How A Few Wall-Street Backed Firms Manipulate The Entire US Housing Market

Wolf Richter's picture

Wolf Richter

Private equity firms are the ultimate smart money on Wall Street; they know how to wring out the last dime from their own clients, such as pension funds and rich individuals, through hidden fees, obscure expenses, elaborate expense shifting, lackadaisical disclosure, and “zombie advisers,” to the point where SEC Inspection Chief Andrew Bowden singled them out in a speech in May. Now the lawyers are circling.

And these PE firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another PE product, American Homes 4 Rent, which went public last summer as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.

And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda.

The smart money on Wall Street had a goal.

And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:

A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up.

Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.

The problem with that strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing. From gobbling up and finding renters to...

Selling, securitizing, and consolidating.

But selling them to first-time buyers at these prices – well, forget it. So Waypoint Real Estate Group is trying to “quietly” unload half its inventory of 4,000 homes in California to another company. It also manages another 7,000 homes that an affiliated REIT owns. Och-Ziff Capital Management Group and Oaktree Capital Management have already started selling their homes. Other firms, including Blackstone Group and American Homes 4 Rent have pulled back from buying homes as prices have soared.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already sold $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

Now that they have to focus on making the business model work with what they’ve got, they have to do the grunt work of fixing up tens of thousands of far-flung homes and renting them out one at a time, and keep them rented out, and they have to come to grips with American mobility where strung-out renters wander in and out and are late paying their rent if they can pay at all, and it’s hard, tedious work.

With buying more homes in overheated markets no longer a priority, or even an option, American Homes is embarking on the next step: buying competitors. It just announced that it would acquire Beazer Pre-Owned Rental Homes, a REIT backed by Beazer Homes, PE firm KKR, and others. It now owns 1,300 homes. Everyone had jumped into this Fed-sponsored game, even home builders like Beazer. American Homes CEO David Singelyn put it this way during the earnings call in May: “We will be one of the players in the consolidation of this sector.”

The goal: manipulate the market to their liking. Through consolidation, the biggest players will try to raise valuations – or at least keep them from collapsing – and control the smaller players that are desperate to take their profits by dumping homes on the market and thereby opening the floodgates. All heck would re-break loose in the housing market. It would reverse the flow, and all the paper profits PE firms have already bragged about to their clients would suddenly evaporate. And that must not be allowed to happen.

Housing Bubble 2 has been accompanied by other bubbles. “Asset prices have reached stunning levels, obviously out of line with ‘fundamentals.’ But the “most dangerous” are housing bubbles; when they burst, they “wreck whole economies.” Read.... UBS: The Secret Reason The Fed Is ‘Tolerating’ Bubbles

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eworrall's picture

Blackstone will not lose in this market. It is the US$ that will bear the brunt of the market collapse (in real terms). That means, americans will bear the brunt of the loses ... yet again. Surely you know this game by now?

eworrall's picture

Blackstone will not lose in this market. It is the US$ that will bear the brunt of the market collapse (in real terms). That means, americans will bear the brunt of the loses ... yet again. Surely you know this game by now?

Ban KKiller's picture

Still living in my house for just insurance, upkeep and taxes. In the latest...the Plaintiff now wants to substitute another Plaintiff. This is after the first Plaintiff's attys withdrew. Been three years but the first Plaintiff is quitting. Don't know why, I am a super nice guy. Wonder if my request for sanctions had something to do with it? 

Banksters are bullies and their attorneys are shit brained. In answer to their coming motion to substitute plaintiff, I will ask for sanctions, dismissal with prejudice and the title to be quieted against them.

Foreclosure attorneys KNOW they are working for criminals and KNOW they are using forged, fraudulent docs...

Mr. I-N-The Sky's picture

Did I read that the Big Investors jacked real estate prices on themselves and priced their own selves out of the market?

El Hosel's picture

They jacked up "the market"... What a suprised, its another rigged market.

novictim's picture

Good article but a whole army of financial reporters seem to flee this topic in the mainstream media.

Who are the players?   What about the soon to retire baby boomers?  What happens to this business model when those flood gates crack open?!

Connect this all to ZIRP. When intersest rates hike, home prices will have to fall.  What happens then?

Can the Fed keep these interest rates so low for ever?


CheapBastard's picture

Where I live they are building thousands of new apartment complexes that cover a few blocks each. There are so many hitting the market you see signs now for “3 months free rent” all over the roadsides. Where are all the renters they expect to fill these units? Plus, builders are cranking out questionable quality wooden boxes faster then ever. I watch them occasionally and the wood is so poor and many times the cement slabs are pockmarked, rough or uneven.



It’ll be interesting to see what these look like 10 years down the road.

lotsoffun's picture

2 billion people in china and india.  they are coming, and they will take your job, if you have one.



Ewtman's picture

One of the problems with attempting to manipulate markets is the resulting mal-investment that inevitably corrupts the aim of the corrupters. It's not just the big banks but their crony capitalist politicians as well. And the problem is global...

Jstanley011's picture

"Wall Street is jubilating"

And orgasmitating.

luftmensch's picture

I've seen Blackstone in action at the foreclosure auctions...indiscriminate buying, screwed up the market for the real investors who actually investigate what they're buying..

JoJoJo's picture

In 2012 President of Blackstone hosted a $38.5k/plate dinner for Obama.Later same day Ricky Martin charged only $5k/plate for Obama's LGBTQ (Questioning) community supporters

doctor10's picture

There are two things going on here

First of all Wall St knows that when the entire US housing market gets priced to reality, all their derivative positions get blown to shit as 50-60%  of their mortgages go underwater;

Second of all, Fed.Gov understands that once housing gets priced to reality most municipal tax bases get blown to shit-and the Fed hasn't the bucks to bail the cities out.

In 2008 the Fed Reserves' first response to dervatives hazard caused by squirrelly mortgages dodgily documented should have been to have  paid them ALL off-all over the country. An effective"jubilee reset" would have killed 2 birds with one stone and allowed interest rates to reset at 7-8%


IANAE's picture

"Second of all, Fed.Gov understands that once housing gets priced to reality most municipal tax bases get blown to shit-and the Fed hasn't the bucks to bail the cities out."


This is important... municipalities will feel the tail of this whip when it cracks - if they haven't started to already - despite a large number of recent USPF debt ratings upgrades (S&P issued 774 upgrades vs 166 downgrades for many cases based on revised rating criteria). 

S&P headline last year: "US State & Local Government Credit Condition Forecast: The Rebounding Housing Market Supports Slow Growth"... will be interesting to see what they have to say this time around. 

lotsoffun's picture

everything is fine.  fed has your back /sarc

Crocodile's picture

Who is the largest mortgage holder in the US?  The US taxpayer.

AdvancingTime's picture

When it comes to real estate low interest rates at some point becomes a double edge sword, that effects both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment".

Prices must rise and real estate appreciate more then the natural depreciation from the wear and tear from age or the main driver for owning it vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity. Currently we are in uncharted waters, more on this subject in the article below.

SmittyinLA's picture

Its a 2 pronged assult on housing, you also have to restrict new housing with a rainbow of artificial barriers, in CA the only people that seem to get building permits are israelis.

America has space, resources, labor and capital for literally tens of millions of new houses homes that could be built in most areas for less than half the going rate of existing houses, yet we instead opt for dead forests all over CA WA, NV ORE and unemployment.

Of course housing freedom will kill the Max Stark slumlord slavelord business model, (why would you live in a shitty apartment paying excessive rent when you could be a homeowner for less?) because max Stark would have to get a real job (if he weren't dead).





ncdirtdigger's picture

I love to see vultures fighting over the last remains of a dying carcass. Now that is sport!

Downtoolong's picture

Hey Blackstone Group, what say I buy another one of your houses and you buy another one of mine.

OK American Homes, where shall we set the price?

How about last trade plus 10%?


God, our bonuses are going to be so huge.

You got that right, but, just don’t spend it on something stupid.

You mean like an overpriced house?



blue gkm's picture

houseing prices have doubled in chicago for the same 100 year old crappy houses. I know this article is true. I paid 15000 for my house in 2011, the very next block rehabbed houses  169000. crazy!!

LawsofPhysics's picture

I always chuckle when I hear mention of "multiplyiers" or "the wealth effect".

These are not realized gains until you sell people...

Downtoolong's picture

Ultimately they must find a bag holder for all this inventory or the paper profits on their holdings collapse.

And, “Golly Lenny, this does look like a fantastic investment opportunity. The rate of growth is though the roof”, said your idiot pension fund investment manager.  

AdvancingTime's picture

 I have owned an apartment complex in the Midwest for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. The strong housing market in much of America is a myth.

In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway, today not only have they shed the extra home many have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More on this subject in the article below.

Duc888's picture




Goes back a long way.  Not sure what to make of CAF regarding the spacemen, but she was a EARLY whistleblower.


Lotsa laundering goin' on in FHA.


RIP Michael.

Crawdaddy's picture

Thanks for the link...good read

Cruel Aid's picture

Yep its getting harder and harder to be a slumlord when you have a slumlord bubble.

And flipping, forget it these days. At least flipping is hard work if you do it yourself and that is the money.

Bemused Observer's picture

They're picking through the bones of the market now. Finding there's not much meat left, and what little there is is harder and harder to get.

Good. I hope the miserable fucks eat themselves right into eventual starvation.