BLACKSTONE, ELON MUSK & ALL-CASH OFFERS: The Real Story of the US Real Estate Market

By weeklyscanner | WeeklyScanner | 29 Apr 2022


Last week,  Elon Musk did something that, given his billionaire status, could've been considered almost yawn-worthy. He made an all-cash offer on a property.

According to Redfin, nearly one-third (30%) of US home purchases this year were paid for with cash.

The only difference in Elon's case is that the property he had his eye on was virtual: Twitter. After reportedly divesting from his entire real estate portfolio in 2021, he was living in a rented tiny home at SpaceX's Texas HQ worth just $50k when he made the $43 billion bid on what he hoped would be his next virtual property.

But while Elon's offer may have been rebuffed (for now), another significant all-cash offer, just a few cities away, was not.

On Tuesday, investment firm Blackstone announced that it's acquiring student housing company American Campus Communities in a $12.8B all-cash deal. The move will make Blackstone the largest publicly traded owner of campus housing in the US, with 166 buildings in cities and college towns across the country.

Unlike Elon's personal real estate approach, Blackstone has been buying up US residential real estate left and right – with a special focus on affordable rentals.

It's a strategy that's paid off for them: "home values grew 19.6% last year, an all-time high in Zillow's data, which dates back more than 20 years. "

This proliferation of all-cash offers, combined with a record-breaking bump in real estate prices, has created a market in which it is nearly impossible for first-time lower- and middle-income homebuyers to compete.


According to a recent survey from the Federal Reserve Bank of New York,

... renters making less than $60,000 a year assign just a 33.5% average probability of ever owning a primary residence, the lowest since the survey question began in 2015 and down from 41.3% last year. Lower-income US residents are losing faith that they can tap into the real estate market, the top driver of household wealth.

An October 21, a survey by the Pew Research Center reported that "about half of Americans (49%) say the availability of affordable housing in their local community is a major problem, up 10 percentage points from early 2018."

This is a familiar refrain among my millennial peers, who graduated into a recession, setting their savings potential back significantly just as inequality around the country was taking off.

Pre-pandemic, this was true mostly in major tech hubs – San Francisco, New York, Seattle. With some key exceptions among high earners, the ability to purchase a home in those areas has been accessible primarily to those whose families can assist with financing.

In the last few years, it's become a common refrain throughout the rest of the country as well.


As The Motley Fool wrote in early April:

Over the past two years, US home values have risen 32%. Meanwhile, total inventory has dropped from a monthly average of 1.6 million units in 2019 to just over 1 million in 2021, per Zillow's estimates. And so far, inventory has not risen this year.

For prospective homebuyers, homeowners, developers, and investors ... the questions on everyone's minds are the same:

Will the market ever go back down? If so, when?

Answering these questions requires us to get honest about the underlying drivers of the real estate boom. It's a story you don't see much of in mainstream media. (But then, of course, that's why you subscribe to the Global Report.)


The Real Origins of the Boom

Most media outlets posit the boom as a natural result of the Covid-19 pandemic: freed from their office tethers and buoyed by a bull market, they assert, Americans of all ages and backgrounds are setting themselves free, migrating to sunnier, cheaper climes, with more space.

But the real story is much more nuanced – a combination of shifting cultural norms, increased American polarity, and the concentration of capital.

There are three main patterns driving the housing market:

Pattern 1: Rising inequality is concentrating capital in the hands of high-income Americans and those with generational wealth.

Pattern 2: High-income Americans are migrating to areas with wealth-favorable tax codes.

Pattern 3: Historic levels of institutional investment in residential real estate are heating up the market to an unprecedented degree, with a special focus on the sector of the housing market that has historically been more accessible to low- and middle-income Americans.

By understanding the origins and confluence of these three factors, we can start to get a sense of what to expect from the future market.

1. Income Inequality Concentrating Wealth

According to a recent Pew analysis, those in the "Upper Income" category held 50% of all American wealth in 2020 – up from 29% in 1970.


That trend was exacerbated by the pandemic, which disproportionately affected the emergency savings of lower-income job holders: "Average liquid assets, which typically reflect emergency savings, rose at the start of the pandemic in all three income groups. But, they started to gradually decrease for households in the bottom 20% after September 2020, while they peaked for the average household in the middle 20% in June 2021."

What's more, while liquid savings make up the bulk of the wealth of low-income households, it's only a small part of the portfolio of higher-income households. Rising home prices and stock-market gains in the last two years have disproportionately boosted upper-income wealth, which typically owns greater proportions of real estate and stock assets.

And it's not just that the upper-income group has accumulated more wealth. They have also grown in population, making them a more significant demographic force – their ranks grew from 14% in 1971 to 21% in 2021 – alongside a correlating increase in the lower-income tier, from 25% to 29% in that same period, according to Pew.

For context, according to the 2020 Survey of Consumer Finances, "In 2019, homeowners in the US had a median net worth of $255,000, while renters had a net worth of just $6,300. That's a difference of 40x between the two groups."

What kinds of real estate is this high-income group investing in? Where? And why?

2. Migration of High-Income Americans to Wealth-Favorable Tax Locales

For many years, I naively assumed that climate events would drive those who could afford it into lush, water-rich regions like the Pacific Northwest and the Upper Hudson River Valley.

But when we examine the proportion of all-cash offers by geography alongside state migration numbers from the last few years, a very different story emerges.


Washington state has been near the top of the list for inbound migration since 2019, but it doesn't appear to be because of its hydropower. Florida, Texas, Arizona, and North Carolina – states that will be hardest hit by rising sea levels, drought, and extreme weather patterns – come in first through fourth.

What do these states have in common?

Low personal taxes.

Florida, Texas, and Washington have no income tax, to speak of. Arizona's applies only to those whose income is generated within the state. North Carolina has no estate tax, has only 2.5% corporate income tax, and has cut its personal income tax in recent years.

It would seem that we are witnessing a huge migration of high–net-worth individuals, perhaps nervous about shifting cultural tides and attitudes toward wealth redistribution, to states with wealth-friendly tax codes.

Now, this in itself would provide a boost in these markets. But it's not the whole story.


If we compare migration numbers with the places where all-cash offers are unexpectedly high, the other half of the places on the list make up a very different segment of the housing market.

Detroit, Michigan.

Des Moines, Iowa.

Augusta, Georgia.

Cleveland, Ohio.

These places aren't seeing commensurate migration numbers. They aren't necessarily appealing to high-income individuals.

So, who's buying all that property in all-cash?

The answer is, in many cases, investors.

3. Private Investors Driving Market Prices Up and Low- to Mid-Income Homebuyers Out of the Market

Remember Blackstone? The firm behind the all-cash acquisition of student housing all over America?

It has very deep pockets. And it's not alone.

Blackstone deployed almost $46 billion in capital across global real estate last year, bringing its total capital under management to $279.5 billion – a 49% increase from the prior year.

Gulp. That's a lot.

How much of that made it into the US market?


In just the third quarter of 2021, institutional investors made $63.6 billion in all-cash purchases of US residential real estate.

$63.6 BILLION. It's a mind-blowing figure.


What's more, the strategy of real estate investors is a little different than the cohort of high-income earners migrating to tax havens.

Redfin analysis of the investor market found a high emphasis on single-family homes and a willingness to invest in climate-risky locales:

Single-family homes represented nearly 3 in 4 (74.4%) investor purchases in the third quarter – the highest level on record. That's up from 70.6% a year earlier. Meanwhile, condos / co-ops made up 16.9% of investor purchases, a record low and a decrease from 19.8% in the third quarter of 2020. Townhouses and multifamily housing represented 5.4% and 3.4% of investor purchases, respectively – little changed from a year earlier....

The typical home they purchased cost $438,770-5.3% higher than a year earlier amid an increase in housing prices. More than three-quarters (76.8%) of investor home purchases were paid for with all cash in the third quarter....

Almost two-thirds (65.2%) of the homes investors bought in the third quarter had high heat risk, and a similar share (64.3%) had high storm risk. Meanwhile, 27.1% faced high drought risk, 22.2% had high flood risk, and 3% had high fire risk. These percentages don't add up to 100% because it's possible for homes to face more than one climate risk.

And, as the Washington Post reports:

Neighborhoods where a majority of residents are Black have been heavily targeted, according to a Washington Post analysis of Redfin data. Last year, 30 percent of home sales in majority Black neighborhoods were to investors, compared with 12 percent in other Zip codes, The Post's analysis shows. ...

The effect of investor activity differs city to city. Regions with the highest share of investor purchases are in the south, stretching from Florida to Arizona, with a quarter of all home sales in Atlanta and Charlotte last year going to investors. But some of the most targeted Zip codes overall are in the Rust Belt, especially heavily minority neighborhoods in Detroit and Cleveland.

Blackstone, one of the biggest players in this field, has just announced the creation of an affordable housing initiative, April Housing:

... April Housing will oversee and preserve affordability of an initial portfolio of over 90,000 housing units recently acquired by Blackstone Real Estate Income Trust (BREIT).

The move comes after BREIT recently took over the interests in a huge affordable housing portfolio from American International Group (AIG). The firm recently closed on a $5.1 billion sale involving approximately 80,000 units across more than 650 assets nationwide.

It's a bit of a Catch-22: hoovering up properties that could have served as a gateway to wealth for low- and mid-income individuals, in order to provide temporary housing for low-and mid-income individuals who are forced to continue renting indefinitely, given their prospects in the current market.

But the tactic is making Blackstone, for one, a lot of money. And that profit is attracting more capital from individual investors who want to buy into their products at a time of perceived market risk.

"Our opportunistic real estate and corporate private equity funds both posted their best annual returns in over a decade, appreciating over 40%," wrote Blackstone chair and CEO Stephen A. Schwarzman in his 2021 Chairman's Letter.

"The response from individual investors for Blackstone-managed private real estate and credit has been powerful. We raised nearly $40 billion for these two vehicles alone in 2021. BREIT has grown to more than $50 billion in equity and is now the largest investment vehicle at the firm."


The Future of US Real Estate

This cycle could continue on forever, if it weren't for the physical limitations of the US housing market. There simply isn't enough housing stock. And with mortgage rates on the rise, buyers are getting discouraged.

In March, as Bloomberg reported, "U.S. homebuilder sentiment fell to a seven-month low as rising mortgage rates and high asking prices led to declining sales and prospective buyer traffic."

The construction business is responding decisively to this shortage, making publicly traded construction businesses an ideal investment target for the next 12-24 months.


However, while they will be busy, Bloomberg reports that "builders are still faced with large backlogs that reflect supply chain difficulties, high materials costs and lingering shortages of skilled labor."

Given the escalating international situation with China and Russia, we should expect more challenges in this space over time rather than less. Building-supply companies creating alternative supplies and those with US-based manufacturing should do well.

The net-net of all this is that US home supply likely won't rise to meet demand for several years yet. So, expect this choppy overpriced market to continue, further dampening homebuyer enthusiasm.

The success of the investor model relies on a certain volume of individual homebuyers to make the market competitive. If individuals aren't willing to pay ever-higher prices for home ownership, and it seems they may not, investors will be left selling their assets back and forth to one another, creating a real estate house of cards.

Desperate for housing stock, with $40 billion in 2021 investment to burn, Blackstone and others like it will likely continue to drive the market for at least the next six months or so. Which means homeowners holding out for the top of the market would do well to sell in the next few quarters before profits start to dip and they go back to the drawing board with their strategy.

In the long run, though, this level of investment doesn't pan out. Blackstone understands this, of course. That's the reason behind its low-income and student housing pushes. When fewer and fewer people can afford to buy, renting becomes the primary profit center.

After all, even extremely high–net-worth individuals can only buy so many homes for their own use.

Even if, increasingly, they may not.

Just ask Elon. He might not be the new owner of Twitter, but he seems pretty happy in his $5oK rental. In income-tax­–free Texas, of course.

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