know whether that last digit would be 0,1, or perhaps 2.

      “To grow they scaled . . .” Now I’m utterly lost.

    5. Lawrence Person says:

      Pretty sure it’s 2021. Corrected.

    6. Joe Bagadonuts says:

      I always heard that residential real estate was a mediocre investment. Yeah, it CAN go up. But its hardly liquid, you have to deal with local taxes, and maintenance. That’s before the hassles of renters, single mom’s who get laid-off, drug addicts, people who have nasty divorces, etc. That’s on the low end- a guy buying a couple houses .

      BUT- a company buying thousands of houses will magically make those problems go away? NOPE.

    7. JackWayne says:

      And the FED will continue to suck up MBS. The moneymen won’t lose anything. Companies may go out of business but billions will have been banked by those on the inside.

    8. Dan says:

      I never click on a YouTube video that has a guy’s face on it with his mouth open.

    9. Howard says:

      OFF-TOPIC …

      Steve Bannon was presidentially pardoned, but then indicted by a state.

      Does that work? Has that been done before?

      If *THAT* is the new standard for behavior … then every sitting Republican governor needs to find:
      – everyone pardoned by Clinton
      – everyone pardoned by Obama
      – everyone pardoned by Biden

      … and then what? Well … happy hunting (in the legal sense).

      Democrats have shown us what they deem acceptable behavior. So we should, in Rules for Radicals fashion, use the enemy’s rule book against them.

    10. RightWingNutter says:

      Howard,
      Actually, the reverse of that was part of how the KKK was broken back in the 60’s and 70’s. Local sheriffs and DAs refused to arrest & prosecute, so federal prosecutors & FBI did it for them. Murder & torture were certainly a violation of civil rights, and some local pols & cops who helped cover up were convicted for conspiracy.

    11. Chris Cha says:

      Those a-holes deserve all the trouble they’re getting. I’m not a fan of regulation, but corporate poaching on individual home buyers needs to be halted, NOW!

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