The Housing Market Just Went Negative

[Music] What's up, real estate? It's BlackRock here, and in the last few days, I have been overwhelmed with non-stop requests to talk about what appears to be one of the biggest and most controversial real estate stories of the entire year. It's the claim that institutional Wall Street investors and pension funds are behind the skyrocketing real estate prices. Will they buy up entire neighborhoods, paying 20 to 50 percent over asking, and then turning them into rentals, making it unaffordable for owner-occupied homeowners to ever have a chance at finding a place to live? The Wall Street Journal even ran a story the other day explaining that if you sell a house these days, the buyer might be a pension fund.

Then, to make matters even worse, rents have just seen their largest year-over-year increase in 15 years, suggesting that maybe there is a serious problem that needs to be addressed, and that's leading to the narrative that maybe one day Wall Street is going to be your next landlord. So here's the deal: I've been working full-time as a real estate agent throughout the last 13 years. I own and self-manage eight properties myself as a landlord, and real estate is still by far my largest investment. This is a topic that I am extremely familiar with, and when I see headlines like this thrown out, I want to get to the bottom of it with actual facts, data, and statistics that a lot of these news outlets tend to miss.

And all I ask for in return is just to hit the like button for the YouTube algorithm. Doing that helps me out tremendously. It is totally free, and is a thank you for doing that. Here's a picture of a Maltese puppy, so thank you again and now with that said, let's get into the video.

Alright, so this all starts off with an article posted last week by The Wall Street Journal with the headline, "If you sell a house these days, the buyer might be a pension fund." Now this was all sparked off by the sale of a newly built subdivision north of Houston, containing 124 newly built homes. But these houses were not sold off one by one to individual homeowners. Instead, the entire lot of them were sold to the property investing platform Fundrise for 32 million dollars, with the intention of putting up the entire community for rent.

In return for that, the home builder said that they made twice as much as they would selling houses to the middle class. This article even goes further on to say that yield-chasing investors are snapping up single-family houses to rent out or flip while they compete with ordinary Americans and drive up the price of homes. And then they go and throw out a statistic that one in five homes are bought by somebody who never moves in.

Now, as you would expect in an already heated housing market, this story went absolutely viral, making its way through multiple news networks and outlets. And then finally, where stories go and they want to get people really triggered—Twitter—this user, Cultural Husbandry, retweeted the article with the caption "Buying every single-family house to confined, paying 20 and 50 above asking price and outbidding normal home buyers." He then goes on to say, "That whole network is the main financial element of the middle-class families used to build wealth, and BlackRock, a financial reserve-funded financial institution, is buying up all the houses to make sure that young families can't build wealth. Let that sink in for a moment. Got it? They're using your tax dollars. It's over for the lower and middle class and it's permanent."

And then of course he winds down with another few dozen tweets about the great reset and selectively optimized articles to validate his argument. But a totally separate report shows that investor sales have actually increased by up to 65 percent year-over-year, making up about 20 percent of the total U.S. housing volume. So there is definitely something to be said about the state of the real estate market that makes it extremely unaffordable for anyone who does not have an endless stream of money at their disposal.

So let's actually go ahead and backtrack all of these claims and see just how much truth there is that BlackRock is buying houses for 20 to 50 above asking. They're receiving tax dollars to screw over the middle class, and then slowly but surely, Wall Street is taking over the single-family housing market and turning America into a renter nation. Because when it comes to claims like that, if this is true, we're probably pretty alright.

So let's start off with the first claim: BlackRock is buying entire neighborhoods at 20 to 50 percent above asking. This obviously stems from The Wall Street Journal article cited here, referencing the sale of a 124 single-family subdivision for 32 million dollars with the statement, "We certainly wouldn't expect every single-family community we sell to sell at a 50 gross margin." So right off the bat, it's really easy to think, "Wow, so institutional investors are buying up entire neighborhoods and paying 50 over asking. They're taking inventory off the market that everyday buyers could have so desperately used." But if you think that would be correct, I hate to break it to you, but it's not.

The reality is this entire article has been taken entirely out of context and twisted into a false narrative that's missing out on quite a few key details. So let me tell you the truth, as referenced by the Financial Samurai, who got the full details from the buyer, Fundrise, after all of these accusations went public. Now this neighborhood in question was a purpose-built rental community created by DR Horton. By the time this project was listed for sale, it had already been completely rented out, and it was being sold as an entire package of 124 homes that was never meant to be sold off to individual home buyers.

In this case, DR Horton purposely sought out a high-demand area. Years ago, they developed the community appropriately, and their business was intended to be a fully occupied flip. They just so happened to have sold at a time where housing prices have skyrocketed considerably thanks to record-low interest rates. Well, the entire state of Texas has seen a large influx of new home buyers from around the country, and that is how they were able to create a 50 profit margin. That's not typical, but if you bought a property years ago, you developed it from the ground up, you fully rented out each house, and you took the capital risk, 50 margins are actually quite reasonable.

So even though this article makes it seem like Wall Street is out there buying up entire neighborhoods, paying 50 over asking, taking inventory away from everyday home buyers and driving up the cost of housing, the reality is these homes supplied much-needed rental inventory on the market, and they were never meant to be individually for sale to begin with. Fundrise, the buyer, even came on record to say that they only bid one to two percent more than other leading buyers and that they were selected the winner for their ability to close quickly.

Basically, the narrative that Wall Street is out there paying 20 to 50 percent over asking is completely unfounded, and from every little bit of factual information that I could find, there is not a single thing out there that supports that claim. And I guess instead I would just chalk this up to a misinterpretation of information and a lack of understanding with how profit margins are actually calculated. And I would even go so far as to say that those figures are completely fabricated out of thin air.

But that does not mean that Wall Street is not writing offers in single-family properties and then turning them into rentals, so for that, we'll continue to go down the rabbit hole of research and get to the truth with what's really going on. The second claim we'll have to address is that investors make up about 20 percent of the U.S. housing sales.

Now again, on the surface, when you read something like this, it's easy to make it feel like they're implying that investors are these large Wall Street-type institutions. But when you really begin to look at the actual numbers behind it, you'll quickly see it's not quite as bad as you might think. First of all, the real answer is that no, investors do not make up 20 percent of all U.S. housing sales. However, they do make up 20 percent of all low-cost housing sales, and in the mid to upper price points, investors make up only about 11 to 12 percent of all property sales.

But remember, the term investor could mean a lot of things, and when you see articles saying that one in five homes are not going to primary homeowners, it is a little bit misleading. It's important to keep in mind that if I go and buy a property with the intention of renting it out, I am an investor, and I am part of that statistic. If you go and buy a vacation home for part of the year, then you are also part of that statistic. If someone goes and buys a burnt down dilapidated house with the intention of fixing it up and selling it for a profit, they are also part of that statistic.

Now if you want to know how much institutional investors are buying, well, in 2018, a survey found that they accounted for less than one percent of all single-family housing units across the U.S. Then again, in 2019, it was said that institutional investors own 300,000 single-family units, which represents less than two percent of the overall market. Corologicals have found that over 95 percent of investor activity came from small mom-and-pop landlords across the lower end of the market where there just so happened to be a higher concentration of renters to begin with.

And that we can't definitively conclude this increase leads to excess competition for owner-occupiers. Even a Federal Reserve study found that typically institutions prefer to purchase homes in neighborhoods where fewer residents can qualify for a mortgage because they don't want to compete with home buyers to pay the top end of the market retail value. Instead, the institutional investors just want the highest likelihood of finding a renter as soon as possible, with some built-in equity as a margin of error.

The only evidence for institutional investors competing with everyday regular home buyers was found by Box, who cited an article that institutional investors are stiff competition for home buyers. However, that article in question contained absolutely no factual data whatsoever to support institutional investors at all, and the only circumstantial evidence that they had to support these claims was that a recent first-time home buyer bid on six houses and was outbid six times by cash offers. There was zero evidence that any of those six offers were from institutions, let alone even investors to begin with.

And really, for all we know, those six offers could be from owner-occupants who had cash or were motivated to move in as fast as possible. At least a Redfin press release clarified that in Florida, cash purchases are mostly from people who are relocating from other states to purchase a second home or a retirement property, and they're using cash from selling their former homes to purchase something.

And if you want to know how many institutional Wall Street-type investors there are buying single-family properties with the sole intention of renting them out, the answer is—are you ready for this? 0.6. And there is no state in the entire U.S. where single-family rental home companies own more than one percent of the housing inventory.

Then in addition to that, single-family rental home companies accounted for less than 0.14 percent of homes purchased in 2020, and you could bet your bottom dollar that they have no interest competing with you on that overpriced three-bedroom, two-bathroom luxury turnkey villa down the street that you've been eyeballing for a week.

But then what about some of these claims about BlackRock being funded by the Federal Reserve with your tax dollars, giving them infinite money at their disposal? Is there any actual truth to that? Because that is quite a big claim. Well, the truth is that, yes, there is a pre-existing relationship between the Federal Reserve and BlackRock, but not in the way you might think.

Much of this all started in 2008 when the housing market began to collapse. At the time, banks were saddled with billions of dollars of non-performing loans from homeowners who couldn't afford their payment, and they left the home go into foreclosure. At that time, banks needed to unload their entire portfolio as quickly as possible, and that meant that investment groups like BlackRock would be able to go in and buy these entire portfolios in mass at a discount with the intention of then fixing them up or renting them out or selling them for a profit.

These were properties that no one else was buying that couldn't be sold off individually, one by one, that couldn't qualify for traditional financing, and that otherwise would have fallen into even more disrepair. So in this sense, institutional investors acted almost like a floor for the market, preventing it from falling further, giving banks liquidity, and creating the demand that would eventually lead to a full housing recovery.

In total back then, single-family rental home companies purchased approximately two percent of homes sold throughout foreclosures and short sales—that's it. And BlackRock was in the position to take over very large real estate portfolios that were never meant to be individually added to the market, such as with ING's 92 billion dollar business.

And today, while it's a little bit more complicated, last year the Federal Reserve announced that they were going to be buying up corporate debt known as bonds to give money back into the economy. Now, since the Fed just can't go and buy those bonds themselves, they have to go through a middleman who could manage those funds on their behalf, and in this case, the middleman was BlackRock.

Now, in theory, the worry here is that BlackRock would be able to go and buy their own corporate bonds, give themselves free infinite loans, and then go and use those loans to buy investments. But it's worth noting that BlackRock waived asset management fees on ETFs purchased on behalf of the Fed, and according to the Federal Reserve, BlackRock is just our agent. We make the policy decisions in conjunction with our colleagues, and they just execute our plans.

And so far, one year later, there is no indication that BlackRock is out there buying up their own loans, and under this agreement, they would be entitled to the same benefits as any other company, with no preferential treatment at all. Therefore, from all the factual evidence that I could find that's not written by a guy wearing a tinfoil hat and using a VPN because he's convinced the government is spying on him, there is just zero evidence that BlackRock is bailing out its ETFs with Fed money while taxpayers take the losses.

It's understandable that people are angry, and it's really easy to blame a nameless, faceless Wall Street institution as the root cause of all the issues. But truth be told, you want to know who's driving up the housing market? Well, it's literally everyone looking to buy a house right now, who's incentivized to go and buy real estate because interest rates are really, really cheap. That's it.

Just think about this rationally: for a giant multi-billion dollar corporation like BlackRock, taking the time to compete with 20 offers on random residential neighborhoods across the U.S. would be a logistical nightmare for them. It just doesn't make any sense. And in order for them to actually make a profit, they need to operate within the economy of scale and have the infrastructure already set up well in advance in order to make offers, key properties rented, and make sure they're repaired.

Instead, institutional investors are way more likely to develop their own subdivisions in scale, with the intention of purposely building out to rent long term. This way, they could keep all of the profit to themselves. They pay significantly less than it would cost to buy each of those homes individually across the U.S., and they're able to maintain quality control from start to finish.

The Urban Institute also said that there really isn't any evidence in our research that institutional investors led to higher rents or greater eviction rates for a sample of counties tracked through the recovery, meaning institutional buyers are not responsible for the current state of the housing market or the largest rental increase in the last 15 years.

The data to support this is also really obvious, with actual homeownership rates having increased at their fastest level ever in history in 2020. Unfortunately though, this entire story is really just like a bad game of telephone, which slowly got warped and distorted as it was passed on from one publication who covered another publication who covered another publication, until eventually straight up misinformation is spread by people on Twitter who have absolutely no idea what they're talking about.

So those are the facts, and for anyone wanting to learn more, I will list all of my verifiable sources down below in the description for you to see. Lastly, before we end, I just want to say a huge thank you to BlackRock for sponsoring this video—just kidding, guys, that was a joke! But seriously, guys, if you enjoyed this video and you find it helpful, just do me a huge favor: all I ask is that you hit the like button.