Some People Just Never Will Understand Markets

All rather Upton Sinclair of course, there would be no point in someone writing for the American Prospect understanding markets because anyone who did would lose their job there. But even then this is particularly dismal as an essay upon economic logic:

Speaking of walking away, private equity just closed a chapter on the opportunity it sought out of the misery of the financial crisis. As millions of families suffered the sting of foreclosure, private equity firms fanned out to distressed areas across the country and scooped up foreclosed properties, spending about $100 million a week. They quickly turned over the properties and rented them out, behaving exactly the way you’d expect a Wall Street landlord to: offering substandard and often dangerous rentals with mold and busted pipes, dragging their feet at making repairs, jacking up rents at will, layering on hidden charges, evicting aggressively.

After inventing the industry, firms sought to cash out, consolidating the Wall Street rental market into a few firms. Blackstone, the largest private equity firm, was the last, merging Invitation Homes with Starwood Waypoint for an empire of 82,000 homes. On Wednesday, they sold the last of the stock, bringing their haul to $7 billion since the 2017 Invitation Homes IPO. That’s more than double the initial investment. So Blackstone disrupted rental markets, delivered poor-quality homes to many of the same people who lost theirs in the first place, contributed to the global affordable-housing crisis, according to a U.N. special rapporteur, and made off with billions in the process.

So, what does someone buying lots of houses do? It props up the price of houses. The more people who buy houses the higher houses prices will be than in the absence of such buyers.

The effect upon foreclosures of private equity buying houses was thus fewer foreclosures. Which sounds like a pretty good start to solving a foreclosure crisis, that we have fewer foreclosures.

But then with Upton again. You’re not going to make a living writing like that for the American left.

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Leo Savantt
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Leo Savantt

The American left son’t seem as detached from reality as the British variety, but now I’m beginning to wonder.

Gavin Longmuir
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Gavin Longmuir

“… rented them out, behaving exactly the way you’d expect a Wall Street landlord to: offering substandard and often dangerous rentals with mold and busted pipes, dragging their feet at making repairs …” So the evil capitalist invests his hard-earned money in a rental property, than allows the rental property to deteriorate, thus destroying his own capital? Yes, it does happen. But those are the incompetent capitalists, not the evil ones. Darwin takes care of the incompetent. Side comment — a gentleman who invested a lot of his money and time in rental properties once told me what he had… Read more »

Spike
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Spike

“People are no damn good” following the enactment of entitlements. Renters are shockingly inconsiderate once the law regards reality as a conflict between renters and landlords and takes the side of renters. By the way, since the infestation of marked crosswalks, pedestrians are shockingly inconsiderate.

Spike
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Spike

Investors were stung during the financial crisis; they did not bring it about in hopes of profiting from the ensuing fire sales. But having scooped up some of those assets, Gavin is right that the chance an investor mismanages his acquisition (for which he alone suffers) is not a systemic problem. Guy mentions Wall Street more often than Sanders and Warren, the vital and misunderstood industry that gets underperforming and abandoned assets into the hands of people who can do something about it.

Barks
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Barks

Wait a second here. Are we to be shocked today by “private equity” or “hedge fund”? It’s difficult to keep up with the current bogeyman.

Mark T
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Mark T

If they doubled their money in 10 years, that is only a 7% annual rate of return. Not bad in a low interest rate environment but hardly ‘ making off with billions’. Otherwise it sounds like a pretty good private sector response as you say – speculators get caught with their pants down, new money comes in and picks up cheap assets then consolidates sector to gain economies of scale. The rest of it sounds like analysis by anecdote. Personally I suspect that the larger corporate landlords tend to be more efficient than the average private one, not least because… Read more »

Phoenix44
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Phoenix44

So the houses became substandard immediately on being bought by private equity somehow? And if you are going to sell a house, and investing in it will make it sell for more, why would they not invest in it?