Investment Ryan Krueger Security, Trade and the Economy The United States of America

Wall Street, Your New Next Door Neighbour

The 2008 United States housing crisis was attributed to predatory mortgage lending and poor financial regulation. The areas of the country hit the hardest by the crisis have witnessed strong growth in the past year despite high jobless rates and few new mortgages being issued by lenders. According to the Case-Shiller home-price indices, in the past year home prices have risen by 23 percent in Phoenix, 15 percent in Las Vegas, 9 percent in Tampa, 11 percent in Miami and 8 percent overall nation-wide. This growth is strongly due to investment from Wall Street, which has increasingly taken interest in the distressed homes that continue to flood the real-estate market.


With low prospective returns existing throughout current financial markets, major investors view excellent growth potential in single-family dwelling acquisitions. This year “a number of investment firms, hedge funds, private equity partnerships and real estate investors have turned into voracious buyers of single-family homes.” The purchasing power Wall Street yields has had a considerable negative impact upon low and middle-income homebuyers, who have been squeezed out by Wall Street’s “deep pockets and the ability to pay cash for homes.”

The purchasing power Wall Street yields has had a considerable negative impact upon low and middle-income homebuyers, who have been squeezed out by Wall Street’s “deep pockets and the ability to pay cash for homes.”

Private equity mega-firms such as Blackstone Group, Colony Capital and American Homes 4 Rent, backed by over $8 billion in investor capital, have purchased “at least 55,000 single-family homes across the U.S. in the past year.” After the firms purchase a dwelling, the home is flipped and transitioned into a rental property. Financially, Wall Street is interested in issuing bonds to investors backed by their rental properties. The scenario is described to be extremely similar to the mortgage-backed securities that helped fuel the last housing bubble. Housing and consumer activists have interpreted the data and “warn that Wall Street is about to crash the housing market — again.”

Critics state the bonds are risky, as they are backed and dependent upon consistent payment from rental property tenants within the corporations’ rental properties. In order for the firms, funds and equity partnerships to keep paying their investors “the rental companies must ensure vacancy rates remain low. This means keeping homes in good shape, so people want to live there.”

The logistical inability of national corporations to effectively micro-manage common landlord issues may deter prospective tenants from signing leases, and low-income tenants may unexpectedly sever leases. Both situations amongst others will result in vacant properties and subsequently a lack of revenue for the rental-backed bonds, which would then default.

With the $7 billion in wealth lost in the previous housing crisis still a reasonably fresh wound to the U.S.’s fragile economy, housing and consumer activist groups are urging federal regulators to address the all too familiar red flags and to take corrective action to ensure a catastrophe similar to 2008 does not emerge.

Those whom are more optimistic believe this may prove to be an instance where “Wall Street ends up doing what it’s supposed to do, allocates needed capital to an undervalued sector of the economy and helps everyone in the process.”

In order to embrace the positive economic benefits offered by mega-firm rental property development and to avoid the calamity of 2008, government policy initiatives must be created to regulate volatile mechanisms of the national housing market.

Ryan Krueger
Ryan Krueger is a junior research fellow for the International Business and Economy section. He graduated from Wilfrid Laurier University in 2010 with a Honours Bachelor of Arts in Political Science. While completed his degree he focused strongly on International Law, the United States Government, International Political Economy, Defence, Security & Foreign Policy Issues, Contemporary Security Issues, Global Political Military Issues, and Terrorism, War & Global Violence. After graduating he travelled all over Europe and Asia and also lived in Australia for 2 years. He currently works for the Government of Canada in Vancouver.