US Housing Crisis

Profits over people in US housing crisis

Home ownership is a cornerstone of the American dream and a key step in building generational wealth. But that dream is being threatened by a perfect storm of contributing factors, including supply issues, inefficient public policies, inflationary pressures and predatory practices by private equity investors.

Housing is treated like a commodity rather than a human right in most of the world and this can lead to a housing crisis. Decades ago, the US signed international covenants that recognise decent, safe and secure housing as a crucial component to an adequate standard of living. But the country has done little to protect that right, unlike France, Scotland and South Africa, which have addressed housing rights at the constitutional and legislative level.

According to a recent report from Freddie Mac, a government-sponsored enterprise that buys, pools and sells home loans as mortgage-backed securities to private investors, the housing supply deficit in the US in late 2020 had risen to 3.8 million units — about 52 percent higher than 2018.

Identified by Nouriel Roubini, the root of this deficit reaches back to the housing bubble and global financial crisis of 2008, which Wall Street and the US Federal Reserve both played a hand in causing. The Fed set the stage by lowering the federal funds rate from 6.5 percent in May 2000 to 1 percent in June 2003 — the lowest in 45 years. Wall Street fuelled the flames by pushing cheap credit and lax lending standards.

Subprime borrowers, those without income or assets, were easily approved for home loans, only to default in record numbers after the Fed began inching up the interest rates. When the housing bubble burst, it sent reverberations across the global financial system. Ordinary citizens paid the price, as the government opted to bail out banks rather than consumers and small businesses.

Emerson Claus, the president of the Home Builders and Remodelers Association of Massachusetts, was working in Florida when the bottom fell out. He says it was a “bloodbath”, and many homebuilders went under. As business slowed, scores of tradespeople left the industry and got retrained for other fields. Workers became harder to come by, and even after Americans started buying homes again, the slump in building persisted.

Claus says the pandemic has exacerbated an already difficult situation. One door recently took six months to arrive; ordering a new dishwasher could take up to a year.

Home ownership is a far-fetched dream for those who are struggling just to pay rent. The US Census Bureau reported a national poverty rate in 2021 of 12.8 percent, with significant variance between age groups and regions. The poverty rate for people under 18 was 16.9 percent and 10.3 percent for those 65 and over. State poverty rates ranged between 8.1 percent and 27.7 percent.

Rent is growing faster than wages, according to data from the American tech real-estate marketplace group, Zillow. For minimum wage workers, there isn’t a single county in the US where they could afford a modest two-bedroom rental home.  This represents a very worrying housing crisis.

According to Redfin, a technology-powered real estate brokerage, the median monthly asking rent in the US surpassed $2,000 for the first time in May 2022.

“More people are opting to live alone, and rising mortgage-interest rates are forcing would-be homebuyers to keep renting,” said Redfin deputy chief economist Taylor Marr. “These are among the demand-side pressures keeping rents sky-high. While renting has become more expensive, it is now more attractive than buying for many Americans this year as mortgage payments have surpassed rents on many homes. Although we expect rent-price growth to continue to slow in the coming months, it will likely remain high, causing ongoing affordability issues for renters.”

HUD (the US Department of Housing and Urban Development) defines cost-burdened families as those “who pay more than 30 percent of their income for housing” and “may have difficulty affording necessities such as food, clothing, transportation and medical care.” Severe rent burden is defined as paying more than 50 percent of one’s income on rent and can result in a severe housing crisis.

In 2019, 23.4 million Americans lived in households that paid more than half their income on rent and utilities. According to the Harvard Joint Centre for Housing Studies, the national stock of available rentals rose by 13.3 million units from 1990 to 2019 — but availability at the lowest end of the price range fell by 3.9 million units. The country only has 7.4 million affordable housing units, but those homes are often taken off the market by households with more buying power. Low- and very-low-income households have claimed 2.1 million affordable housing units; middle- and above-median-income households have taken another 1.3 million units off the market. Barely half of the available affordable housing stock is left for extremely low-income households.

According to the National Low Income Housing Coalition, no state has adequate housing for its lowest income renters and this represents an obvious housing crisis. Average statistics show only 36 affordable rental homes available for every 100 extremely low-income renter households. In Nevada, where 81 percent of the population qualifies as extremely low-income renter households with severe cost burden, the figures are 18 out of 100. California trails a close second in this list, with severe cost-burdened households accounting for 76 percent of population and 23 affordable rental homes available per 100 extremely low-income renter households. These households fare only marginally better in the south east of the US — specifically West Virginia, Alabama, Mississippi and Kentucky — where over 60 percent of the population suffers severe cost burden and the availability of affordable rental homes meets slightly more than half of the need.

Corporate landlords enrich shareholders, not communities and create a housing crisis

Private equity investors are replacing mom-and-pop landlords and individual-owned rental companies; residents are suffering the consequences. A decade ago, about a third of the 35 largest owners of multifamily apartment buildings were backed by private equity firms. By 2021, half of them were. According to analysis from ProPublica, private equity firms benefited from 85 percent of Freddie Mac’s biggest apartment complex deals.

Greystar, a real estate developer and manager with operations in nine countries and $59bn in AUM, topped that list. When Greystone took over the Olume building in San Francisco, Daniel Cooper, a former resident, expected his rent to rise but not for the quality of life to deteriorate.

“Our building was recently acquired by a new firm which has shown nothing but contempt for existing residents,” Cooper posted online, “and a desire to increase profits.”

Rental renewals, fees and penalties saw a steep increase, while trash collection, cleaning services and security measures were cut back. The building began to fall into disrepair. When the boiler went out, some renters were forced to heat bathwater on the stove or shower at a friend’s place. When large appliances needed repair or replacing, tenants were told to wash laundry in unoccupied apartments.

“We would be told for weeks on end that requests for repairs were awaiting corporate approval,” Cooper said.

After numerous tenants filed complaints, the city had to issue an abatement order before the building’s violations were finally addressed. Before Greystar took over, the building was owned and managed by Monogram Residential Trust, a publicly traded real estate investment trust. Under Monogram management, any building malfunctions were resolved within days, without needing repeated complaints, visits from an inspector or a municipal hearing.

Bob Faith, the founder and CEO of Greystar, boasted in a 2010 interview about his ability to squeeze money from real estate investments. “Many times we take over an asset that perhaps was managed by a smaller organisation that hasn’t been focused on the bottom line. We can drive dramatic savings out of the expense side of the equation, even in a flat or slightly declining market.”

Freddie Mac provided Greystar with a $1.8bn financing package to acquire the Olume as well as other apartment buildings across 10 states. The deal closed in 2017 and set a new record for the biggest loan Freddie Mac had ever extended to a single borrower. According to data from Freddie Mac, Greystar achieved a 24 percent spike in profits between 2018 and 2019 by shrinking expenses and raising revenues.

In response to recent bad press, Greystar issued the following statement: “Resident satisfaction is very important to us, and we regularly survey our residents to gauge their level of satisfaction, to help us address issues and identify opportunities to make improvements in our services.”

After nearly doubling its portfolio of apartments between 2016 and 2021, Greystar has become the sixth largest owner of apartment complexes in the US.

Private equity preying on the most vulnerable and enabling the housing crisis

Meanwhile, the homes of some of poorest people in the US are being bought by the some of the biggest private equity firms, like the Carlyle Group, TPG and Blackstone — often using tax-payer-backed, low-interest loans from Freddie Mac and Fannie Mae.

There are around 20 million Americans living in manufactured homes, many of whom rely on fixed income from social security and disability benefits. According to Fannie Mae, more than a quarter of manufactured home owners and over a third of renters are trying to make-do on less than $20,000 a year.

Unlike brick-and-mortar homes or apartments, a manufactured home doesn’t make for a good investment. The value depreciates over time, similar to a car. Within a few short years, a $50,000 mobile home might be valued at only $10,000. Manufactured homes are financed through high-interest “chattel” loans and don’t qualify for the same tax benefits as site-built homes or apartments.

About a third of mobile home residents own their homes — but few own the land underneath it. Most manufactured home residents live in communities where they pay monthly lot rent.

Before corporate investors got involved, lot rent rarely increased more than four to six percent annually. Some residents hadn’t seen a price increase in years. Now, many residents are reporting increases of 10 to 25 percent, while others are slammed with lot rents that have doubled or tripled.

Out-of-state investors exploiting a captive customer base

Manufactured homes are frequently called mobile homes, which is only a correct nomenclature when the homes come from the manufacturer or dealership. But after years of residency, moving them becomes increasingly cost prohibitive. Once they’ve been put together, 80 percent of mobile homes never move again. Attempting to move a mobile home could cost between $5,000 and $20,000 — if it can be moved at all.

Frank Rolfe and Dave Reynolds rank as the fifth largest owner of mobile home parks in the US, with a $500m portfolio including over 21,000 lots. They also co-founded Mobile Home University, which tours the US delivering courses on how to extract the highest profits from captive residents. Rolfe was recorded encouraging park landlords to be “heartless” with customers. If residents object to rent hikes, they can walk, but they’ll have to abandon their home. Then the landlord can recycle the property and rent it out to someone else. “You really hold all the cards,” said Rolfe. “So, the question is, what do you want to do? How high do you want to go?”

Rolfe shares tips with would-be investors for free through an online forum, monthly newsletters and weekly podcasts. He also offers a bootcamp version of the course, complete with trailer-park bus tours and warnings not to be “turned off” by residents’ low-class living standards.

“One of the big drivers to making money is the ability to increase the rent,” Rolfe explained in an audio seminar. “If we didn’t have them hostage, if they weren’t stuck in those homes in the mobile home lots, it would be a whole different picture.”

Protection policies scarce

Resident-owned communities are one solution to private equity’s invasion of America’s trailer parks. ROC USA, a non-profit social venture founded in 2008, has been helping mobile home residents take ownership of their communities. It currently works with 304 resident-owned communities nationwide.

If Congress were truly concerned about addressing the affordable housing situation, it could pass laws granting residents a Right of First Refusal (ROFR) and allowing them sufficient time to raise the necessary funds to purchase their home. Despite calls from advocates, it has yet to exercise that power.

In the meantime, prospective tenants might negotiate a ROFR clause with their landlord, essentially giving them first dibs on buying their home if the owner ever decides to sell. These clauses are uncommon, but not unheard of.

In 1980, Washington DC passed the Tenant Opportunity to Purchase Act (TOPA), requiring that tenants be given the first opportunity to purchase their building if it’s going to be sold. The law is credited with helping to preserve some measure of affordable housing in the capital city, creating nearly 100 limited-equity cooperatives that provide over 4,300 units of affordable housing. Proponents claim TOPA gives residents collective bargaining power and better access to funding sources. It also helps to prevent gentrification and the displacement of working-class citizens, lessening the socio-economic divide between owners and renters. Nonprofit Quarterly points out how the disparity in DC — like most the US — is compounded by race, as most of the city’s low-income households are ethnic minorities.

Other cities — like San Francisco, Boston, New York and Minneapolis — have begun to introduce similar tenant protection initiatives.

Rent stabilisation or rent control laws can also protect residents by freezing rental prices or capping rental increases. As of 2022, there are only six states — California, Maryland, New Jersey, New York, Oregon and Minnesota — and the District of Columbia that allow municipalities to enact rent control policies. Manufactured homes are excluded from these protection policies. Meanwhile, over 30 states have passed legislation banning rent control initiatives.

But even in cities with rent control protection, tenants can face harassment from landlords seeking to force them out. Some take advantage of loopholes that allow them to sell the building if rent-controlled occupancy falls below a certain threshold. Tenants recount horror stories of unfounded eviction threats, non-stop construction, shut-off utilities, neglected repairs, buy-out coercion and refusal to accept rental payments.

The Federal Housing Assistance programme (including Housing Choice and Section-Eight vouchers) could help lower-income households by covering housing expenses that exceed the 30-percent marker. But the programme is massively underfunded, and qualified applicants can wait years before being approved. Federal rental assistance is provided to 5.2 million American households, but it still falls short. Only one in four households in need receives assistance. Poverty is stigmatised and many landlords refuse to accept federal assistance housing vouchers.

If residents fall behind on rent, they can be evicted during this housing crisis. A Colorado study found that lawyers represented 89 percent of landlords in eviction cases, while less than one percent of tenants benefited from legal counsel. An eviction conviction stays on a person’s record for life, which can give landlords an excuse to refuse prospective tenants and ultimately push families into homelessness.

New York enacted legislation to ensure tenants’ right to counsel during eviction cases, leading to a 41 percent decrease in residential evictions from 2013 to 2021.

Meanwhile, Bob Nicolls, owner of Monarch Investment and Management Group, has been deemed the “Wolf of Main Street” by Bloomberg for using evictions to drive up rents during the pandemic.

“We have an unprecedented opportunity to really press rents. The country’s highly occupied; we’re at 97.5 percent. And so, where are people going to go? They can’t go anywhere. We have a tremendous opportunity to press on renewing leases for existing residents and to reset market rates — which we’ve reset numerous times even this year,” Nicolls said in a videotaped meeting with investors in September 2021.

 

---