8 ms·

This doesn't make a lot of sense to me. Why would an entity trying to maximize profits pay an extra 20-50% to purchase an illiquid asset?

Faaak 5y ago
I suppose when your investment horizon if 40+ years (and interest rates are low), you can afford you have a longer ROI ?
mantas 5y ago
Sort of like investing crazy money into startups. Big bets hoping to get a once-in-thousand-years cashcow.
- Scoundreller 5y ago
  Make enough bets and it works out.
krona 5y ago
It's the least risky asset on the time horizon that they're operating on.
- RGamma 5y ago
  Not that risk really matters much because Blackrock is too big to fail anyway.
toomuchtodo 5y ago
Reaching for yield. People will need housing, and assets are inflating because there’s more capital chasing fewer returns. Lock up housing assets, you’re locking in returns.
nickthemagicman 5y ago
They have so much money there's nothing really left to spend it on.
briefcomment 5y ago
Once you own all housing, what's to stop you from increasing rents?
- recursive 5y ago
  Presumably your own desire to maximize revenue. If you charge a rent that your tenant can't afford, then you get nothing.
  - briefcomment 5y ago
    If you own all options and the renter needs to have some sort of housing, they'll pay anyway. The end result is that the owner will start collecting a larger percent of the renter's earnings.
    - recursive 5y ago
      I'd give up housing before food. There's a limit to how high that percentage can be.
      - briefcomment 5y ago
        The point is that landlords will be able to suck up the income that you spend on non-essentials and luxuries.
        rhodozelia 5y ago
        Only when demand exceeds supply and people have that extra income. Edit: which is common in desirable places with lots of well paying jobs. There are cheap places to rent and buy in the fly over states but not as much opportunity, hence the price
      - WarOnPrivacy 5y ago
        > I'd give up housing before food. Lack of food can be fixed in a day. Lack of housing can be impossible to overcome ever.
randomfool 5y ago
Since land is a limited asset they can effectively corner the market in specific regions and gain pricing power, allowing them to turn that 20% purchase price premium into a hefty profit. Cities can counter this by allowing more new construction but backfilling Single Family Residences requires land and that may not be readily available within certain commute distances.
- rkangel 5y ago
  It's slightly more complicated than that because what they'll do is keep the properties and rent them. There being few houses to buy increases the demand for rent, and cornering the rental market means you can control rent prices.
  - tptacek 5y ago
    There is no analysis anywhere that suggests Blackrock is poised to corner the rental market.
opsecweather 5y ago
They certainly get better mortgage rates than their middle-class competitors or maybe they just buy it outright which would save $100k's in the long-run.
rmah 5y ago
It doesn't make sense because the headline and linked tweets misrepresented the facts of the WSJ article it sourced its info from. I quote "Blackrock is buying every single family house they can find, paying 20-50% above asking price and outbidding normal home buyer..." and then he links to https://www.wsj.com/articles/if-you-sell-a-house-these-days-the-buyer-might-be-a-pension-fund-11617544801 https://www.wsj.com/articles/if-you-sell-a-house-these-days-... The general thrust that institutional investment groups have increased their purchasing of single-family residential homes over the last decade is true (around 20% to 25% of all such transactions now, IIRC). And it may be true that such buyers are pushing up home prices in many areas. I haven't done any analysis of that so I cannot comment on it. However, the tweets are ... not quite correct. First off, the transaction in the article was a deal where Blackrock purchased a set of 124 rental properties that was already owned by an institution (D.R. Horton). It was this complex https://www.amberpineshomes.com/floorplans https://www.amberpineshomes.com/floorplans. The seller is quoted as saying "We certainly wouldn’t expect every single-family community we sell to sell at a 50% gross margin", which isn't the same as 50% above asking price. Various groups bid on the complex and, from another linked article, all bids came within a few % of each other. Any seller would hope to sell with some sort of positive gross margin. The seller's statement indicates that 50% may be high for residential real estate and thus is an indicator that the market in that area is quite hot. The average price per home in the deal was $258k. Perhaps a bit high given the average size in the complex, but... If you examine the location (because real estate is all about location), we're talking about a small town outside of Houston that has grown in population from 56k to 91k between 2010 and 2019. The median family income there in 2016 was $60k. So this looks like a high growth area with upside potential. The buyers are probably making a bet that the homes there will see substantial appreciation in the future because of this growth. The seller probably either wanted the cash injection, didn't want to manage rentals anymore or otherwise prioritized some short term concerns over long term asset yields. To sum up, the people at Blackrock is not stupid. They won't pay a premium everywhere. They'll only do it in areas where their analysis shows that they will make it back along with a substantial profit. Is this good for society as a whole? Perhaps not. But that's not their problem.

Faaak 5y ago

I suppose when your investment horizon if 40+ years (and interest rates are low), you can afford you have a longer ROI ?

mantas 5y ago

Sort of like investing crazy money into startups. Big bets hoping to get a once-in-thousand-years cashcow.

Scoundreller 5y ago
Make enough bets and it works out.

krona 5y ago

It's the least risky asset on the time horizon that they're operating on.

RGamma 5y ago
Not that risk really matters much because Blackrock is too big to fail anyway.

toomuchtodo 5y ago

Reaching for yield. People will need housing, and assets are inflating because there’s more capital chasing fewer returns. Lock up housing assets, you’re locking in returns.

nickthemagicman 5y ago

They have so much money there's nothing really left to spend it on.

briefcomment 5y ago

Once you own all housing, what's to stop you from increasing rents?

recursive 5y ago
Presumably your own desire to maximize revenue. If you charge a rent that your tenant can't afford, then you get nothing.
- briefcomment 5y ago
  If you own all options and the renter needs to have some sort of housing, they'll pay anyway. The end result is that the owner will start collecting a larger percent of the renter's earnings.
  - recursive 5y ago
    I'd give up housing before food. There's a limit to how high that percentage can be.
    - briefcomment 5y ago
      The point is that landlords will be able to suck up the income that you spend on non-essentials and luxuries.
      - rhodozelia 5y ago
        Only when demand exceeds supply and people have that extra income. Edit: which is common in desirable places with lots of well paying jobs. There are cheap places to rent and buy in the fly over states but not as much opportunity, hence the price
    - WarOnPrivacy 5y ago
      > I'd give up housing before food. Lack of food can be fixed in a day. Lack of housing can be impossible to overcome ever.

randomfool 5y ago

Since land is a limited asset they can effectively corner the market in specific regions and gain pricing power, allowing them to turn that 20% purchase price premium into a hefty profit. Cities can counter this by allowing more new construction but backfilling Single Family Residences requires land and that may not be readily available within certain commute distances.

rkangel 5y ago
It's slightly more complicated than that because what they'll do is keep the properties and rent them. There being few houses to buy increases the demand for rent, and cornering the rental market means you can control rent prices.
- tptacek 5y ago
  There is no analysis anywhere that suggests Blackrock is poised to corner the rental market.

opsecweather 5y ago

They certainly get better mortgage rates than their middle-class competitors or maybe they just buy it outright which would save $100k's in the long-run.

rmah 5y ago

It doesn't make sense because the headline and linked tweets misrepresented the facts of the WSJ article it sourced its info from. I quote "Blackrock is buying every single family house they can find, paying 20-50% above asking price and outbidding normal home buyer..." and then he links to https://www.wsj.com/articles/if-you-sell-a-house-these-days-the-buyer-might-be-a-pension-fund-11617544801 https://www.wsj.com/articles/if-you-sell-a-house-these-days-... The general thrust that institutional investment groups have increased their purchasing of single-family residential homes over the last decade is true (around 20% to 25% of all such transactions now, IIRC). And it may be true that such buyers are pushing up home prices in many areas. I haven't done any analysis of that so I cannot comment on it. However, the tweets are ... not quite correct. First off, the transaction in the article was a deal where Blackrock purchased a set of 124 rental properties that was already owned by an institution (D.R. Horton). It was this complex https://www.amberpineshomes.com/floorplans https://www.amberpineshomes.com/floorplans. The seller is quoted as saying "We certainly wouldn’t expect every single-family community we sell to sell at a 50% gross margin", which isn't the same as 50% above asking price. Various groups bid on the complex and, from another linked article, all bids came within a few % of each other. Any seller would hope to sell with some sort of positive gross margin. The seller's statement indicates that 50% may be high for residential real estate and thus is an indicator that the market in that area is quite hot. The average price per home in the deal was $258k. Perhaps a bit high given the average size in the complex, but... If you examine the location (because real estate is all about location), we're talking about a small town outside of Houston that has grown in population from 56k to 91k between 2010 and 2019. The median family income there in 2016 was $60k. So this looks like a high growth area with upside potential. The buyers are probably making a bet that the homes there will see substantial appreciation in the future because of this growth. The seller probably either wanted the cash injection, didn't want to manage rentals anymore or otherwise prioritized some short term concerns over long term asset yields. To sum up, the people at Blackrock is not stupid. They won't pay a premium everywhere. They'll only do it in areas where their analysis shows that they will make it back along with a substantial profit. Is this good for society as a whole? Perhaps not. But that's not their problem.