What’s Behind It? Can You Say, “Financial Arbitrage?”
“After a period when cheap mortgages were too available, the pendulum has swung too far; a lack of finance is holding the economy back. The clearest evidence is the growing number of lower and middle-income families paying rents to the private-equity firms that own their homes at rates far above what a mortgage would cost.”
–Larry Summers, “The Growth Agenda We Need“; The Washington Post (Feb. 10, 2013)
I don’t see much evidence of it in the Twin Cities, but apparently in markets like Phoenix, Las Vegas and parts of Florida, (very) well-heeled Wall Street investors are literally buying up tens of thousands of single family homes.
Doing the buying: Wall Street’s Leverage Buyout (“LBO”) types — now rechristened “Private Equity.”
Step #2: rent out the houses to former home owners whose credit is shot, and are now involuntarily renting.
Step #3 (presumably a few years from now): sell the homes at much-higher prices, reaping millions (billions?) in capital gains.
Bullish on Housing? That, Too
It’s easy to view such behavior as a bullish bet on housing — and indeed, it may be.
But what it’s really a bet on is financial arbitrage.
That is, thanks to the Federal Reserve’s policy of zero percent interest rates (“ZIRP”), well-connected, financial behemoths can borrow money virtually for nothing.
Meanwhile, millions of homeowners whose credit was damaged in the housing bust . . . . can’t borrow at all (cue Larry Summer’s quote, above).
Borrowing low and lending high — or in this case, renting — is a surefire way for Wall Street’s especially well-connected to cash in on housing.
Again.
