December 16th, 2013 10:31 AM by Nick Rapplean
"In what way does this real estate market compute in year-end 2013?"
I want to raise an issue that has been preoccupying me for quite some time all-cash home purchases. I mean, is it just me, or does it run against the grain of your sense of how money works and what the best real estate transactions look like to plunk down a full-price pile of cash for a piece of real estate. Something-- something I don't quite understand... is going on here.
I was raised in the school of saving tax dollars by taking out a purchase money mortgage. Every dollar of interest paid on the mortgage created a deduction on your tax return.
In fact, it still does. And if were talking about an investment property, then were deducting bits of interest and insurance and costs of operation.
But we find ourselves in a time when Blackstone, the humongous investment conglomerate, buys up thousands and thousands of single family residences and then puts them into play as rental properties. It is now the largest private landlord in the U.S. and perhaps in the world having spent $7.5 billion on 40,000 single family residences which is enough to provide a place for all the members of a small-to-medium-sized city to lay their heads down for as long as they may live.
But wait! Is that the plan-- to pay cash for a few tons of real estate and hold on to the lots and houses for a long time, generating profits for investors from the normal operation of these rentals? Handling single-family rentals has long been the domain of mom and pop investing. It's not a cookie cutter sort of task. There are too many differences from one rental property to the next.
So, maybe these investors are just going to hold on to the properties until the time seems right to dispose of them and reap the capital gains from the project. That may be it.
But, notice a few things. First, we have these investors to thank for bidding up the value of underwater properties and allowing their owners to refinance or sell at last. But something instinctual in me says the project wasn't specifically designed to help underwater properties. It was designed to make a lot of money.
Jack McCabe, of McCabe Research & Consulting, came up with a rather chilling term, corporatization of residential real estate. RealtyTrac, meanwhile, warned that were watching a paradox in the housing recovery. A housing boom is taking place alongside a plunging rate of home ownership.
You see, every time an investor buys a property, he or she takes a property off the market and generally doesn’t replace it. Thus, we have Lawrence Yun, the chief economist of NAR, warning that we need more newly-created homes on the market or we are creating a seller/buyer imbalance that may bite us in the nose sometime soon.
It’s not flat-out guaranteed to turn into a serious problem, but I guarantee we should be watching it closely.