From Bad To Worse: Wall Street’s Housing Bet

Prashant Gopal and Patrick Clark at Bloomberg recently wrote about the beating that Wall Street firms are taking at the hands of regular folks in the housing sector.

• “First-time buyers and small investors have the upper hand on supposedly sophisticated players that badly misjudged the market. It’s quite a turnabout. More than a decade ago, Arizona was at the center of a foreclosure wave that hit local mortgage borrowers the hardest. Private equity firms swept into Phoenix and other once-hot US markets to buy at pennies on the dollar. This time it’s the so-called smart money getting played.”

All that fancy technology and algorithms were beaten by local analysts and gut instinct.

• Opendoor hired Wall Street quantitative ­specialists, or quants, to model a portfolio that, in theory, balanced risk and reward…Even when it became clear to many local analysts that the market was stalling, the iBuyers and other institutions kept purchasing. In April, the Cromford Report, a Phoenix data firm, put out a “red flag” to its 2,000 subscribers…

Wall Street firms that bought homes after the ’08 crash have undoubtedly profited as home prices spiked during the pandemic. Firms that bought during the pandemic are more likely to have lost money than made money.

• “In Phoenix, Opendoor lost money on 89% of the homes it sold in the fourth quarter, an average of $58,000 apiece, before accounting for fees and expenses…”

That above statistic is probably a shock to many. One of the theories during the pandemic run up was Wall Street buying up homes all over the country, pricing out wannabe homebuyers, and making money hand over fist in the process. Jerusalem Demsas at the Atlantic says that blaming the housing crisis on hedge funds and private equity may be easy, but it’s dead wrong.

• “I don’t want to be hyperbolic, but the idea that these firms are ultimately responsible for our housing-affordability crisis is absolutely ridiculous, and no one who knows anything about housing markets believes it.“

So how did this easily disprovable myth become canon on Reddit message boards and Twitter? Like everything else does. Bad information. Demsas notes that one particular stat that got a lot of attention online was just plain wrong.

• “A report from the House Financial Services Committee reads that ‘in the third quarter of 2021 alone, institutional investors bought 42.8% of homes for sale in the Atlanta metro area and 38.8% of homes in the Phoenix-Glendale-Scottsdale area.’ These are unbelievably big numbers, and they are—literally unbelievable, that is. The citation provided in the document was not correct, but I was able to find the relevant report and, wouldn’t you know it, that’s not what it says. The report shows only the share of purchases made by investors, not institutional investors.”

This matters because the vast majority of rental properties are owned by individuals not institutional investors. According to Census estimates, 70% of rental properties are owned by individuals compared to Wall Street REITs which own 1% of single-family rentals.

BOTTOM LINE: There is no doubt that during the pandemic Wall Street money was flowing into housing markets all over the country. What is less clear is if Wall Street ever made money doing this. They are certainly losing money now and from all accounts, it looks like they weren’t making much money then either. Let’s not forget Zillow was so bad at iBuying that it almost took down the entire company.