Benefitting from Housing’s Burst Bubble
I recently purchased a home in Los Angeles, something I wasn’t sure I’d ever be able to afford. When prices started skyrocketing in the mid-2000s, like many other people I chose not to buy and saved my money instead. I was glad I did, despite some acquaintances insisting that prices would only get higher. In 2005, the median price of a single family home in Los Angeles was about $529,000; by 2008 the median price fell to $340,000. (The median is the point at which half of all homes cost less, and half cost more).
After watching prices and interest rates fall, I began looking in earnest. I got very excited to see I could actually afford to buy in a neighborhood where I would like to live. I began by looking online, and found many places that fit my criteria: in my price range, a reasonable commute to work, nearby places to walk or hike, and safe enough for me to take a walk alone. In fact, there were so many places that I got picky, at first only wanting to see places that had been decorated to my taste. If I didn’t like the flooring or the kitchen countertops, I passed. Most of the listings were short sales, meaning the homeowner owed more on their mortgage than they could expect to sell for. Banks will often agree to accept less money in order to avoid the more expensive and time consuming foreclosure process.
A few months into my search I saw the market change. No longer were properties lingering on the market for months as they had before, going for thousands less than their initial asking price. People started snapping up condos and houses, often within days of their being placed on the market. Many had multiple offers: I was outbid on two offers I made by buyers who were paying with all cash.
Finally I got lucky. A townhouse in my ideal neighborhood came on the market. Once again, there were multiple offers, but apparently none with all cash. Since mine was the highest offer, the seller accepted, and now at long last I am a homeowner.
Not everyone who has been patiently waiting and saving has been so lucky. As the Los Angeles Times recently reported, the relatively low price of homes in southern California has attracted Wall Street investment firms into the market. Able to pay cash and close deals in a matter of days, rather than the 4-6 weeks it takes most buyers who need to take out a bank loan, investment firms have gone into the rental business.
The Times reports detail stories of middle-class would-be homeowners who found themselves outbid on every home they tried to buy, unable to compete financially with big companies with deep pockets. An economist quoted in the Times article stated, “They create the problem — and now they are taking advantage of the problem,” referring to the idea that the financial sector created the housing bubble in the first place, by providing risky loans to homeowners, then selling these loans to investors. When these investments collapsed, so did many financial firms, leading to the government’s bailout of the financial industry a few years ago.
The investment firms are focusing primarily on the Inland Empire section of southern California, one of the hardest hit by the housing crisis, and one of the more affordable areas of the region. Targeting this area leaves lower-middle class and working class buyers largely out of the housing market. While pricier neighborhoods have also seen real estate prices decline, the drops are more modest and there are fewer properties available, so people in higher income brackets are less affected by this practice.
Not only does this leave many people who have saved their money, have good credit, and can afford to buy a home on the sidelines, but the cost of renting has risen too. Those who have trouble finding a home to purchase have to pay more in rent, and they are subject to rental increases and cannot benefit from mortgage tax deductions or build equity in their home—the largest source of wealth for most Americans.
Would-be homeowners have to compete with investment companies, and the competition itself has led to an increase in home prices. When there are more buyers than sellers prices can rise quickly, especially when inventory is low. Many homeowners, seeing that prices are rising, may choose to wait to sell their homes in hopes of reaping bigger sales prices later.
The practice of buying multiple properties to use as rentals affects more than just potential buyers. Firms have bought about 20,000 homes in nine areas, according to the report, including 74 in one neighborhood. Communities filled with renters are generally less stable, as absentee landlords might have less incentive to keep up the properties and make minor improvements that maintain neighborhood property values. So a homeowner on a street filled with rentals might see their property value decline through no fault of their own.
The decision to become a homeowner is a big one, and the process of looking can be exhausting. Putting in an offer only to be outbid can be a hug emotional letdown. But more importantly, it can perpetuate economic inequality by systematically keeping responsible people with modest incomes out of homeownership.