On Fri, 28 Jan 2005, Jordan Hayes wrote:
>> A recent article in the Sacramento Bee indicated that 20% of Cal. houses
>> are purchased for investment purchases.
>
> 35% of the housing stock is rentals (if 65% of households live in the
> house they own ...). This is a fairly stable number (though growing).
> Rentals are "investments" -- there's nothing new here.
Except that they might just mean houses, which might be a little different, since investors in houses are a slightly different class than owners of apartment buildings.
Just on an anecdotal basis, I was kind of floored two years ago when I visited a couple in Washington DC. They're upper middle class with high income and high expenses and so are most of their friends in politics, media, etc. And the conversation at the party was continually turning to how all of them were forming little groups with their friends to buy houses. Every time we drove anywhere they would be scouting out locations and talking about friends they were trying to talk into it. The houses typically cost between $300,000 and $500,000, and they would form groups of 3 to 5 to buy them, rent them just long enought to fix them up, and sell them. It was amazing to me how omnipresent this idea was. The tone of the room was very reminiscent of the stock market bubble: the trembling of virgins and the bragging of old hands. And hanging over it all was this group conviction that you had no other intelligent choice. You had to put your $100,000 somewhere, and stock market was flat and nothing else was paying a return. And there was a deep belief that, while they might have gotten burned in stocks, real estate was much less dodgy.
Now maybe you are right that we shouldn't feel too bad for someone with a college degree worrying where to invest their $100,000 who does a bad job of it -- that they get what they asked for. But I think it would be going too far to call these people sophisticated investors. Their main argument was simply that real estate was real and they trusted it more than stocks and the whole thing made them feel good.
It doesn't implausible to me that people in this situation (as opposed to people living in the houses they own) are very much in the position of stock investors. Now if the rent is paying the mortgage and the cost of improvements, and the renters are stable, then they have nothing to worry about when it comes to weathering a downturn -- it pays for itself, there's no drain. But if they are counting on the turn-around to pay off a lot of their sunk expenses and bring them back a profit -- which it seemed to me like a lot of them were -- then I don't see why they shouldn't end up taking a collective bath. Is seems the more of them do this, the more they will inevitably weaken their positions, since the sustaining rents will go down (since renters will have so many of these places to choose from) and eventually so will the resale prices for this class of houses in this location. It just seems like simply supply and demand. And if, like people who invest in the stock market, they sometimes need that money and have to get it out, well, even more so.
I guess the argument then is whether such a thing would have any systemic effects beyond investors getting their just deserts. You might be completely right that most people who live in their houses will escape largely unscathed from any up and down tsunami in prices. It might even have a moderate positive redistribution effect if a crash caused such an improved housing stock to trickle down or lowered rents. But if this kind of investing ever reached as sizeable a portion of the population as stock investing did -- which seems mainly to have been done by the same class of people -- why shouldn't it have as much of an effect on demand if it falls as a falling stock market does? The negative wealth effect, as it were.
Michael