A Software Monopoly's Influence on Rising Rents

[Milton Kuo]

This is a long article from Pro Publica that talks about a software product used by the multifamily housing industry to optimize pricing and revenue. Between the Federal Reserve's decade-plus of ridiculous interest rate policy and large scale purchase of mortgage-backed securities; the concentration of ownership of rental units among fewer and fewer participants; and a software program that indirectly enables collusion on rents, the affordability issue is becoming a very serious problem. For example, the revenue management program could encourage a higher rate of vacancies whose loss of rent revenue is more than made up for through higher rents. Do this for many properties owned by multiple owners, all using the same software and using the same data set, and this becomes another distorted market created by too much easy money.

Rent going up? One company's algorithm could be why

[thriftyandboringinohio]

Fascinating Milton, thanks.

[Milton Kuo]

Continuing this story, a lawsuit has been filed against RealPage and a handful of multifamily lessors for being a cartel that artificially inflates rents in violation of federal laws. I think this bears watching because one of the very nasty side effects of the Federal Reserve's housing bubble of the 2000s and its subsequent desperate reflation of the housing bubble and all of the crappy financial paper related to bubble prices for real estate is that housing--both purchase prices and rents--have gotten out of control for the people living in them.

This may have implications on returns for entities that make their money buying apartment complexes, possibly improving them, raising rents, and then selling them. For those of us here who have invested with Eastham Capital, this should be of interest especially since we have a highly interventionary administration that regularly flouts existing federal laws.

https://www.propublica.org/article/r...in-new-lawsuit

[thriftyandboringinohio]

The Great Financial Crisis of 2007 and 2008 centered on housing. The cause was a huge inflow of "dumb money" that bid up prices to the moon using those crazy sub prime NINJA loans, which were in turn created by the mortgage backed securities derivatives banks used to offload the doomed mortgages.

Today's toxic real estate market also seems to have no end of "dumb money" bidding up prices to the moon. Prices higher than individual people can afford to pay each month, and prices higher than astute investors can tolerate to make good profits.

As I understand Eastham Capital, their strategy is essentially a gambit using gentrification -buy class C properties in Class B neighborhoods and let the neighborhood upgrade to class A for high rents and high resale.

[Milton Kuo]

The Great Financial Crisis of 2007 and 2008 centered on housing. The cause was a huge inflow of "dumb money" that bid up prices to the moon using those crazy sub prime NINJA loans, which were in turn created by the mortgage backed securities derivatives banks used to offload the doomed mortgages.

The truly dumb money in the 2000s housing bubble was Wall Street, which subsequently needed a multi-trillion dollar bailout to save its stupid ass and to protect the reputations and careers of the idiots working on Wall Street who were too corrupt and/or too stupid to stay out of harm's way. In a perverse sense, the smart money was all the deadbeats who helped themselves to a lifestyle that they otherwise could not afford. For them, it was fun while it lasted.

Today's toxic real estate market also seems to have no end of "dumb money" bidding up prices to the moon. Prices higher than individual people can afford to pay each month, and prices higher than astute investors can tolerate to make good profits.

I don't know how dumb the money is. To be certain, there is exceptionally stupid money chasing SPACs, meme stocks, cryptocurrencies, and NFTs. However, one thing the Federal Reserve has made abundantly clear over the past decade-plus is that there is no act that is too banana republic for them. In 2013, I didn't think it possible that they would truly go on a rampage of purchasing one trillion dollars of U.S. Treasury bonds and mortgage backed securities solely to goose asset prices until after they had completed it. The entire time, I kept thinking that it was a high stakes game of financial chicken and that they would stop as soon as they had convinced the private sector to start buying before the Federal Reserve bought everything up.

After the peculiar troubles in the Treasuries market in 2018 resulting in more Federal Reserve largesse and then another massive round of LSAP in 2020, can you blame the hoi polloi--most of whom are not educated, trained, or experienced in investing--for buying any and every asset? As "stupid" as they are, they have a rough idea of what's going on.

As I understand Eastham Capital, their strategy is essentially a gambit using gentrification -buy class C properties in Class B neighborhoods and let the neighborhood upgrade to class A for high rents and high resale.

I can only speak to some of Eastham Capital's investments but for the properties that I have visited, I have seen no gentrification which is kind of a real estate speculation play as you assume that poor people and criminals will somehow get squeezed out of an area by yuppies causing real estate prices to skyrocket. I think the more likely scenario is that it's a class C property in a class B neighborhood and they renovate the property to a class B property to capture higher rents commensurate with a class B neighborhood and, with proper management, higher occupancy rates. I don't think having a class B neighborhood become a class A neighborhood is part of the general investment profile.