Real Estate & Housing

Investor “Giants” Still Figuring Out the Best Ways to Invest in Your Home

Jonathan Asmis | 15 Feb 2019

A friend of Landed, Ashby Monk, coined the term “Giants” to refer to the large investment funds that dominate the capital markets. These pension funds, sovereigns, endowments, and foundations manage over $80 trillion of money with the general goal of improving the lives of their members, their citizens, or their institutions. They represent the base of the capitalist system, and the decisions they make impact us all, whether we actively think about them or not. With coordinated action, the Giants can starve entire industries (pension funds are slowly divesting from tobacco, fossil fuel, private prisons, hedge funds, etc.) or bring new ones to life (like private investment into public infrastructure).

The Giants are now turning their attention to homes. At Landed, we know that how the Giants choose to invest in homes will impact all of our lives, so we’re paying attention.

Homes as an investment

Land is an interesting investment. While U.S. land is limited, it is not particularly scarce, nor expensive. Jeff Bezos could buy all of Wyoming, donate it back to Wyoming residents, and still be one of the 25 richest people in the world. But if he wanted to buy Manhattan… he’d have a little more trouble. Even the top 26 richest people in the world couldn’t pool their money together to buy that small island 4,250x smaller than Wyoming. As an aside, the top 26 richest people also have as much wealth as the bottom 50%, so even the poorest 3.8 billion people couldn’t pool their resources together to buy Manhattan… (we have some work to do on wealth inequality!)

Urban land is getting more and more expensive. It’s expensive because it is scarce, and as the U.S. economy becomes more of a service/knowledge-based economy, more economic activity will concentrate in these small areas. Buying urban land is a way to invest in urbanization, which as it turns out, has been a pretty good bet. The problem is that the main thing that’s built on expensive urban land is housing, and housing has traditionally been an investment that Giants have avoided (see below).

But today, as a Giant, it’s becoming harder and harder not to invest in homes. Imagine you were told to invest in U.S. stocks, but also told that you can’t invest in anything to do with tech, finance or healthcare! A city can only hold so many hotels, apartment buildings, malls, warehouses, and parking lots (classic Giant investments). To find places for their $80 trillion of investments, the Giants have been forced to turn to housing.

Wait… aren’t Giants already invested in homes?

Yes and no. The Giants have exposure to residential homes in a few different ways:

  1. The Giants own a massive amount of mortgages (generally through mortgage-backed securities) – but while their investment is related to the performance of the home (if the home declines significantly in value, so do the mortgage-backed securities), they don’t get any of the upside. Most financial advisors will tell you that you should own both stock and bonds, and it’s the same for the Giants. Not having any access to the “stock” part of the homes is a problem.
  2. The Giants own a lot of apartment buildings. Apartment buildings are generally thought of as a substitute to homes, and so owning an apartment is kind of like owning a stock of homes. But apartments and homes are not the same, and as investments, they perform differently. If demand suddenly increases for homeownership, homes will increase in value and apartments won’t.
  3. The Giants are increasingly owning individual homes and renting them to families. That way, if demand for homes increases, they can always easily sell them back to the market as a home. Between 2010 and today, over 200,000 single-family homes were taken off the market and turned into 1-unit apartments so that Giants could own them.

What’s wrong with Giants buying homes and turning them into rentals?

  1. It’s an inefficient investment. Managing a 200-unit apartment building has many economies of scale. As an example, you could hire a handyman to service the whole building. You could also hire a single full-time leasing agent to show guests around to try to rent your vacant apartments. Managing 200 individual homes spread across an entire city is a little more complicated, and it’s getting more expensive every year. So as an investor, much of your rental income is wasted trying to manage this group of plumbers, contractors, and leasing agents.
  2. That’s not a world people want to live in. A 2014 FNMA survey showed that renters want to buy homes, just as much as previous generations. They remain renters not because of choice, but because of real and perceived difficulties in affording it. We do not want to live in a world where the Giants own, and the citizens rent. Disproportionally, Americans want to live in a world where we have control over our own shelter. Who knew!

At Landed, we’re trying to build a different way for Giants to invest in homes: a way that helps essential professionals, like educators, become homeowners. Instead of competing with our workforce, we want the Giants to cooperate, uphold those who uphold us, and choose to co-invest in home purchases.

Remember, most Giants exist to help us. They hold our retirement funds, our life insurance premiums, or our government’s investments. While they must prioritize generating returns (so we can all retire peacefully), they also understand their responsibility as the base of our capitalist system. Our job at Landed is to build another way, a better way, for Giants to support us in becoming homeowners. The more reliable Landed can become as an investment pathway, the more these “powerful, sleeping giants” can support educators across the country.


 

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Real Estate & Housing Investing & Finance

About the Author

Jonathan Asmis

CEO of Landed. Expects more from finance.

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