Hi, The Investor’s Podcast Network Community!

🏡 Today’s newsletter is heavy on real estate. Comparing March 2023 to March 2022, cities like Austin and Chicago saw 11% and 9% declines in asking rates for rents, respectively. 

While others, like Raleigh, North Carolina, saw a 17% jump (scroll down to our chart of the day to see this all visualized).

And the good times of being a landlord may be ending — more on that in our main story.

Oh yeah, happy Tax Day, too. 

—Shawn

Here’s the rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we’ll discuss two items in the news:

• Goldman Sachs’ quarterly earnings
• Updates on Miami’s hot real estate market
• Plus, our main story on why the golden age of being a landlord may be over

All this, and more, in just 5 minutes to read.

Today’s trivia: In a survey of 1,000 homeowners across the country, what percent sold a house due to paranormal activity?

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MORE HEADLINES

👨‍⚖️ High-stakes Fox-Dominion defamation trial kicks off

🏡 New construction falls in March, building permits down 8.8%

✍️ The four biggest banks wrote off $3.4 billion in bad consumer loans last quarter, a 73% increase from a year earlier

IS THE GOLDEN AGE OF BEING A LANDLORD OVER?

The golden age

Being a landlord in a major city has been a good gig for years: Laws are generally favorable to owners over renters, and interest rates have been trending down for decades, pushing up the value of financial assets.

One New York City landlord, Ben Carlos Thypin, thinks the good times might be ending, at least for residential properties.

To answer whether the landlord golden age is winding down, he paints the context that preceded it: 

• “There’s this great paper by Professor Katharina Knoll that looks at housing prices over time from 1870 to the present, and she studies 14 countries, including the U.S. What she found is that until around 1950, depending on the country, housing prices were relatively flat. And then after that, they’ve exploded.”

What changed in the mid-20th century, he suggests, was the subsidization of homeowners and single-family homes in the suburbs. 

Simultaneously, less was invested in public housing in favor of private solutions, while land use controls restricting new developments were frequently implemented to protect homeowners’ investments.

Enter the golden age for landlords.

Two decades later

Thypin argues that by the late ’70s, homeowners, and the businesses surrounding them, had formed a powerful coalition that successfully lobbied to “pare back rent regulations where they existed, ban them where they didn’t exist, and generally implement a set of policies that discriminated against renters.”

Because homeowners were less transient than other groups, they formed a potent political block due to their higher propensity to vote. It was almost like a “Ponzi scheme because (they were) protecting their investments by putting up barriers to entry.”

In other words, the next generation of prospective home buyers were the losers, buying in at higher-loan-to-value ratios for properties with “arguably inflated” values or opting to rent indefinitely.

He compares the dynamic to enabling Enron to run wild with deregulated energy markets in the early 2000s, “except we’ve been doing it all over the country for decades” in local property markets. 

Varying business models

With that backdrop, Thypin remarks that landlords typically have two business models, depending on the city. New York City landlords rely more heavily on property price appreciation to drive returns than yield from rents. In contrast, in the Sunbelt, things are much more yield-focused.

The differences lie, perhaps, in that the U.S. is one of the few developed countries with vast unregulated rental markets, at the same time that the business of multifamily real estate became institutionalized.

Institutionalization

He adds, “This has happened in a particularly acute way in multifamily because of just how big the market is, how long-standing of a business it is, and how relatively homogeneous the product is.”

Saying further, “It’s become a business where everyone is getting their cut.” And corporations like Blackstone are much better at organizing to push for favorable political changes than classic mom-and-pop landlords.

Essentially, beginning in the 1950s, deregulation and institutionalization of the rental market fundamentally made landlording more profitable, at least according to Thypin.

Technology facilitated more efficient unit pricing and building operations, allowing professional landlords to extract profit out of every part of the business, not necessarily to the benefit of the public. 

But demographic change and technology are reversing this golden age.

Shifting tides

While renter groups were often marginalized demographics in the past that politicians more willingly ignored, as renting has become more mainstream, so has the block’s political influence.

Thypin cites the YIMBY movement, standing for ‘Yes In My Backyard,’ which has effectively advocated for building housing in high-demand areas. “In parallel, we’ve seen a resurgence of the rent regulation and tenant protection movements.”

He notes that the U.S. has an unusually low homeownership rate, contrary to what most think. A paper published in the Journal of Economic Perspectives found that in 2015 the United States’ homeownership rate was 63.7%, compared to an average of 69.6% for 18 developed countries and well below countries like Spain, Sweden, Ireland, Finland, Canada, and Italy.

Compared to countries with similar homeownership rates, American cities typically don’t have rent controls. However, “we’ve seen the resurgence of rent regulation not just in places like New York and California, but also in Minnesota and even Orlando.”

Technology is enabling tenants to organize, forming more powerful coalitions to negotiate rent price moderation or new housing construction, increasing supply, and pulling down prices. In New York State, for example, a proposal from the governor aims to build 800,000 homes over the next decade.

Thypin explains that the economics haven’t changed for developers per se, but they do feel emboldened to try and rezone residential communities that were previously very hostile to new development.

What to expect

Institutionalization will likely continue because real estate is a capital-intensive business, and institutions can fund their investments at a lower cost of capital, allowing them to remain profitable in this shifting environment.

That’s why, as a non-institutional landlord, Thypin plans to leave the business, thanks to secular shifts that he expects will empower tenants at the expense of landlords like himself and their profits.

Still, he offers advice to tenants, “you have more leverage than you think, generally speaking. If you leave a landlord, they probably lose a month of rent. So at the very least, you should factor in that month of lost rent and even a broker fee into what you’re negotiating for.”

Dive deeper

To hear the full interview about the end of the golden days for landlords, listen to this Bloomberg podcast.

SEE YOU NEXT TIME!

That’s it for today on We Study Markets! 

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