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Invitation Homes—a subsidiary of Blackstone—now owns more single-family homes than any other entity in the country. Here, an Invitation Homes for-rent sign in Chicago.

Game of Homes

The private-equity firm Blackstone could be your next landlord.

BY Rebecca Burns, Michael Donley & Carmilla Manzanet

While the 'American Dream' of homeownership has always been an exclusionary one, out of reach for millions of people of color and working-class whites, a rental market controlled by Wall Street could easily turn out to be a nightmare for all.

In a 2011 report, Morgan Stanley analysts proclaimed that America was experiencing a transition from an ownership society to a “rentership society.” “The combination of falling home prices, limited mortgage credit, continued liquidations and better rental options is fundamentally changing the way Americans live,” says the report, concluding, “We believe this change is only beginning.” For Wall Street firms, the Morgan Stanley report appears to have become a self-fulfilling prophecy: Seeing a profitable opening in the wake of the foreclosure crisis, investment groups have worked diligently to bring a “rentership society” into being. During the past two years, investors have bought approximately 200,000 single-family homes, mostly foreclosures, in urban areas nationwide, with plans to convert them into rental properties. In Atlanta, one such investment group purchased 1,400 homes on a single day in April of last year.

This investor-led feeding frenzy has sent home sales and prices rising again, leading some commentators to hail a “robust housing recovery.” But it’s one that’s happening largely without homeowners. In the final months of 2013, the rate of homeownership dipped to an 18-year low of 65.2 percent, down from a 69.4 percent peak prior to the 2007 financial crisis, according to U.S. Census data.

Some commentators have chalked this trend up to itinerant millennials who choose renting over buying as a matter of preference. But growing numbers of older Americans are also finding themselves renting due to wrecked credit, continued unemployment or the inability to outbid deep-pocketed investors. And while the “American Dream” of homeownership has always been an exclusionary one, out of reach for millions of people of color and working-class whites, a rental market controlled by Wall Street could easily turn out to be a nightmare for all.

In the new rentership society, the largest landlord of them all is the Blackstone Group—which, with $266 billion in assets, is also the world’s largest private equity firm. Through a survey of Blackstone-owned rental homes in Chicago, as well as interviews with housing advocates and policy researchers, In These Times discovered a slew of concerns related to this new investor-owned housing stock. Tenants report poor conditions and attempts to evade responsibility for maintenance that appear to violate city ordinances. Moreover, housing advocates worry that investors’ long-term presence in recovering neighborhoods will speed gentrification and shift the balance of power away from communities, to faraway Wall Street landlords.

The new landlord on the block

Long a bête noire for progressive activists because of its history of buying out troubled companies and then shipping jobs overseas, Blackstone began its foray into real estate in 2012, when it created a subsidiary called Invitation Homes to purchase and manage single-family rental homes. Invitation Homes has since become the largest owner of single-family homes in the United States, spending more than $7 billion to gobble up 41,000 properties.

(Full disclosure: Two authors of this story, Michael Donley and Carmilla Manzanet, had a personal encounter with Invitation Homes last year when the company evicted them from the home they were occupying. Read that story here.)

Invitation Homes claims on its website that by removing vacant, foreclosed houses from the market, it is reducing blight and “providing a much-needed service for communities across the nation.” But Blackstone is backed by a host of companies that bear direct responsibility for the foreclosure crisis, including Morgan Stanley, CitiBank and Bank of America. After first making money from the housing bubble that crashed the economy, then benefitting from the federal bailout, banks and investors now stand ready to profit all over again by cleaning up the mess they made.

“They’re sitting on record amounts of cash,” says William K. Black, an associate professor of law and economics at the University of Missouri-Kansas City and a former financial regulator. “Why not buy something with it?”

At the height of Blackstone’s buying spree, real estate agents in cities such as Phoenix and Atlanta, where home prices fell furthest, began noticing that businessmen with suitcases full of money were showing up and picking the market clean at housing auctions on behalf of Blackstone and other investors, easily outbidding first-time homebuyers who weren’t able to put down 100 percent cash.

Now Blackstone’s purchases of empty homes are proceeding apace in more than 10 major metropolitan areas in Atlanta, Chicago, Las Vegas, Phoenix, northern and southern California, Miami, Orlando and Tampa, Fla.

Meanwhile, rental demand is soaring as would-be homebuyers are squeezed out of the market. Add to that the 10 million people who lost their homes during the foreclosure crisis, and Blackstone and its backers have a captive market at their disposal, as they graciously offer to rent foreclosed homes back to former homeowners.

In many cases, victims of foreclosure are literally renting back their own houses, notes Rob Call, an organizer with Occupy Our Homes in Atlanta. “If Blackstone buys a house at an auction, they may show up pretty much the next day,” he says. “They’ll knock on the door and say, ‘You can either rent the home you used to own, or we’ll evict you.’”

Big Finance’s ‘bet on America’

Invitation Homes has called its investment strategy a “bet on America.” This may be a bit too much honesty, considering the financial aspect of the company’s operations. In October 2013, Blackstone partnered with Deutsche Bank to offer a first-of-its-kind “rental-backed security” to Wall Street investors to the tune of $480 million.

If this sounds eerily familiar, that’s because it is. Rental-backed bonds work essentially the same way as the mortgage-backed bonds that crashed the economy in 2008, except that they are serviced by monthly rental checks rather than mortgage payments. Other investment companies are now coming to the trough and preparing to offer similar rental-backed bonds. Financial analysts at Keefe, Bruyette & Woods estimate that the rental securitization market could balloon into a nearly $1 trillion industry in the next six years.

On March 4, 75 housing and consumer advocacy groups sent a letter to federal bank and housing officials, warning of another bubble in-the-making and demanding federal intervention. “We are poised to experience another crisis if federal regulators fail to recognize and take corrective action to address red flags that are all too familiar,” the letter cautioned.

Particularly troublesome is the fact that Blackstone’s security assumes a 94 percent occupancy rate in the 3,000 properties backing its first bond, a target that rental estate professionals say is extremely challenging.

Already, there are signs that this high occupancy rate isn’t bearing out: Bloomberg reported in February that rents collected on collateral for the Blackstone security declined by 7.6 percent from October 2013 to January, as a result of leases expiring or tenants exiting early. While several major credit rating agencies assigned Blackstone’s security a sterling triple-A rating when it was rolled out in October, Standard & Poor’s cautioned in February that this accolade was premature, given the infancy of the REO-to-rental securitization market. The inexperience of new companies in managing large numbers of rental properties means that it’s still difficult to gauge the predictability of rental payments, according to Standard & Poor’s.

Indeed, an In These Times survey of a portion of the 2,500 Blackstone-owned homes in the greater Chicago area suggests high vacancy vates in homes purchased during the past year. Using data from the Cook County Recorder of Deeds, In These Times identified approximately 200 properties in the city’s northwest neighborhoods acquired by Invitation Homes during the past year. In February and March, In These Times surveyed 50 of these properties and discovered only 17 that were occupied. Invitation Homes indicated that it may take the company six to eight months to rehabilitate and rent out properties, but declined to comment on the record about its occupancy rates. However, 24 of the properties surveyed had been acquired by Invitation Homes at least eight months prior, and half of those were still unoccupied.

These and other warning signs have caught the eye of some policymakers, but to little effect thus far. In January, Rep. Mark Takano (D-Calif.) wrote a letter to the House Financial Services Committee requesting hearings on rental-backed securities. “Proper oversight of new financial innovations is key to ensuring we don’t go down the same road of the unchecked subprime mortgage-backed security and create an unsustainable bubble that will wreak havoc when it bursts,” he wrote. (As In These Times went to press, no hearings had been scheduled.)

Wall street slumlords

Rental-backed bonds aren’t the only aspect of Blackstone’s operations that worry housing advocates. In cases where Invitation Homes is actually acting as a landlord, the evidence so far indicates that it isn’t a very good one.

Antonio Hernandez, 34, moved with his family into an Invitation Homes-owned property in Chicago’s Belmont Cragin neighborhood in February 2013. He says the company has tried to shift most of the responsibility for maintenance of the home onto him. “It doesn’t make sense that I would be responsible for someone else’s home,” Hernandez tells In These Times. “Everything I do to take care of it adds value for them, not for me.”

When Hernandez began renting from Invitation Homes, he was also perplexed by a section of his lease that says he must rent the property “as is.” He isn’t the only one. In These Times obtained a copy of Invitation Homes’ lease and presented it to Mark Swartz, legal director at the tenants’ rights organization Lawyers’ Committee for Better Housing, and Kelli Dudley, director of the nonprofit Resistance Legal Clinic. Both housing attorneys told In These Times that several sections of the lease violate Chicago’s Residential Landlord Tenant Ordinance (RLTO), a longstanding document that establishes the baseline of tenants’ rights and governs most residential agreements in the city.

In response to inquiries from In These Times about the legality of the lease given to Chicago tenants, Invitation Homes spokesperson Andrew Gallina wrote in an e-mail, “Invitation Homes complies with all fair housing laws and regulations. We use standardized leases adopted by state and local real estate associations, which comply with local statutes.”

But Dudley notes, for example, that while commercial leases sometimes say that tenants have to rent a property “as is,” putting this stipulation in a residential lease “is a violation of the RLTO, which clearly places the greatest responsibility for repairs on the landlord. … [Invitation Homes] is definitely overreaching and trying to shift all the risk and the expense to the tenant,” she says. Swartz adds that the lease's attempt to indemnify Invitation Homes for any damages, including those caused by its own negligence, violates Illinois' Landlord and Tenant Act. He also points to several other sections of the lease that are illegal under the RLTO, including a stipulation that tenants must pay the associated fees in the event that Invitation Homes employs an attorney to enforce an eviction or collection of rent.

Hernandez also says that since moving in, he’s faced a slew of problems with the home. Most recently, he says, after Invitation Homes ignored multiple requests to fix a railing in the basement, his mother-in-law fell down the basement stairs and hit her head.

Hernandez also says that it is difficult to reach personnel with complaints and that he has had six different property managers over the course of his yearlong tenancy. A forthcoming report from Occupy Our Homes Atlanta and the Right to the City Alliance also found that while some Invitation Homes tenants in Atlanta are given a specific point person to relay concerns to, most receive only a phone number and are asked to communicate requests via voicemail.

Hernandez' experience resembles those of Invitation Homes renters in other cities who have complained that major plumbing and electrical problems have gone unaddressed for weeks or months on end, according to a report by Ben Hallman and Jillian Berman in the Huffington Post. Hallman and Berman also spoke to former Invitation Homes employees who told them that the high volume of complaints and the wide geographical distribution of rental properties amounted to a near-impossible feat for workers tasked with fielding maintenance requests. Tenants renting with Colony American Homes and American Homes 4 Rent, the two other major investors-turned-landlords, have reported similar complaints.

When asked by In These Times about tenant complaints, Gallina wrote, “We pride ourselves on the affordability and quality of our properties, the customer service we deliver and the professional management we bring to the rental home industry. … When issues like the ones referenced are identified we work hard to quickly resolve them.”

Dudley, however, is concerned that as large banks and investors increasingly take on the role of landlords, the rights of tenants and homeowners are being increasingly trampled. (Full disclosure: Dudley is also handling the suit involving Invitation Homes’ eviction of two authors of this piece.) She says she first noticed this trend when handling foreclosure cases in which homeowners had their possessions put out on the curb by a bank before they had even been served with court papers. Such an action clearly constitutes an illegal eviction, but was widespread nonetheless.

“We’re at risk of entering a vigilante society in which a powerful company can decide that it doesn’t like someone being on its property for whatever reason, come in, dispossess that person, take their things, kill their pets, and face consequences that aren’t nearly severe enough,” says Dudley. “It’s a complete disregard of laws that took thousands of hours of work by advocates and legislatures to develop. These companies think they’re so powerful that they can undo all that.”

Indeed, Invitation Homes has appeared to move quickly on evictions. Last November, Hernandez was surprised when an Invitation Homes agent arrived at the end of the week to deliver him a five-day eviction notice. The company had asked him to switch to its online payment system, but the system had failed to deduct his rent for that month. Though Hernandez was able to rectify the situation, similar experiences in other cities suggest high eviction rates among Invitation Homes tenants. According to a report in the Charlotte Observer, Invitation Homes filed eviction proceedings against 10 percent of its renters in Charlotte, N.C., during several months in 2013. The report compares this to Camden Property Trust, one of the city’s largest landlords, which initiated eviction proceedings against just 2.5 percent of its tenants in 2013. Some financial analysts have said that quick evictions may be part of Invitation Homes’ business model, thanks to the need to keep securitized rental payments flowing. (Invitation Homes declined to comment on the record about its eviction rates).

The prospect of large numbers of tenants left at the mercy of a far-removed firm concerns housing advocates. While labor activists have long bemoaned Blackstone’s strategy of buying out companies and then refusing to acknowledge responsibility for worsening conditions—a problem labor reporter Josh Eidelson refers to as, “Who’s the boss?”—Blackstone’s place at the head of a housing empire may now raise a new question: “Who’s the landlord?”

Blackstone neighborhoods?

Invitation Homes says on its website that by removing distressed inventory from the market, it is contributing to the housing recovery by “stimulating economies in areas hardest hit by the housing crisis.”

Housing organizers beg to differ, noting that while Blackstone may be buying in cities where prices fell the furthest as a whole, they’re avoiding the hardest-hit neighborhoods in communities of color, instead focusing on suburban enclaves or areas where rents are already on the rise. Advocates worry that the heavy investor presence in the rental market will send gentrification into overdrive in recovering neighborhoods. “It's basically a massive land grab,” says Occupy Our Homes organizer Rob Call.

In response to criticism, Blackstone has insisted that it provides affordable housing, writing on its website that its “average rents per square foot in our single family homes are approximately 30 percent below comparable multifamily rents.”

However, comparing rents to rents may be missing the big picture, given the possibility that Blackstone and other investors are locking would-be homebuyers out of the market: Those priced out of homeownership still generally pay more in monthly rent than they would in mortgage payments, according to data from the real estate website Trulia. 

And while Invitation Homes rents vary widely by neighborhood and city, some studies suggest that the heavy concentration of investor-owned housing is already having a detrimental impact on affordable housing. A report from DePaul University’s Institute for Housing Studies found that the rapid growth in investor-owned single-family housing may be one factor fueling a widening gap between the supply and demand for affordable rental housing in Chicago and the surrounding suburbs, given that the median rents in single-family-home rentals are 41 percent more expensive than those in other types of rental properties, once utilities are factored in.

Moreover, as the stock of vacant homes dwindles, investor-landlords may seek to raise rents in order to pass the increasing costs of acquiring homes onto tenants, notes a February 2014 report from the Center for American Progress. The report also predicts that Invitation Homes could raise rents if overall occupancy rates aren’t being met, in order to continue making monthly payments to bondholders. “Managing portfolios of tens of thousans of single-family rental homes across the country may be more expensive than most institutional investors have planned,” Sarah Edelman, the primary author of the report, tells In these Times. “These expenses, along with increases in home prices, could put upward pressure on rents as operators try to deliver the returns on investment they have promised.” Hernandez says his rent was raised by $200, an 11 percent increase, between the first and second year of his tenancy—more than double the average increase in Chicago rents between 2013 and 2014, according to Trulia.

The University of Missouri-Kansas City’s William K. Black also worries about the impact that investor-owned housing will have on neighborhoods as a whole. He suggests that groups like Blackstone may try to lower their property taxes by reducing the appraisal values for the homes they own—which could drain city coffers. “That’s a big hit in particular areas where they’re buying thousands of homes,” says Black. “You can imagine what that’s going to do to the budget, for things like school districts.”

This scenario is already playing out in Huber Heights, Ohio, where the hedge fund Magnetar Capital LLC bought up a third of all rental properties, then proceeded to apply for the “largest reduction in residential property taxes in the county’s history,” according to Bloomberg. The local school board is fighting to block the reassessment, which could slash up to $800,000 from the education budget.

Black notes that the function Blackstone is performing, of rehabbing homes and making them available again, could also be performed by government agencies or community organizations. By relying on Blackstone to lead communities to “recovery,” Black says, the potential is there for investors to accrue too much influence: “Will their economic power begin to translate to political power through cronyism?” he asks.

For these reasons, activists believe that a fight against Blackstone could be the next front in the battle for the right to the city.

“This is a game-changer,” says Call. “These companies are offering their solution, which consolidates private ownership into the hands of Wall Street. … This is a real opportunity for community groups to act and provide an alternative.”

Want to learn more? Read about some of those alternatives here.

Michael Donley and Carmilla Manzanetare housing activists in Chicago. Rebecca Burns is a staff writer for In These Times. Read more of her work here.

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