When Profit is King

When Profit is King

If you know me in real life, you’ve probably heard me brag about my NYC housing luck.  When Kelsey and I were moving down from Boston a couple of years ago, we knew that the odds of us finding a reasonably decent place to live that was affordable were pretty slim. We’d done the dog-and-pony show of Boston’s rental market in the summer and knew that New York was storied to be much, much worse. We resigned ourselves to the likelihood of having to spend a year in a less-than-ideal apartment before being able to move to a different place.

Because we knew that we weren’t going to score the housing lottery from a couple hundred miles away, we decided to just jump on anything that seemed reasonable. I’m pretty sure that within an hour of our now-home being posted on Streeteasy I had reached out to the realtor and expressed interest – it looked like a nice enough place and seemed below the going rate for the neighborhood. She put me in touch with the landlord and when he told me that the folks that were leaving the unit were moving from the second to the third floor of the building because they’d just had a kid, I committed – if they weren’t moving to get away from the landlord or the building but just to get a bigger apartment, that seemed like a good sign.

So, we signed on the apartment before we’d been inside. The next week, when the apartment came up on Apartment Therapy as the deal of the week for New York City, I was pretty pleased. Flash forward two-plus years and we have no intention of leaving the place in the foreseeable future.

(Let me stop for a second. Jacobie (my landlord and sometime-reader of the blog): if you’re reading now, the place isn’t actually priced below market. I’m just, you know, making a rhetorical argument. No need to raise the rent or anything)

As I’ve accumulated more and more stories from friends around the city who have had rough relationships with landlords (and, more often, the live-in superintendents employed by absentee landlords), I’ve considered myself luckier and luckier. One friend spent the first few months in her apartment without heat, so the landlord bought her a “shower membership” from the gym down the block so she could bathe. Another friend called 311 last week because her landlord wasn’t responding to the cockroach problem. Us? We’ve had cookouts with our landlord and his family, their two-year-old daughter feels maybe a little too comfortable coming into our apartment, and I’m in the doghouse with the seven-year-old who’s frustrated that I keep needing to put off teaching him how to bake bread. Our landlord and his family (they’re on the first floor, we’re on the second) have become neighbors and friends.

It should not be surprising, perhaps, that our landlord is willing to rent the apartment for less than the maximum he could get for it. When your family lives in the same building as your tenant, there are obviously other considerations. Will they be friendly? Will they treat our shared home with respect? How much noise will they make, and what sorts of odd people might they bring in? My neighbors know that I rent this unit out – how will their presence make me look in the eyes of other residents of the block? When Kelsey and I were looking for a roommate on Craigslist in Boston we were asking some of the same questions, and ultimately decided to list the room for less than we could have gotten for it, preferring instead to have a large pool of applicants to pick from. We lucked out – Sam and her husky Juno were just awesome to live with. There, too, our own landlords were community members, and we’d often see them around the neighborhood even though they didn’t live in our building.

Okay – what am I driving at? Colin Kinniburgh had an article in the New Republic in August reviewing and synthesizing two books on gentrification that came out this summer (Peter Moskowitz’s How to Kill a City and John Joe Schlichtman, Jason Patch, and Marc Lamont Hill’s Gentrifier – both are on my list, but I haven’t gotten to either of them). The article is a great look at the impacts of what Kinniburgh calls disaster capitalism, and how major events like Katrina or Detroit’s bankruptcy can open the door for big firms to come in, buy up huge chunks of land on the cheap, and then start marketing neighborhoods to new residents. The whole article is worth reading, but right now I’m thinking about the implications of just one observation. Kinniburgh notes: “Wall Street, as ever, found innovative ways to profit off the [2008 housing market] collapse: hedge funds, large investment firms, and private equity companies snapped up foreclosed homes and converted them into rentals, making them some of America’s biggest landlords.”

It reminded me of one of the storylines that have been underreported following the bounce-back of the housing market. At the height of the crash, as many as 30% of American homeowners owed more on their mortgage than their homes were worth (purple and red area):

From a paper I worked on while at the Federal Reserve Bank of New York (PDF)

And, amazingly, in the so-called Sand States the average home with a mortgage was worth less than what was owed on it:


Same source as above


What happened? An enormous number of homeowners went into foreclosure (these foreclosures were concentrated in communities of color) at precisely the time when American families were facing a crisis that had wiped out a big chunk of their savings. The result? A number of Wall Street firms bought up incredible numbers of cheap houses all across the country which they then rented out or sold after a few years.

An article from the Charlotte Observer this summer looked at how many homes had been bought in the Charlotte region by these investment firms. They estimate that the firms now own more than 10,000 homes, the majority of which they have turned into rental properties. The result, in Charlotte and in similar cities around the country, is two-fold. In places like Charlotte where most folks own their homes, these firms have taken a big chunk of the low-end housing out of the ownership market and into the rental market. Thanks to this relative scarcity of “starter homes”, fewer Millenials are buying homes. Everyone here knows that I’m, at best, ambivalent about the public benefits of homeownership, but the fact that the homeownership rate has dropped by roughly 8% since the peak of the crisis and shows no signs of bouncing back is really amazing:


If you’re in the camp that believes that homeownership makes model citizens and helps families build wealth you should be alarmed by this trend. You should question whether these big firms swooping in when normal Americans couldn’t afford to keep their homes or buy new ones helped or hurt the public good – and whether we should encourage them to return their homes to the market (slowly enough, of course, to avoid a new crash).

If you’re like me, you’re more concerned about the community impacts when whole neighborhoods have landlords that are not members of the community. Investment firms based in New York and Chicago don’t give a damn about making sure their tenants are good for the community and are not likely to accept lower rents in return for nicer neighborhoods. I don’t mean to romanticize the local landlord – history is replete with slumlords who took advantage of their neighbors, and even today there are countless landlords who are interested in nothing more than making money. I do worry, though, that as we make a structural shift to an environment in which big players prioritize profit above all else we’re tearing down community and ramping up displacement at the same time. While smaller landlords who live in the neighborhoods with their tenants and are perhaps more likely to “pay” foregone rent for good tenants (especially when it comes to lease renewals), big investors don’t face the same questions. These institutional investors are simply going to move their capital where ever it can get the highest return, whether that’s in housing or any other industry.

On the other hand, these bigger operations are likely to have a number of efficiencies. When they’re managing thousands of units, streamlining becomes a must. The size of their holdings means that they’re able to employ full-time staff to manage the properties and respond to requests for tenants. It’s entirely possible that, on net, the professionalization of the big holdings of the investment firms leads to a higher quality experience for tenants in these units. Moreover, when the homes are managed as true assets and less as sources of side-income (as second and third units often are for individual owners), there’s maybe a bigger incentive to keep the units in top-shape, inside and out, to retain their value.

Who knows – maybe I’ve just had great landlord luck and one bad experience with a landlord in the future will convince me that local landlords and investment firms alike are just looking to make as much money as they can. But while the local landlord is at least accessible to the community and thus susceptible to pressure from the neighborhood, housing for big investment firms can’t be anything more than profit and loss. I can’t shake the feeling that these big investment firms are a bad change for the housing market, but it might be nothing more than just a feeling. Ultimately, however, this is a big change in the structure of the housing industry, and it will be interesting to see how that change plays itself out through the whole economic cycle.

One thought on “When Profit is King

  1. So, the discussion of Millennials as no longer interested in buying a starter house, but renting an “Uberhouse” instead, is not driven strictly by the desire to avoid commitment to a neighborhood. Instead, there is this alternative, where they can move in first and think before buying. That’s been the traditional function of starter homes, but this new model eliminates the concept of building equity for “moving up” as they need space for the kids.

    Baltimore is strange in that the variety and price of “starters” is limited and neighborhoods are seldom interested in racial integration.A neighborhood is either “us” or “them”. With anemic regional population growth, but with developers still interested in building starters on greenfields, we see that development following the segregated pattern. Nobody is seriously pushing an integrated model. Buyers know where they’re wanted. Discouraging to me, but this pattern is reflected in the lack of articles about gentrification in this region.

What do you think?

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