Investment Companies - Why The Housing Bubble Will Never Burst

I miss the old days when bubbles were a good thing. Thanks childhood memories.

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When you were younger, do you remember saving your money for something special? To some extent, I think everyone has done this at least once or twice. As a kid, you stockpile your allowance to save up and buy something fun (I don't know what that would be these days, I'm old now). As a teenager, you saved what you were able to earn in hopes of putting it towards your first car before senior year started. As a college or university student, let's be real, you saved up for food and coffee. As you got older though, you gained appreciation for just how far money goes. That $10 may have to carry you far, and recently it seems like it just doesn't go as far as it used to.

Eventually you reach the end point. The big purchase. All that time spent saving and learning just how best to stretch a dollar has led you to the real estate listings. It's time to look at buying a house.

For most of us common folk, the house represents the single biggest thing we will ever look to purchase. There are not many people (at least that I know personally) running around with private jet money. The house is the end point; You will likely not purchase anything bigger or more expensive. At least, that was the reality for the past several decades and it worked out very well for the generations that came up in the 1900s.

Unfortunately, this is no longer the reality we are faced with.

Housing costs have gone absolutely wild in the last few years and are now valued much higher than they were even a decade ago and things aren't keeping up. We have arrived at the point where you need to be low key rich to afford a home at market value now or have access to a substantial amount of money. We're talking company revenue levels of income.

Oh wait... that actually turned out to be a thing.

In the search for other means of generating revenue in an economy firmly turned to the "Growth" setting, Investment Companies in search of "Assets" took one look at the skyrocketing housing prices and decided they wanted all that money for themselves. Thus began the competition between regular home buyers and Investment Companies for property. It's a battle that is still playing out now, but it's very one sided and has an obvious outcome that is eventually going to play out. There's a housing bubble that many people are waiting to burst, but Investment Companies will ensure that bubble never bursts for anyone but themselves.

So how did the housing bubble get there in the first place? Why and how are Investment Companies going to ensure the average home buyer never sees the bubble burst? And what is the eventual outcome waiting at the end of the buying battle?

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Blowing a bubble

It's widely known and accepted at this point that the cost of things generally increases over time. There really isn't many instances of goods or services bucking this trend, and unless you're looking at a Costco Hot Dog or an Arizona Ice Tea, the price you see will not be the same in a years time. The housing market is no different. It fluctuates over time and can be difficult to track given the wide range of factors that go into pricing, but generally the cost of a house has risen over the years just as everything else has.

What we have experienced in the last few years is not the typical rise and fall.

The cost of purchasing a home has increased much faster than is the standard rate, outpacing wage growth at almost every metric imaginable. The speed of this growth is exactly what gives us the term "The Housing Bubble". It's a rapid increase in price.

So what caused this bubble to blow up? Emotional spending? Generational demand? That awkward pandemic situation? Sure, some of these could have been a trigger for it to start and a means by which to sustain the situation, but they all ignore an underlying issue...

Money doesn't go as far as it used to.

Stuff is expensive, and yes, it took a pandemic to rock the world and shatter the illusion of job security for everyone to realize just how fast savings can disappear. It kicked off a society wide arms race of sorts wherein many people looked to secure any means of income they could. Is it any coincidence that the ideas of Passive Income, Cryptocurrency, and NFTs (which are basically just digital "Art" that ruins the environment but that's a rant for another day) came to the forefront of conversation during this time? These represent what we can consider "Assets". They are things that can make you money if handled correctly, which is exactly how we can look at real estate.

So what caused the bubble? An increase in demand by way of people looking to secure "Assets". Buy now, sell later, turn a profit. Wage and income insecurity drove the need for "Assets", and real estate was an obvious candidate for those that could buy in and play that game. The main issue is that there ended up being players in this game that made it very, very unfair...

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Nice revenue stream you got there...

You see, companies love money. They exist to make money. The big asset grab, having a lot of monetary potential, was bound to attract the interest of companies looking to augment their holdings. Enter the bully on the block... The Investment Company.

Why are they a bully? Because they have more money than most individual home buyers will ever see at their disposal and can leverage it to their advantage.

Most home buyers have already had to clear a bar set somewhat ridiculously high just to participate in the real estate market. Are you making $129,000 as a household per year? That's the average amount required to participate in the housing market. Make less and you may be out of luck. This number is what the price has ballooned to as a result of the bubble. It's why you see many from the younger generations clamoring for the bubble to burst. The first time home buyer simply does not make this much money.

So now we take this already trimmed down section of the population that can afford to buy and let them search for homes. People buying have specific things they want in a home. Maybe they want it facing east. Maybe they want a big yard. Maybe they want to be near a school. Investment Companies don't care. A house is an asset, and the value is all that matters. They can afford to go in and buy tens or hundreds of homes and sit on them just to let the value shoot through the roof. They don't even need to compete with other buyers since they won't treat them as houses. It's easy for them to skip a home inspection phase and offer $50,000 above asking price to immediately secure a deal. What does this do? It increases demand and drives those prices even further up.

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Now what?

Once the Investment Company has secured a ton of real estate assets, what does it do with them? Sell them? Keep them? There's risk in both. If it sells, it makes a one time payout and that's it. If it keeps them, the value could increase, but it could also decrease. There eventually becomes a point where the value will have to drop, so what should be done when this happens?

Here's the fun (not fun) part...

The houses are "Assets" for a business, but they are literally living conditions for people and people need places to live.

Companies these days love their recurring revenue and subscription models, and isn't renting a house or apartment exactly that? Why not repurpose all the houses and rent them to people at an extremely inflated rate? Why not buy more properties and continue the cycle?

The younger generation is waiting patiently for the bubble to burst. It is what holds back many first time buyers from entering the market. How is the bubble supposed to burst if Investment Companies will convert any homes that dip even remotely in value to rental properties (and there sure is enough information out there on how to effectively do this)? Individuals who are already fairly well off and that have a pool of savings are being out-competed; Can we really expect a couple in their late 20s or early 30s to compete in the same arena? Investment Companies now have a vested monetary interest in keeping the bubble from bursting, and they have the means of doing so. And they don't like sharing.

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The rental generation

So where is this all headed? It's simple... if you can't afford to buy, the next option down the list is to rent. Not only that, but rentals will be for the same properties that people once looked to buy. In some cases, rental costs may even begin to exceed the cost of what would have been a reasonably priced house payment (not reasonable by today's standards, reasonable by the standards 5 years ago. There is nothing reasonable about prices today). I've already covered the idea that rental is becoming the only option for many looking to move out, so it begs the question:

Are we not kind of already there?

And on top of that, the company you pay rent to for the property is the one that outbid you for that house. At the risk of sounding like I'm being overly dramatic, Investment Companies have found a way to hold the housing market hostage. You now can no longer pay what the market value for the home is, you can only pay what the company that owns it all wants you to pay. It gives a small set of companies control to set the market price to whatever they want. Don't like it? Where else are you going to go?

So to recap, we have Investment Companies with large sums of money that have bought into a bunch of real estate. They now have the ability to control...

The Price

The Supply (and The Demand as a result)

Who gets to participate

And again, to a company, a house is not a home. It is an asset. The company does not care if the house sits empty because it still has value. The only ones that get punished here are those that are looking for affordable housing.

So why won't the bubble ever burst? Because what is affordable to the average person is not the same as a company. You cannot compete with a company. The bubble will never burst because the moment it becomes even remotely affordable, you will be outbid. Right now, there isn't anything saying companies can't participate in buying real estate. Until that happens, Investment Companies will be the gatekeeper to the housing market.

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A growing trend

It seems to be that a growing number of industries are headed to subscription based models. It's becoming increasingly uncommon to actually "Own" something these days, and you are expected to sign lengthy contracts (that no one really ever reads) stating that your service can be revoked at any time. With Investment Companies intent on keeping the bubble from bursting, we are headed towards a rental heavy housing market, and isn't rental just a subscription to a roof over your head?

Rental housing isn't a bad thing. Is it the stereotypical American Dream to say that you rent your house? No, but there are some benefits to rental as opposed to ownership. But as I've always argued, choice is a good thing. When you take a small batch of Investment Companies and hand over all the power in a market for them to do as they wish, can they be expected to work for anyone's interests other than their own?

We keep on hearing that the housing bubble will burst soon. We keep being told that we're on the brink of a market crash and that the market will correct itself. On an even playing field, sure. This is not an even playing field. Don't wait for the bubble to burst, because right now there is no scenario where the bubble bursts for the common house buyer.

The nail in the coffin on this is that you can't win. If you purchase a house, then congratulation, but you probably had to pay $100,000 over asking price and take a massive hit to your budget. That's not winning. Only by returning the real estate market to a person-centric space can we hope to pop the bubble. So don't feel bad if you can't afford to buy a house and have to look to rental. You won't be the first or the last... you'll be the norm.

~IR

Do you own a house or are you currently renting a place? Do you see an end to the housing bubble? Or maybe you just have a comment to add? Check out the Facebook, Twitter, Instagram, or LinkedIn page and let everyone know. Don't forget to follow or like the page for updates! And share this article if you feel others should give it a read!

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