Saturday, November 10, 2012

Peon Irritated

Those of you who also watch Fox News probably can't figure out why I would be irritated at this point.  After all, we raised taxes, elected some Democrats, turned back an anti-union initiative, saved Obamacare, and generally had a high old time.  But we may get Erskine Bowles (sign the petition against him here), have to listen to people making racist comments and informing us that California is "doomed."  California is not doomed, unless you think doom is paying for the services you want, requiring rich people to pay a fair share, and you don't want to turn the political system over to the Brothers Koch.  Yeesh!

But Peon is irritated.  And it all goes back to housing foreclosures.  Yes, Peon has written on the subject before.  But now there's a new insult to the renting class, and it's that we, like our now-forsaken homeowner comrades, are going to bring down the financial system.  Yes, us, the lazy and shiftless, who didn't even get it together to buy a house with an exploding mortgage.  After all, if you could fog a mirror, you could buy a house, and we didn't.  We irresponsibly spent our incomes on hooch and high-living, giving not a fig for our obligation to help out the banks by taking on one of their innovative mortgage products.

But now it's our turn.  We're sitting here, perfectly positioned, ready to help crash the economy, evil half-smiles on our disreputable faces.  How will we do this, you ask?  You don't have any money (although that doesn't distinguish us at this point from most of the rest of our fellows), you pay by the month, and defaulting is a fast and risky process.

But we can.  And here's how.  The housing bubble left a lot of properties littering the landscape.  Some of them are empty, many need a fair amount of work, and because of rapid price increases in low- and moderate-income neighborhoods, many of them are not in the best locations.  Some of them are in neighborhoods that are slightly scary.  ("No," J said to me, after seeing one of them.  "You walk with a cane, slowly.  No.")

But somehow, some way, all these properties have to be, uh, disposed of.  Some of them were so bad, especially after the former owners vacated and the houses sat around for a couple of years, that cities are just tearing them down.  But that still leaves a lot of houses.  Dean Baker, who called the housing bubble in 2002, and warned particularly of the effect it would have on low- and moderate-income buyers, proposed that the former homeowners remain in their foreclosed homes as renters, thus sparing them homelessness, and us the "life after people" landscape.  Alas, there was little interest in something that required so little bureaucracy, didn't punish people for alleged misdeeds, and let the banks and investors take responsibility for their stupidity.  Worse than that, the investing class didn't see that they'd make much money off the process.

But they've turned that one around.  And now, various investor groups have gotten into the foreclosures-into-profits market in a big way.  They've purchased, singly or in groups of 100 or more, thousands of houses across the country, and converted them into rentals.  Yep, you can rent the house you used to own.  (Yes, we have heard that one before.  See the paragraph above.)  Or a different one.

But some people object to this, for good and bad reasons.  Realtors see bulk sales cutting into their profits, as they don't get to market each of these turkeys and collect a commission.  Affordable housing advocates, however, saw many of these properties as permanent affordable housing.  The prices were so low that the houses could be rehabbed and rented at below-market rates.  But the Obama Administration was more interested in bailing out the financial elite than providing affordable housing, and didn't even consider the idea.

Far more objectionable than even the realtors though, is the assertion on the part of some observers that these investments are a really bad idea because tenants are pretty dicey people and depending on us to pay the rent and not trash the place makes for a really dangerous investment.  Yves Smith and David Dayen have both made arguments that are a variation on this theme, as have some of the right-wing bubble bloggers.  Smith and Dayen couch them more nicely.  It's not that we're a bunch of high-living lowlifes, but that there's no data on costs, vacancy rates, tenant management, and the like.

That may be true, but it's irrelevant.  The investor groups are buying these houses in bulk, and they're getting huge discounts for taking them--at least 40% in most cases.  You'd have to screw up royally not to make money on them.  Hell, if I had the cash, and any interest in landlording, I could make money off them.  Anyone who can do simple arithmetic can figure out that buying a house for $50-60K and renting it out for $1,500 a month is going to make real money.  See, for example, this.

But isn't there a real risk in this?  How many tenants want to pay that much for housing?  What if the tenant moves?  Well, there's not much risk at all.  First, rental vacancies are falling in many communities.  And a lot of people, both former homeowners and victims of the fallout from the bubble, are credit-challenged, which means that landlords can charge more money (sort of like a payday loan for housing) than the market should bear.  And our fellows will just be happy that they have a roof over their heads, and aren't likely to go anywhere.  Finally, it's very easy to get rid of a non-paying tenant, so the investor groups will likely not have more than a month of vacancy.  The vast majority of tenants pay their rent on time, don't trash the place, and are often better-behaved toward their fellows than their homeowner neighbors.

That doesn't mean there isn't risk, but it's mostly of the investors making.  First, when you rent a place for a lot of money, just because you can, tenants become more precarious.  A moderate-income tenant paying half her gross income for rent can be tripped up by a relatively minor car repair, health emergency, or trip to the mall.  Second, if you've sold the rental income stream into securitization, if enough people couldn't pay rent, it could cause problems.  But you take that risk when you charge higher rents than people can pay.  No sympathy.

I did think about one issue--whether tenants might be likely to improve their legal standing--and then decided that it wouldn't matter much.  State Legislatures and City Councils aren't much given to tenants' rights, and aren't likely to change their positions because large investor groups are, or aren't, part of the landlord mix.  If they failed to maintain minimum standards, there might be some increased code enforcement.  But standards in most communities are so low that we'd have to see substantial problems before anything happened.

Owning rental property is very profitable, no matter what the landlord interests tell you about their burdens.  Otherwise landlords wouldn't do it.

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