Hedge Fund Gobbles Up Hundreds of Residential Homes in a Day for $98M
Something is happening in the housing market that just doesn’t add up.
Amid rising interest rates and a struggling economy, large investment firms are gobbling up residential rental properties.
The trend is happening nationwide, including in Clark County, Nevada, where a Wall Street-backed firm gobbled up $98 million worth of residential real estate this summer alone, the Las Vegas Review-Journal reported.
Invitation Homes, based in Dallas, acquired a total of 264 homes in and around Las Vegas on July 18 in a swap with another private investment firm, Starwood Capital Group, out of Miami.
The prices averaged $371,514, but ranged from a relatively modest $292,000 up to a sizable $694,000 price tag.
This was only a portion of the $650 million agreement between the investment firms that involved 1,900 single-family residences across the U.S. in places like Texas, Florida, Los Angeles and Phoenix.
It’s also a sliver of a larger trend of hedge funds, private equity firms and other financial institutions adding residential real estate rentals to their portfolios.
The goal for some is to turn the rental income into its own investment in “rental-backed securities” that echo the risky mortgage-backed securities that contributed to the 2008 economic crisis.
“They’ve turned these homes into collateralized rental obligations,” veteran Las Vegas real estate agent Noah Herrera shared.
“They’ve collateralized them and what they’re doing is swapping homes like stocks for one another,” Herrera added.
The switch to rental income came following the 2008 financial crisis, when banks were stuck with foreclosures due to defaults on subprime mortgages and the government helped with the transition of those to rental properties, CNBC reported.
“It was that rare opportunity that attracted the institutions to build a portfolio out of these foreclosed properties,” University of Texas finance and managerial economics assistant professor Steven Xiao told the news outlet.
The trend could change the housing rental market dramatically in the coming years.
A 2022 estimate found that only about 5 percent of single-family dwellings for rent were owned by these types of investors. MetLife Investment Management projected that by 2030, 40 percent of single-family rental properties in the U.S. will be owned by institutional investors.
Besides the potential economic impact this could have, a changing landscape for home buyers and renters alike threatens an important component of the American Dream.
According to the Museum of the American Revolution, Founding Fathers such as Benjamin Franklin, Thomas Jefferson, James Madison and others were committed to the idea that landowners were the backbone of a new nation.
“The small landholders are the most precious part of a state,” Jefferson said in a letter to Madison. Jefferson even put a promise of 50 acres of land to citizens in his draft of the Virginia Constitution.
Contrast this vision with that of the World Economic Forum, which predicted that by 2030,”You will own nothing. And you’ll be happy.”
While it may still seem alarmist to sound the warning at this point, it’s undeniably worrisome that Wall Street is increasingly in control of Main Street residences in places all across the nation.
America’s homes and farms are increasingly in the hands of people who will never set foot anywhere near them, and that’s never a good thing for communities.
As the Founding Fathers understood, people who own their land grow deeper roots in a community because they have more to gain or lose by what happens there.
Investors who sink money into bundled rental income have very little at stake, by contrast.
As troubling as it is to see the changing landscape, a larger cause for concern is that these residential rental investments are coming at a time when most indicators point to a housing market that’s likely about to cool off, with rising interest rates and cash-strapped home buyers.
Such a move begs the question we may be too afraid to find out the answer to: What does Wall Street know that the rest of us don’t?
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