Investors, Are They Good for the Future of Real Estate?

Greetings from Varanasi, probably the most chaotic place I have ever been to. This is supposedly the oldest city on earth, where a never ending stream of pilgrims comes to bath in the the Ganges. Less than 100 yards upstream, a dozen bonfires are roaring as bodies are cremated on a 7/24 basis. Mobs of tourists come to witness the daily offerings, creating monster traffic jams with every square inch of the narrow roads packed. I think I deserve a break this afternoon.

If you like real estate, India is the place. There are probably more households here with no homes than the entire population of the United States, with a birth rate that would guarantee an endless wave of "household formation".  I suppose the bulls would call this pent up demand.  In reality, I have no idea what to make of it.  How India can address the issues of this homeless country within the country is beyond the comprehension of the human mind.

The US is not India, but India's extreme gap between rich and poor did get me thinking about the current housing market phenomenon in the US. Specifically, I am referring to the invasion of investors in the single family market. In India, the rich are getting richer while the poor are already at rock bottom. Is the US heading in the same direction, albeit very slowly?

Take the Blackstone Group as an example. They have been in the news recently as having purchased 16,000 homes already and they are still buying at breakneck speed. Wall Street cheers. Housing has bottomed and is on its path to full recovery. In reality, this is a transfer of wealth that, in my opinion, will be another price that future generations have to pay.

Steve Schwarzman, founder of Blackstone, is not just part of the 1%, he is in the top 1% of the 1%. As Obama and other politicians are fighting tooth and nail over how to tax the rich, Schwarzman has already levied a housing tax on 16,000 families. Here is how it works.  The free market is driving prices back down to equilibrium, so normal people can afford to buy a starter home they can call their own. Right or wrong, Bernanke is trying to accommodate this by driving down long term rates for these potential home owners.  Now mega rich Schwarzman steps in to extract a fee so he can be richer. The first time buyers are forced to either pay a higher price for the same homes, or have to buy an equally inflated house from a builder. Those who are squeezed out and cannot afford to buy anymore will have to rent from Blackstone. Are we back to the middle ages of landlords and peasants? Is Schwarzman the modern day warlord, Shogun or Maharaja?

Henry Ford made his fortune with the Model T, revolutionizing manufacturing and transportation in the process. Alexander Graham Bell gave us the groundwork for modern communications. Steve Jobs created smart and cool devices that brought joy and functionality. The single family bulk buyers today provide no added value to real estate, just added cost.  Blackstone is not alone. In fact, Blackstone is just a small part of this wave of transfer of wealth from the have-nots to the haves. For new college graduates who are burdened by student loans and are lucky enough to be employed in a mediocre low-paying job, trying to save up for a starter home will  prove a challenge.

Home ownership brings pride, not only for the home owner but also for the neighborhood. Home ownership is the back bone of societies. Intuitively, I believe there is something wrong when investors are gobbling up 30% or more of the available inventory in the recovering markets, driving up prices in the process. I believe there is something wrong when foreigners use single family homes as a place to park money, regardless of their need for the dwelling. In the long run, I believe it is the wrong direction for single family real estate, something that deserves attention.

Now off to the next town – Kolkata (Calcutta).