Wall Street's Newest Scam: Buying all the houses they foreclosed on and renting them back to us
Rents are skyrocketing--up 19% on average over last year--and Wall Street is to blame.
Also, whenever a reporter says the rebounding housing market is a sign of recovery? They're wrong.
It’s clear why people are so excited: Housing typically leads economic recoveries. As more people build equity in their homes, they feel more free to spend disposable income and increase economic activity, a phenomenon known as the “wealth effect.” So a bullish outlook for housing would seemingly augur a long-awaited recovery to Main Street. But the more you look into it, the clearer it becomes that it’s not being driven by the typical American families who lost their homes in the economic crash. In fact, it’s being fueled by the banks and hedge funds whose speculation caused that crash in the first place.
If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street. One of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices. Their strategy is to convert them to rental units for a while before reselling them when prices appreciate. The Wall Street firms are scooping up properties in the hardest-hit areas, promising high returns for the rental revenue streams—up to 10 percent annually —and starting bidding wars that have driven up some prices well above national averages. It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble.
The investment market for REO, which stands for real estate-owned properties (i.e. owned by the bank, typically after a foreclosure), really heated up in 2011. In that year, according to Wall Street analyst Graham Fisher & Co., investors made 27 percent of all home purchases, a number right in line with the housing bubble years of 2004 and 2005. Numbers for 2012 have not yet been released, but indications show it accelerated, particularly in areas with the highest foreclosure rates. Hedge funds and private equity firms seek out foreclosed properties at public auctions, or purchase them through short sales, where a bank agrees to let an underwater buyer sell the home for less than the balance of his or her mortgage. The cheap, often damaged homes usually cost between $100,000 and $150,000, and the investors pay in cash. They routinely promise their backers annual returns from the rental revenue income of anywhere between 6-10 percent, and they typically offer a share of the profits when they eventually flip the homes.
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