Thread by @StephenPunwasi

Quick thread on why funds like Blackrock are in bidding wars for your grandma's single-family home.

Let's try something different. Pretend you're an institution. I'm going to pitch you on why you should consider buying a home, or 100,000.

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2. Let's start with your pre-Great Recession days.

You were investing in bonds, booking 5% fixed income returns, and doing mountains of coke. Things. Were. Awesome.

All of a sudden, the Great Recession happens. Interest rates plummet, and you can't make any money lending cash.

3. What happened? Well, credit markets are based on supply and demand.

When more people want to borrow money than want to lend, interest costs rise.

If more people want to lend money than borrow, interest costs fall.

Bad environment = no one lends, everyone needs. High rates.

4. Good environment = everyone lends, and no one needs money. Low rates.

That's how free markets work. It chokes off capital when the risk occurs and frees it up when it leaves. It's naturally regulating.

Central banks hate free markets though. Things. Only. Go Up. Or else.

5. Don't worry, this is about real estate.

In a downturn, central banks normally cut interest rates. When they're down to zero interest, they deploy something called quantitative ease.

This is when the central bank unleashes an unlimited amount of money to push yields down.

6. Chill, Barry. We aren't debating whether QE is a good thing today.

The fact is when a central bank floods the market, yields get crushed. Since the credit markets are competitive, borrowing rates generally fall across the board.

7. You're stuck. What do you want to do? Accept yields lower than inflation, or look for an alternative?

Obvs, look elsewhere. That's why fixed-income allocation went from 50% of portfolios in 1990 to 30% in 2019. Alternative assets went from 7 to 29% over the same period.

8. Low rates do 3 important things:
- lower the cost of borrowing. You can borrow a fuck ton for cheap.
- it increases the debt households can access. This lets homebuyers absorb higher prices.
- it crushes your fixed income. What's your obvious move?

9. You take your massive amount of capital, and start scalping homes.

Apply pressure to the housing stock, and look for yields higher than bonds.

People keep saying institutional investors only represent a small amount of housing stock, so they can't impact prices. Nope.

10. It would be true if you were buying homes anywhere across the US. You're not though. You're chasing higher yields.

You're not buying a single-family home in NYC to get a 1.37% yield. That's still below inflation. So you zero in on higher yield markets.

11. The inflation target is 2%, so you'll need at least that. So you want Charlotte (2.38%), Phoenix (2.43%), or Atlanta (2.42%).

I'll admit, it's getting a little crowded in Atlanta, with institutional investors scooping up 15% of sales from 2019 to 2020. But that's the idea.

12. This is partially why cities like Toronto are terrible for this kind of play. Many homes are trading at prices where the rent is insufficient to cover the mortgage.

You're not replacing a bond yield, you're speculating if you're topping up your tenant's rent every month.

13. Back to our high yield markets though. Buying in such high concentrations has increased the price of those homes, by a lot.

These are now the fastest-growing markets in the US one year later — Charlotte (5th), Atlanta (11th), and Phoenix (1st). Niiice.

14. Now you can sell, or you can wait to see if you can capture higher rents. See, people are fleeing expensive coastal cities to relatively cheap places.

Your yield might improve if you target high-income folks moving to the region instead of local incomes.

15. But like, you don't care. You don't even live in the same cities you're targeting.

One of the biggest buyers in the US isn't even in the US. It's located in Canada.

Sounds great, but why didn't you do this before?

16. Home prices used to be volatile, companies used to go bankrupt, and fixed income yields dropped.

Now the majority of voters are self-serving homeowners, that vote to protect their (and now your) equity. Bailouts are ready and waiting if things blow up. Yields are better.

17. Does this still work, and will it continue in the future? Maybe. Financial innovations like this sort of yield chasing are usually abused until it blows up.

Other funds are betting it'll work. If it doesn't, they'll get a bailout and take a shot at something else.

18. I unpacked this further and with more clarity (and data!) for anyone that's still confused.

As for the rest of you, good luck bidding against your local uber fund. May the odds ever be in your favor.

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