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After the 2008 housing crisis, a lot of people made big money buying up foreclosed homes and renting them out — and it shows one response to a financial crash

Ryan Dezember   

After the 2008 housing crisis, a lot of people made big money buying up foreclosed homes and renting them out — and it shows one response to a financial crash
  • Ryan Dezember is a reporter for The Wall Street Journal, writing about financial markets and investors.
  • He previously wrote about the oil industry from the Journal's Houston bureau. Before that he worked as a reporter for the Mobile Register, reporting on the real-estate boom and bust for coastal Alabama's daily newspaper.
  • The following is an excerpt from his new book, "UNDERWATER: How Our American Dream of Homeownership Became a Nightmare."
  • In it, Dezember dives into how, following the housing crash, foreclosed homes became a new rental opportunity.
  • The Blackstone Group, the world's largest real estate investor, funded a group called Treehouse — later renamed Invitation Homes — which eventually would spend $150 million on foreclosed houses each week.

Blackstone Group's real-estate chief Jonathan Gray was back home in Chicago visiting family for Thanksgiving when he and his father hopped in the car and went for an after dinner spin to do some due diligence.

It was the depths of the housing crash and the man with one of the biggest war chests on Wall Street was eyeing a push into the final frontier for institutional real-estate investors: suburban single-family homes.

That summer, in 2011, a team of housing analysts at Morgan Stanley sent the investment bank's clients a report that would become wildly influential. It was titled "A Rentership Society." In it, as well as in subsequent papers, the analysts forecast a surge in the number of renters and a potentially massive opportunity for investors to convert the glut of repossessed homes into rental properties.

There were more than 1.6 million foreclosed homes on the market around the country and judging by the hundreds of billions of dollars in delinquent mortgages out there, more were on the way. In each foreclosed home, the analysts saw both a potential rental property and a new renter hitting the street whose needs — room for children, access to good schools — were unlikely to be met by an apartment.

The analysts noted the bursts of household formation that usually follow recessions, during which people tend to delay things like marriage, having children, moving out of their parents' homes, and even divorce. Banks were stunned by losses and facing the wrath of lawmakers. They were being as tightfisted with home loans as they had been lavish with them before the crash. Billowing student debt was making it as difficult as ever to save for down payments, which were back in style among lenders.

Attitudes toward renting were changing, too. Homeownership had resulted in financial pain and sacrifice for millions of Americans. The argument that paying rent was wasteful had lost resonance. Workers were no longer tethered to particular towns for their entire careers. Being able to move for employment without worrying about selling a house and paying sales commissions and other fees was more important than ever.

Homeownership, long upheld as the American dream, was in crisis.

One in five homeowners either was no longer willing or able to make mortgage payments or, like me, had lost every penny of home equity. If you counted only people with a mortgage, it was roughly one in three. "That dream," the analysts wrote, "has become more of a nightmare."

The first great hauls from the housing bust came when contrarian fund managers, such as John Paulson and Michael Burry, and traders at Goldman Sachs constructed complex wagers against subprime mortgages. The Morgan Stanley analysts said the next fortunes could be minted scooping up repossessed homes and renting them out. They estimated that even in the worst-case scenario — one in which home values never recovered and not a penny could be borrowed to amplify returns — the yield from renting homes bought cheaply enough on the courthouse steps or from desperate banks would be much higher than almost any other investment given how low interest rates were being held. The opportunity as they saw it was nearly boundless, measured in trillions of dollars. They deemed it Housing 2.0.

There were doubters. Mostly apartment owners. They were in the business of managing large numbers of residences, and it was hard enough when they were all under one roof. There were good reasons no one had ever attempted to manage huge pools of rental homes, skeptics argued.

If ever there was a time to try, though, it was now. Apple released its iPhone in 2007 and the iPad in 2010, launching a new era of mobile computing. These devices as well as advances in cloud computing enabled investors to conduct an unprecedented land grab and profitably manage thousands of far-flung properties.

The phones at Morgan Stanley were flooded by inquisitive investment fund managers. Ben Bernanke, who helmed the Federal Reserve during the foreclosure crisis, endorsed the idea in early 2012 while speaking at a National Association of Home Builders conference in Orlando, Florida. "It could make sense in some markets to turn some of the foreclosed homes into rental properties," Bernanke said. By then, more than $1 billion had been raised by investors for the purpose of doing just that. Much more money was coming.

Gray and his staff at Blackstone had been meeting with landlords and house flippers when an investment banker introduced them to a group of Arizona men with a fast-growing rental-home business.

They had been buying mobile home parks around Phoenix when home prices crashed and decided to trade up to single-family houses. Their business was called the Treehouse Group and led by Dallas Tanner, a fourth-generation Phoenician who had just completed his graduate degree at Arizona State. Treehouse accumulated 1,100 rental homes with investments from the country club set, but Tanner and his partners wanted to expand to other cities. They went looking for an investor to pair with, someone with deeper pockets than the doctors and dentists who had so far been funding their splurge.

Pockets didn't get much deeper than at Blackstone, the world's largest real-estate investor.

In Chicago, Gray wanted to see for himself what sorts of foreclosures were out there. He had a list of addresses and asking prices. He was shocked by how little the repossessed homes cost. He snapped a picture of one house, tapped out a message beneath the photo, and texted it to Tanner back in Arizona: "Guess how much we can buy that one for?"

At Blackstone's Park Avenue offices, the firm's brass weighed a big rental-home investment. Blackstone's billionaire chief executive was on board. "Oh my goodness, this could be huge," Stephen Schwarzman said. "Nobody is going to be able to borrow. They're going to need housing."

The only issue was that the Treehouse guys were looking for $150 million for their house hunt. That wasn't big enough of a spree for Blackstone to bother. One of Gray's lieutenants told them that they'd need to boost their ambitions.

Within a couple years, Treehouse, flush with Blackstone's billions and renamed Invitation Homes, was spending $150 million on foreclosed houses each week.

Excerpt from UNDERWATER: How Our American Dream of Homeownership Became a Nightmare by Ryan Dezember. Copyright © 2020 by the author and reprinted by permission of Thomas Dunne Books.


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