Thanks to Bernie Sanders, this topic is pretty interesting. His question:
Should People Profit From Housing?
If we think government is a solution to free market ups and downs, you are seriously mistaken. The profit motive drives all of us (including socialist leaders and dictators who stay in power down to home buyers and home sellers)…to offer goods and services for their highest values motivates us all to acquire more money to get more things and other benefits. Investors are no different, they want a return in their money…that includes large and small investors alike.
I understand Bernie Sanders may be talking about high priced rental and housing costs in mega, highly congested cities of Democratic control (San Francisco, Chicago, New York, Los Angeles, Atlanta, etc), but he is just playing the old socialist wealth jealousy game here and pandering to those college graduates who didn’t get well paying jobs from their useless degrees. And if you’ve notice migration of company growth, they are moving away from the congested cities into more favorable Republican controlled cities and states that offer more affordable housing and employment for its residents.
The plan of iBuyers (large instant cash investor/buyers – see My iBuyer post on my blog and listen to my iBuyer podcast) is to capture at least 10% of the residential real estate market in the next few years. That represents 10s of millions of single family homes.
But talk about residential real estate disruption. Uncle Bernie’s plan could create significant turmoil in real estate by negatively affecting more than his intended targets (evil, greedy landlords and developers)….as any government plan to control something has proven.
First, iBuyers are scooping up potential homes that first time homebuyers can still buy, so inventory levels exist but at a lower level than if iBuyers weren’t there. But homeowners are also somewhat to blame since in exchange for a quick dollar (greed or convenience) they want to sell for about 10% less than the free market would pay in exchange for perceived convenience of quick closings and don’t have to make upgrades or changes to the property. Bernie’s plan would stop this greed of home sellers! But this also both diminishes and prevents wealth building through individual home ownership for some homeowners who are willing to buy homes and fix them up themselves. When iBuyers purchase the bottom 1/3 of prices of homes (easier to rent or flip since most in this price range are affordable to most home buyers) they fix them up (make improvements) and resell about 2/3 of them. That way home buyers still purchase homes, but upgraded and improved over what they “could have purchased” and they don’t have to put up with the contractors and disruption. A win-win for home buyers and investors. Message: Free market capitalism works.
Second, iBuyers generally purchase the lower 1/3 price range of homes which are the types of homes generally are most affordable rentals. If they control the inventory of homes for rent in their market, they can control rental rates in those markets. Is this bad? Yes, if there are few alternatives and if one investor purchase all homes in a rental market. But dozens of investors usually exist in each market and no one investor normally controls rents for very long (even though one investor purchased over 100 properties within a 3 mile radius of my home, several other investors purchased more). There is a lot of competitors in the marketplace when there is profit potential and rental rates vary based on alternatives in marketplace, return on investment each investor is seeking, location of property for rent, and several other factors. Message: Free market capitalism works.
Sanders also proposes a national rent control standard (the amount that landlords can raise rents) which lowers the profit incentive for investors to purchase homes to rent. This discourages property investments (less housing is generated thereby reducing supply not only creating a shortage of available places to rent, but thereby putting artificial upward pressure on rents that skyrocket once caps are removed). It also discourages investments for improvements/upgrades/repairs to properties (not as nice of homes on inside and out to live in). And it places artificial pressure on all landlords to raise the rents to the maximum allowed instead of allowing the free market to make the price decision. And basically, if investors can’t meet their profit goals, they can close the building (where do these residents go?) and sell it to a developer that will tear residential down and build something else…thereby reducing available housing for all. Message: Free market capitalism works.
Sanders also proposes a hefty tax on house flipping within five years of purchase. This is intended to curb rapid turnover of real estate for profit, but will curb the properties available for sale which in turn will boost prices even higher (and more unaffordable) due to low inventory and make more profit for investors on fewer sales. So when government tries to get involved, it screws up a market. If flippers continue to turn properties at lower prices and make profit yet low priced enough for first time home buyers to make their purchase, this boosts home ownership for individuals. Under Bernie Sanders proposal, more properties would be held as rentals and prohibit home ownership. Mr. Sanders’s proposal would also put a hefty tax on house flipping, hitting owners who sell a property for more than the original price within five years of purchase (for a place they don’t occupy). What about someone who closes on a home purchase and moves out of their current house before it sells? Someone who has put a property on the market and struggled to sell it for months might end up facing this tax. This makes little sense.
So like it or not, you need to really look at what Bernie Sanders is proposing. To limit the iBuyer acquisition of millions of homes, yes – this may limit their power over local zoning boards and lower priced homes and rental home market. So there is some merit to what Bernie is proposing, even though it’s socialistic and government controlled. The trouble is, many of these purchases are made by dozens of individual LLCs or other shell companies and then transferred over to iBuyers and thereby hiding their true identity until they own thousands and eventually perhaps millions of homes.
Bottom line: Bernie’s proposal may sound like a “sweet solution” to highly congested areas of today’s “unaffordable housing” issues, but digging deeper and following the proposals out to eventual results, it will significantly lower housing inventory and push rents as high as possible. Free market capitalism isn’t perfect, but it has a self regulating behavior. But when government gets involved with a anti-capitalism solution to a perceived problem, all kinds of troubles are created and legislatures continue to attempt to correct those problems (by adjusting existing or creating new legislation to chase issues that grow faster than they can catch up) that spawn from their initial involvement.