Are hedge funds planning to crash housing?

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Are hedge funds planning to crash housing?

Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes

Ok, I'll state up front I don't think this is likely but I find it an intriguing conspiracy theory.  

Basically, the theory goes like this. 

Last time, the hedge funds knew we were in a housing bubble and were betting against housing (read the Big Short), but they didn't know exactly when the bubble would burst, which is always the problem with bubbles.  

For the current bubble (assuming there will be one)  the hedge funds are not only playing the upside by buying tons of houses (at one point in Atlanta 25% of houses were going to hedge funds or similar big players), they will play the downside (like a violin) as well.  After buying a lot of assets and still continuing to buy some assets they are then going to securitize their holdings by selling bonds.  Then they are going to start selling some of the holdings keeping control of enough assets so that they will be able to control the timing of the next crash.  They will use the funds acquired through selling and securitization to bet against housing. 

 Unlike the last time they will know when the bubble is going to burst because they will cause it to burst by suddenly putting a large number of houses on the market simultaneously at a steep discount. As any put buyer can tell you knowing when an over priced asset is going to crater is a huge advantage.

Yes, they would lose money (on paper) on the assets they still owned, but they would make much more money shorting the overall housing market.   

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Fay Chen
Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
10y

@Cal C., I did hear the home prices are due for an adjustment next year though. I heard different theories from different ppl:

  • Just the normal market cycle
  • ppl who got into a 7-yr variable loan just before the crash is about to get hit by a balloon payment
  • the Chinese government is starting to restrict money leaving the country. So there will be less investment money coming in the US market.
  • And now the hedge fund conspiracy

Whatever it is. I'd make sure I have my cash ready when the home prices start to fall.

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  • Moiez Karim
    Atlanta, GA · Member since 2015 · 32 posts · 6 votes
    10y

    Great topic...would love to see opinions

    1Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    10y

    Neat theory! The hole I immediately see is that the scale you're speaking of is immense, like, unimaginably immense. You're talking of a group of investors with enough of a foothold in the housing market to be able to tank it at will. Also, you're talking about this on a national scale. It would be more feasible if this could be done in one city, but across the whole country? I remain unconvinced. Additionally, it HAVE to be on a national scale to make this plan work. Think about how many houses that is, how many working parts, and most importantly, how many people have to be involved to make this happen.

    This would take more people working together and keeping their mouths shut than it did to fake the moon landing!

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    What @Alexander Felice left out is that any coordinated effort on such a scale would not be possible to keep secret and the fallout would most probably involve orange jumpsuits for those behind such a conspiracy.

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  • Brian Wysel
    Investor · Scottsdale, AZ · Member since 2015 · 22 posts · 7 votes
    10y
    I agree with @Alexander Felice , the largest players in the rental space have acquired around 50k homes across maybe 10-15 states. Even if all the funds consolidated, which is happening, and they were capable of selling them all at once, which would realistically take years, you'd only be talking about around 200k homes. That's only roughly 0.25% of the total SFR housing stock in the US. These guys don't have near as much influence as people think. I am curious about what has changed since the sub-prime debacle. Are people still going to be able to find ways to bet against the housing market? Will CDO's and credit default swaps come into play again or has the finance world learned its lesson?
    1Reply
  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Okay again. I don't think this is likely but for argument's sake- 

    When the hedge funds (institutional buyers) came into the Atlanta market we were still at or near the bottom and soon after the hedge funds came in the Atlanta market magically turned around.   It is extremely likely they had a very significant effect on Atlanta home prices.  

    The number of overall houses is not relevant.  What is relevant is the number of houses for sale.  In Atlanta there are about 37K houses for sale.  I'm fairly certain the hedge funds have bought more than 20K houses in Atlanta.  Obviously if a quarter of those suddenly came on the market at a steep discount, that would have a negative effect on home prices.  

    Let's say that the hedge funds discounted their properties by 20%, still probably giving them a profit.  This caused the Atlanta market overall to drop 10%.   This is not going to be kept secret.  What do you think is going to happen to other markets where the hedge funds have had a major presence?  

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  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Roy N.:

    What @Alexander Felice left out is that any coordinated effort on such a scale would not be possible to keep secret and the fallout would most probably involve orange jumpsuits for those behind such a conspiracy.

     Not sure if you fully understand how the political system works in this country.  Even after the excesses leading up to 2007-2008, very few if any of the banksters went to jail.  In fact, in 2010, they were able to pass Dodd-Frank (look at how much money those two took from the banks).  Since the passage of Dodd-Frank a grand total of two banks have started in the U.S.  

    One of the politicians who has the best chance to win in 2016, has taken millions from Wall street, especially the banks.  She claims that she needed to do it for her 2000 Senate campaign because of 9/11 which happened in 2001.     

    Hedge funds like Wall street are big contributors to both parties, especially one of them and I'm not talking about the Grand Old Party.  

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  • Nicole O.Pro Member
    Atlanta, GA · Member since 2015 · 29 posts · 5 votes
    10y
    Originally posted by @Roy N.:

    What @Alexander Felice left out is that any coordinated effort on such a scale would not be possible to keep secret and the fallout would most probably involve orange jumpsuits for those behind such a conspiracy.

     You would certainly think so, but after I saw Inside Job (where no one has even been investigated) I'm not so sure. 

    1Reply
  • Fay Chen
    Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y

    What if the hedge funds' plan doesn't work? Let's say they put all the homes on the market at a discount, and the working ppl like you and me goes "Oh great!" Then the market absorbs the homes. So the prices fall a bit, and a lot more ppl got homes at an affordable price... Now what? 

    If I were a hedge fund manager, I wouldn't tie up that much liquidity in real estate for a bet with too many variables. But I'm not a hedge fund manager ;P

    1Reply
  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Fay Chen:

    What if the hedge funds' plan doesn't work? Let's say they put all the homes on the market at a discount, and the working ppl like you and me goes "Oh great!" Then the market absorbs the homes. So the prices fall a bit, and a lot more ppl got homes at an affordable price... Now what? 

    If I were a hedge fund manager, I wouldn't tie up that much liquidity in real estate for a bet with too many variables. But I'm not a hedge fund manager ;P

     Then the would simply dump some more houses.  But I'd make dang sure that the fact I'm pulling out is all over the news.  

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  • Fay Chen
    Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y

    @Cal C., I did hear the home prices are due for an adjustment next year though. I heard different theories from different ppl:

    • Just the normal market cycle
    • ppl who got into a 7-yr variable loan just before the crash is about to get hit by a balloon payment
    • the Chinese government is starting to restrict money leaving the country. So there will be less investment money coming in the US market.
    • And now the hedge fund conspiracy

    Whatever it is. I'd make sure I have my cash ready when the home prices start to fall.

    3Reply
  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Of those a normal market cycle with a hint of mortgage rate rises I view as the most likely culprit if anything does happen.   

    But except for some really frothy markets SF (not from the fog) and Seattle (not from Starbucks) I don't see a steep decline as likely.  

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  • Brian Wysel
    Investor · Scottsdale, AZ · Member since 2015 · 22 posts · 7 votes
    10y

    I get what you are saying and that you are posing this for argument sake, which is great because it's something people worry about. My counter argument would be: Since 2007 there have been millions (around 4-6 million I think) of foreclosures which created a flood of inventory all at once, resulting in artificially low prices. The big boys did play a roll in accelerating the correction in certain markets, but only marginally (in my opinion) until that inventory dried up and prices returned to normal. They have since stopped buying in large volume and prices are still rising as they would in a healthy market. 

    Reiterating @Fey Chen 's point; Let's assume that the "big boys" own 20,000 homes in Atlanta and, for whatever reason, decided to evict 20,000 families so they could sell them all at once. Atlanta's inventory would rise by ~50% for a few months until that inventory was absorbed; prices WOULD drop a bit, but, assuming all other market conditions were healthy, don't you think they would correct fairly quickly once inventory levels returned to normal? 

    In my humble opinion, these guys don't hold nearly enough market share to move the needle for any meaningful length of time, even if they had a reason to. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Cal C.  I think that hedge funds also bought primarily in a pretty tight bracket.. so in the brackets they bought in there would be some effect for sure on downward pressure.. but they bought for cash flow so they bought heavy in the 50 to 200k range and maybe some went above 200k but I would bet 90% of the housing stock they bought was in that range.

    And since its all rental stock I think it would affect these properties on the investor side but not much on the retail buyer side especially in Atlanta were building is booming and you can buy brand new for 150 to 200k no problem. who wants a 20 year old rental ( on the retail side)..

    What I always thought would happen though would be some pretty heavy downward pressure on rents..  IE so many homes converted from ownership to rentals. But I think in most markets rents have stayed flat pretty much were the hedges were super active. I sold my 54 Atlanta rental houses to a smaller hedge fund 2.5 years ago I suspect rents are probably about the same.. I would need to check in with my partner on those he manages about 2k doors for hedges there in S. ATL

    But its a great subject to talk about.

    the other thing I always thought could happen is they realize ( especially some of the lower end stuff they bought) that this is not that great of an investment no matter the price as the tenant base is a tough one  LOL

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  • Brian Wysel
    Investor · Scottsdale, AZ · Member since 2015 · 22 posts · 7 votes
    10y
    Blackstone is selling 1,300 of their worst properties in south Atlanta (likely as one or several portfolio). They did a bad portfolio trade with BLT a few years ago and the assumption is they are selling off the worst of those homes. It'll be interesting to see who ends up with the short end of that stick. I led an effort to sell about 500 homes while working for one of the other big firms. It took about 18 months and was not easy. Since the cash flows are securitized, we couldn't just sell whatever homes we wanted because we didn't really own them anymore. Had to cut through miles of red tape every step of the process.
    1Reply
  • Josh Nicolson
    Investor · Tucson, AZ · Member since 2015 · 50 posts · 18 votes
    10y

    I don't believe the OP's post but I do worry about the recent introduction of the portfolio loans with 10 year balloons. 

    There's a lot of medium sized SFR investors that jumped into these loans. I have no idea what the size of this group is. However, it B2R is owned by blackstone. If, for whatever reason (war, inflation rates, downturn) there is some type of significant restriction in the money supply when these 10 year balloons come. There may be another large housing "bust/opportunity". I plan to time my cash on hand to correspond with the 2024-27 timeframe and be well positioned for whatever he market will bare.

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  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Josh Nicolson:

    I don't believe the OP's post but I do worry about the recent introduction of the portfolio loans with 10 year balloons. 

    There's a lot of medium sized SFR investors that jumped into these loans. I have no idea what the size of this group is. However, it B2R is owned by blackstone. If, for whatever reason (war, inflation rates, downturn) there is some type of significant restriction in the money supply when these 10 year balloons come. There may be another large housing "bust/opportunity". I plan to time my cash on hand to correspond with the 2024-27 timeframe and be well positioned for whatever he market will bare.

     You don't believe that I think don't think this is likely to happen?  As I stated originally this is unlikely but intriguing.  

    0Reply
  • Cal C.
    OP
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Jay Hinrichs:

    @Cal C.  I think that hedge funds also bought primarily in a pretty tight bracket.. so in the brackets they bought in there would be some effect for sure on downward pressure.. but they bought for cash flow so they bought heavy in the 50 to 200k range and maybe some went above 200k but I would bet 90% of the housing stock they bought was in that range.

    And since its all rental stock I think it would affect these properties on the investor side but not much on the retail buyer side especially in Atlanta were building is booming and you can buy brand new for 150 to 200k no problem. who wants a 20 year old rental ( on the retail side)..

    What I always thought would happen though would be some pretty heavy downward pressure on rents..  IE so many homes converted from ownership to rentals. But I think in most markets rents have stayed flat pretty much were the hedges were super active. I sold my 54 Atlanta rental houses to a smaller hedge fund 2.5 years ago I suspect rents are probably about the same.. I would need to check in with my partner on those he manages about 2k doors for hedges there in S. ATL

    But its a great subject to talk about.

    the other thing I always thought could happen is they realize ( especially some of the lower end stuff they bought) that this is not that great of an investment no matter the price as the tenant base is a tough one  LOL

     Good point about the narrow range.  Rents have actually gone up some, THANKFULLY!  Or at least its much easier to rent at supposed going rate than it was 2-3 years ago.  What was sitting at $1,200 is either going quickly at $1,250 or is going for $1,300+.   

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