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The Phony Debate Over Wall Street and the Housing Crisis

Josh Stephens on
Apr 4, 2021

I know next to nothing about commodities trading. But I do know this: people who buy pork bellies do not make bacon.

Whether they end up on a breakfast plate, on a bun, in a McRib, or as the centerpiece of a celebrity chef's paleo-inspired menu is immaterial to the people who own them. Investors buy commodities (or, rather, the financial idea of commodities) not for what the commodities do but for the simple fact that they exist. They profit when demand grows relative to supply or supply shrinks relative to demand. 

To the person who owns pork bellies, the fewer pork bellies there are in the world the better. 

How, then, is a house like bacon? 

Investors buy a commodity when it is A) relatively scarce; and B) undervalued relative to its scarcity. Homes are undervalued when the cost of purchasing them is relatively less than the cost of renting them (accounting for carrying costs, value-add improvements, etc.). If investors can buy homes such that the value of rent exceeds the cost of ownership ,then they make a profit. This is Real Estate Investing 101. (Not to be confused with Real Estate Developing 101.)

This capitalist axiom makes Los Angeles a ripe target, since the city has some of the highest rent-to-income rates in the country.

Over the past few years, concerns about “Wall Street ownership” of houses in California has grown increasingly serious, with the The Blackstone Group being the poster child for a handful of finance companies that buy up single-family homes, often in disadvantaged areas, only to kick out tenants and increase rents.

They charge as much rent as the market will bear, with little concern for communities and the urban fabric. As absentee landlords, they probably aren’t going to get involved in civic life. Maybe they’re outbidding real people who want their pieces of the American dream and would be better stewards thereof. Maybe they’re going to distribute their profits to horrible human beings who each already own five homes of their own. They are surely displacing and evicting vulnerable residents.

All of those things are bad. But those bad things are all made possible by the opportunity that Blackstone has been given. And, yet, somehow the (justified) ire against Blackstone leads many stakeholders to conclude that, to really stick it to The Man, we need to limit new development. This is completely backwards.

Blackstone deserves derision. Unfortunately, much of the derision comes from a loose alliance of anti-growth homeowners and far-left, anti-Wall Street activists that, rather than solve the problem on which Blackstone is capitalizing, plays right into Blackstone’s hands.

The 80,000 or so homes in Blackstone’s nationwide portfolio and the few thousand homes in its California portfolio do not drive the 3.5 million-unit Los Angeles market. Blackstone did not create a shortage of 3 million units statewide (give or take). Blackstone did not impose restrictive zoning laws. Blackstone did not kill California’s redevelopment system. Blackstone did not drive up rents in the 2010s when recession-stricken millennials emerged out of their parents’ basements. 

Blackstone did not create California's insane real estate market. It is capitalizing on California’s insane real estate market.

The housing market is complex. But, fundamentally, the way to decouple speculation and commodification from housing — whether you own one, ten, or 10,000 houses — is to make housing less scarce. 

That is, generally speaking, what the YIMBY movement is trying to do. It’s what many planners in California are trying to do. It’s even what some elected officials are trying to do, at the state and, sometimes, at the local levels. But it’s rarely what incumbent homeowners are trying to do. 

Many homeowners are their own little Blackstones. Many of the same people who decry the purchase of thousands of homes by Wall Street are the same people who protest the development of new homes in their neighborhoods. Why? Sure, some of them care — a little — about “neighborhood character.” But California’s NIMBY movement has not endured the decades, beginning with its Prop. 13 temper tantrum in 1978, because of neighborhood character. It’s because they don’t want to endanger their property values. 

Last year’s SB 50, this year’s SB 9 and SB 10, and other municipal- and state-level pro-density regulations warrant plenty of scrutiny and criticism. All’s fair in politics. But, in the debate over growth, Blackstone is a red herring. 

See, Blackstone is not a developer. It’s a landlord

As I've written before, landlords and developers do completely different things and have completely different interests. With its pile of cash, Blackstone can scoop up homes by the thousands. It doesn’t need new development. It doesn’t need to wait years for entitlements or battle neighbors at community meetings. In fact, Blackstone has been making off like a bandit while stakeholders have been making speeches and planners have been patiently tearing their hair out.

California has more humans than bedrooms, by a margin in the millions. To not build just to spite Blackstone is like not planting crops when people are starving.

The best way to de-commoditize housing is simple: make more of it. If you truly hate Blackstone, you should want to see cranes and backhoes everywhere. More homes and more housing choice means more aggregate supply and less demand for the units on offer by any given landlord.

I don’t know what the price of bacon is going to be tomorrow. I do know that, when Californians bring it home, I want more homes for them to bring it to.