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Matteo Columbo
The TINA Trade
How homeowners are unknowingly financing their own community’s demise.
The “TINA” trade is an acronym for “There is no alternative.” It’s a term used by stock market investors to describe the current state of affairs where investors are forced to buy wildly over-valued stocks because of the paltry returns investing in anything else (e.g., Treasuries, corporate bonds, etc.). But it could just as well be a metaphor for the predicament middle-class homeowners are in.
Consider the following:
(1) According to Bloomberg News, two out of every 10 single-family homes “flipped” (bought and quickly resold) in the past year were done through “iBuyers” (technology-enabled transaction companies). The majority of these property transactions converted single-family, resident-owned properties into rental properties, which are now owned by major, global financial institutions. More significantly, that percentage increased to four out of every 10 homes in “hot” real estate markets and at an even higher percentage in disadvantaged communities of color.[1]
(2) When the state of California proposed passing SB 9 and SB 10, polls showed that a majority of homeowners in single-family neighborhoods (and an even larger majority in disadvantaged communities of color) opposed these laws. They felt the laws would destroy the fabric and integrity of their neighborhoods.
(3) Every year, 60 million people (the majority of whom are middle-class) pour billions of dollars of their hard-earned money into retirement plans; IRAs, 401ks, profit-sharing plans, etc., currently estimated at over $8 trillion in total invested funds. Other than having equity in a home, these savings are increasingly critical to having sufficient income to ever be able to retire in the U.S.
(4) In the 1980s, during the high-flying “penny” stock boom, before the advent of any semblance of reasonable banking disclosure laws, stockbrokers would buy stock in their own firm’s initial public offerings (IPOs) through third-party “rat” accounts (it was referred to as putting money “in the rat hole”)[2]. A “rat” was someone who set up a retail brokerage account with a relatively small amount of money, which was then issued IPO shares, which would typically shoot up to ten times the initial offering price at the opening of trading—at which time his “broker” would sell the shares and the rat and the broker would split the profits.
(5) The news recently reported that Tim Cook, the Chief Executive of Apple, was paid $100 million in compensation in 2021. That amount is a 570% increase in his compensation from the year before and it’s 1,465 times the annual pay of the average Apple employee, who’s paid an average of $68,254 per year.
So, you might ask, how are these things connected?
Blackstone, Inc.
The crossroads for all those middle-class retirement savings dollars are companies like Blackstone, Inc. Blackstone provides an opportunity to understand how global finance works, who it benefits, who it doesn’t, and how it impacts your neighborhood. Companies like Blackstone are where what’s happening on Wall Street connects to what’s happening on Main Street.
The top shareholders in Blackstone (its “owners”) are The Vanguard Group, Inc., Blackrock Fund Advisors, Capital Research & Management, Morgan Stanley, SSgA Funds Management, Wellington Management LLP, JPMorgan Investment Management, Janus Capital, and RBC Global Asset Management. Blackstone’s stock is also a holding in countless ETFs and mutual funds from Vanguard, American, JPMorgan, and Janus, to name a few, and the company advises pension funds, insurance companies, and private foundations; all of whom are desperately looking for alternatives to the TINA trade. The Blackstone’s of the world are also investment advisors to household name, brokerage companies like Charles Schwab, Fidelity, and TD Ameritrade.
As Blackstone’s website explains,
“Our clients include more than 31 million pensioners in the U.S. and millions more globally. As the world’s largest alternative asset manager, we partner with some of the world’s largest and most successful institutional investors, including major endowments, sovereign wealth funds and retirement systems.”
Traditional real estate investments in malls, retail space, office buildings, and the like have generally been sucking wind, while real estate cap rates (a measure of real estate value related to its income stream) remain stubbornly low and future returns are uncertain. So, your house (an asset in super high demand) looks like a pretty good "alternative" investment to the Blackstones of the world.
Blackstone is one of many global investment companies that are aggressive buyers of single-family homes across the U.S., through intermediary companies it controls. And real estate “fintech” (financial technology) companies, known as “iBuyers,” who are bursting at the seams with IPO and private investment funds, find themselves at the right place at the right time.
Bloomberg reports that what started as an online, tech-enabled way for homeowners to buy or sell a home more easily has morphed into a bonanza for institutional investors looking to build a rental real estate portfolio. As such, iBuyers have been rabidly buying up as many single-family homes as they can, sight unseen, and quickly flipping them to large, absentee, institutional buyers like Blackstone and its intermediary companies. Fortunately for iBuyers, these institutions use valuation and ROI metrics that have little relationship to the way families attempting to buy a starter home would evaluate a purchase, which allows them to overpay. The biggest losers in all this are first-time home buyers.
As I’ve argued in the past, one’s home is more than an investment. It’s a place to live, to raise a family, to be part of a community, and to feel safe. Those “returns” can’t be reduced to ROI statistics or algorithms.
Again, according to Bloomberg,
“The three largest iBuyers acquired more than 27,000 homes in the third quarter of 2021, nearly twice as many as they bought in the previous three-month period. At the end of September, the companies owned more than $10 billion worth of real estate.”
“A Bloomberg News analysis of more than 100,000 property records shows that Zillow and the two other biggest iBuyers, Opendoor Technologies Inc. and Offerpad Solutions Inc., are selling thousands of homes to landlords backed by KKR & Co., Cerberus Capital Management, Blackstone Inc., and other large institutions. In many cases, those properties are never even listed, further squeezing average buyers out of competitive housing markets.”
In other words, connecting some of the disparate dots noted above, when you pour your hard-earned money into that retirement savings plan, you are unwittingly funding global investment conglomerates that are pillaging the cherished single-family neighborhood that you worked so hard to be able to afford to live in.
But they want you to know they care
The home page of Blackstone’s website brags that it takes an “Integrated Approach to ESG.” It states that “Blackstone believes that Environmental, Social and Governance (ESG) principles are crucial to developing strong, resilient companies and assets that deliver long-term value for our investors.”
Forgive me for finding all this a bit of a stretch.
Unlike the residents in communities that are affected by top-down, state housing legislation, major financial institutions involved in real estate finance in California strongly supported SB 9 and SB 10 and all the other laws that have removed local control and environmental review requirements from the real estate investment risk profile. These financial beneficiaries of the state’s largesse (SB 9 and SB 10 have no affordability requirements) have also been financial supporters of their natural allies, such as the YIMBYs[3] and compliant politicians such as Senator Wiener. Groups they have not supported would include anyone who was against SB 9 and SB 10 and that’s particularly true for opponents in communities of color.
So much for the greenwashing and ESG B.S.
The iBuyers and the institutions they flip properties to also argue that by converting resident-owned, single-family homes to rentals they are creating much needed rental housing in tight supply markets, disregarding the fact that they add nothing to the supply-demand equation because every home they convert to a rental removes a potential starter home opportunity for a first-time homebuyer (i.e., ironically, Millennials and YIMBYs)
Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder, put it this way.
“These companies go around saying, ‘We’re going to help mom and pop and inject liquidity into the market.’ They don’t say, ‘We’re going to suck up houses from the ordinary market and sell them to Wall Street.’”
One has to wonder if any of the Sacramento lawmakers who feverishly promoted SB 9 and SB 10 are even remotely aware of all this. Did they consider for a minute that a fourplex apartment building that goes up where a single-family home once stood will likely be owned and managed by return-on-investment algorithms designed by global money managers who couldn’t care less what happens to the neighborhood or the city it sucks resources and public services from?
Could it be that those disadvantaged communities of color understood the real impacts of SB 9 and SB 10, better than all the YIMBYs, foundations, corporations, and cadres of high-paid “expert consultants” that endorsed those bills in Sacramento?
Imagine that.
On second thought, the politicians probably did know but just don't care.
SB 9 loopholes?
At the last minute, language was inserted in the text of SB 9 that supposedly excluded predatory developers, like iBuyers and their financial backers, from exploiting the law’s single-family home to fourplex by right provisions for a quick turnaround profit. In language that some argue is ambiguous and impossible to enforce, the law requires that the person who owns a property and exercises their redevelopment rights under SB 9 has to live in one of the units as their primary residence for 3 years after redevelopment. However, since corporations are considered legal “persons,” it’s been suggested that absentee investors will still attempt to exploit SB 9 to purchase, split lots, and redevelop properties. Some have said that the law should have restricted property owners to being “natural persons,” meaning human beings, to avoid ambiguity.
Regardless of what the outcome of the inevitable lawsuits that will follow, it may not matter. This brings us to the story of the rat hole.
There appears to be a workaround for iBuyers and their transactional partners to comply with the three-year residency requirement by purchasing properties using “rats;” or "nominee homeowners."
In just one of many possible scenarios, an iBuyer/institutional partnership would finance a "nominee" homebuyer's purchase and redevelopment of the property (iBuyers purchase with all cash offers; the nominee receives a personal loan with no payments due for 3 years, from the iBuyer/financial institution). The nominee then buys the property, takes title in their own name, and occupies it as their primary residence. Under the terms of their financing/development arrangement, the new “homeowner” would split the lot, redevelop the property as a fourplex, and rent out the other three units (hiring the iBuyer's pre-arranged designers, contractors, and management company). When the 3-year period is over, the nominee buyer (who has no money in the deal) would participate in the exit strategy profits.
Once this arrangement is in place and proforma cashflows are determined, revenue interests could be bundled with other properties as derivatives to sell in the broader debt markets to free up cash to buy other properties. After the three-year residency requirement period is up, ownership could be sold or traded or the property could be refinanced and the nominee homeowner could have the option to either buy or rent one of the units or take their profits and move on and do it all over again on another property under a similar arrangement.
How hard do you think it would it be to source candidates for that deal on Zillow or OpenDoor’s website? We can probably look forward to seeing a version of this play out; coming soon to a neighborhood near you.
The conundrum of blame
About now you’re probably asking, what does Tim Cook and his hundred million dollar compensation package have to do with any of this? People like Tim Cook who have vast amounts of wealth are the preferred clientele of the Blackstones of the world.
Bloomberg quotes Tim Cook as saying that he intends to give away all of his multi-billion dollar personal fortune before he dies “after providing for his nephew’s education costs.” I find this to be a very bizarre statement.
It makes we wonder, does Tim Cook intend to finance and build an entirely new college for his nephew to attend? Is that why he’s worried enough to include educational costs in this calculus about what to do with his billions? Does he have any idea how much money he has? It’s hard not to interpret this as a symptom of how the gross wealth inequities in our economic system are causing otherwise relatively intelligent people to lose touch with the realities of everyday life and its financial challenges for normal people.
Tim Cook makes 1,465 times more than his average employee and 3,333 times more than the full-time, minimum wage-earning, maintenance crew member who cleans his private executive bathroom. And this man is still concerned about the cost of a college education for his nephew? And he’s not even self-aware enough to be embarrassed to say so?
To me, it's just another example of the incredible disconnect between the world of immense wealth and the world everyone else lives in.
But I can hear the iBuyer tech-bro's rebuttal now. This is how the game is played; Law of the Jungle and all that stuff. After all, isn’t wealth accumulation and maximizing profits over everything else our society’s highest priority? Isn’t that what everything in our crypto-touting, TikTok influencing, spaceship-riding culture tells us success in America is all about? Money... and what it can buy?
I guess, I can't argue with that grim assessment.
[1] Bloomberg News
[2] This scam was mentioned in the movie “The Wolf of Wall Street”
[3] YIMBYs are being led astray by their own financial backers whose tactics are decreasing their chances of home ownership. Their ideology and naiveté is causing them to act against their own self-interest without even realizing it.
Bob Silvestri is a Marin County resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded by individuals and nonprofit donors. Please consider DONATING TO CVP to enable us to continue to work on behalf of California residents.