Absentee Investors

Capitalism’s insatiable drive for returns remains a wild card at the center of our economic system, a source of economic instability. A case in point: the current recovery in the housing market may have less to do with the optimism of prospective home-owners about the slowly improving economy as with Wall Street’s demand for new investments.

The last housing bubble was fueled by banks making cheap and unsecured money available to people who couldn’t really afford the houses they were buying. The disconnect in the system, then, was that the mortgages were bundled and sold so that those who bought them had no knowledge of the properties that they were based on. When home-owners defaulted on a massive scale, the banks kept dicing and slicing the “derivatives,” oblivious to the risk.

Now according to The New York Times: “Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.” Once again, those who buy have little or no knowledge of what they are actually buying.

This can look like a recovery, but as an analyst at Fitch put it: “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.” The Times commented: “investment companies, like Blackstone, have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.”

“Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year”. . . . But “he wondered if faraway investors would properly maintain the homes they buy. . . . He also worries what will happen when these investors start selling, as they inevitably will.

“The thing that scares me is the values going up so quickly,” said Mr. Cusumano. “That’s what happened before and that’s what’s scaring me. Is this going to happen again?” (See, “Behind the Rise in House Prices, Wall Street Buyers.”)

The danger is not just to the families who find the value of the homes they live in disintegrate as the new bubble bursts. It is to the underlying health of our economy. Are we seeing real growth, genuine robustness reflecting well-founded consumer confidence? Or are we seeing what we want to see?

It looks like playing has resumed at the casinos. Is the music going to pause in time for investors to reconsider the risk? Or, as last time, are they going to continually recalculate the risk so as to keep on playing? Will competition among the banks and hedge funds make it virtually impossible for them to pull out before it is too late?

Or will they once again fall prey to the group mentality that whispers: “Everyone is doing it, so it must be OK”?