Hedge Funds Outbidding Average Americans for Single Family Homes
by John Lawrence
Want to know why single family homes are less affordable? Hedge funds are buying them up and turning them into rentals. The long term implications of this are that the American people will become a nation of renters. Home ownership has been the traditional way that Americans have increased wealth. A home represents an asset which increases in value over the years. Renters typically end up with no assets and very little to provide for themselves in old age. Those with fixed incomes are even priced out of the rental market as rents continue to increase. That's why so many seniors are ending up on the streets. This issue is even becoming noticed by Democratic politicians. In the Senate, the End Hedge Fund Control of American Homes Act of 2023 would force big investors to sell off all the single-family homes they own over a period of 10 years, and eventually ban hedge funds from owning any single-family homes entirely. "The housing in our neighborhoods should be homes for people, not profit centers for Wall Street," co-author of the bill, Senator Jeff Merkley, D-Ore., said in a press release. "Yet, in every corner of the country, giant financial corporations are buying up housing and driving up both rents and home prices. It's time for Congress to put in place commonsense guardrails that ensure all families have a fair chance to buy or rent a decent home in their community at a price they can afford."
If home ownership is taken off the table for most Americans, there is only one asset class remaining in order to build wealth - the stock market. Today about 58% of Americans are invested in the stock market in some form or other. That's a huge increase from 1990 when only about 20%of Americans owned stock. If the stock market continues to go up in value, those Americans so invested will have a nest egg in their advanced years. However, there is no guarantee that this will be the case. Money has been made in the stock market, and money has been lost. Home ownership by and large has always been a much safer bet. The dotcom bubble of 2000 was a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies in the late 1990s. When the bubble burst, the Nasdaq, which rose five-fold between 1995 and 2000, saw an almost 77% drop, resulting in a loss of billions of dollars. Home ownership, however, maintained its value. It took 15 years for the stock market to regain its value.
This does not augur well for Americans who are placing all their bets on the stock market to provide for them in old age. Stock market based wealth can vary considerably over time based on economic conditions over which the average investor has no control. Sophisticated investors can buy and sell on an almost instantaneous basis. The average American, however, doesn't have the expertise to exit the market if a crash or even a downturn is imminent. The stock market does not represent a stable investment in the same way that real estate does. Even though real estate values collapsed during the 2007-2008 Great Recession, rents remained stable in that time period. Notably rents did not decrease. Between 2007 and 2011, the worst years of the 2008 Recession, rental prices increased. So an investor in rental property continued to receive the same or more rent, even if the underlying property value decreased temporarily. People should not look to the stock market for all their wealth building needs because it can collapse leaving one with nothing. A rental investment, however, will probably continue to produce rental income in perpetuity unlike a pension or social security which will terminate on the death of the recipient. "This [affordability] crisis [for home ownership] has been exacerbated in recent years by an increasing number of large investors purchasing a significant percentage of single-family homes, squeezing out prospective buyers," said Rep. Adam Smith, D-Wash., in a statement.
Three U.S. presidents were instrumental in establishing Thanksgiving as a regular national event. On October 3, 1789, George Washington declared the first federal Thanksgiving holiday. In 1863, Abraham Lincoln made it an annual federal holiday. And in 1941, Franklin Roosevelt signed a bill setting the date at the fourth Thursday of every November. All three presidents were giving thanks for bringing the country through a major financial crisis related to war, and they all achieved this feat through what Sen. Henry Clay called the “American system” of banking and finance – sovereign or government-issued money and credit.
For Washington, the challenge was freeing the American colonies from the imperial rule of Britain, then the world’s leading military power, when the new government lacked a source of funding. Lincoln faced a similar challenge, leading the Northern states in a civil war while lacking a national bank or national currency to fund it. For Roosevelt, the challenge was bringing the country through the Great Depression and World War II, when 9,000 banks had gone bankrupt at the beginning of his first term and the country was again without a source of credit.
In 1796, after 20 years of public service, George Washington warned in his farewell address to “cherish public credit” and avoid “accumulation of debt,” and to “avoid foreign entanglements” (“steer clear of permanent alliances with any portion of the foreign world”). He would no doubt be alarmed to see where we are 227 years later. We have a federal debt of $33.7 trillion, bearing an interest tab of nearly $1 trillion annually — over one-third of personal tax receipts. And we have a military budget from “foreign entanglements” that is also approaching one trillion dollars, devouring more than half the annual discretionary budget. Meanwhile, according to the American Society of Civil Engineers, the country is in serious need of infrastructure funding, tallied at $3 trillion or more; but our debt-strapped Congress has no appetite or capacity for further infrastructure outlays.
However, Washington, Lincoln and Roosevelt faced financial challenges that were equally daunting in their day; and the country came through them and continued to thrive, using a funding device that Benjamin Franklin described as “a mystery even to the politicians.”
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