Scrying the Orbuculum

What do people want to know? Understanding the Past is interesting; predicting the future is even more important. Shaping the future is the Holy Grail. Data mining (understanding what happened and perhaps why) and predictive analytics have become huge industries, as every sector of the economy and every aspect of the culture comes under the scrutiny of the algorithms. An algorithm is a computer program that takes vast amounts of data, and tries to make sense of it. Where you go who you see what you buy: everything is a data point and the more data points the system gathers, the more accurate its understanding of who we are. And what we might be influenced into doing based on our past behavior. For a really thorough examination of how pervasive this has become, check out Shoshana Zuboff’s “The Age Of Surveillance Capitalism”. The objective is to influence everything we see, buy, and believe.

There are too many random factors and unusual events that affect the future: it is unpredictable. It’s better to anticipate a range of outcomes, and plan for each of these. Years ago, virologist scientists conceived of a pandemic occurrence exactly like the world is experiencing now. The animal-to-human virus transmission itself was not a surprise. What is surprising about the virus outbreak is the lack of effective programs and action in dealing with it.

On a somewhat less life-threatening basis, there is the possibility of a real estate virus pandemic too. The current market is so strong that those of us who live in it 24/7 wonder how this momentum can be sustained. Do we encourage buyers to jump in right now, and pay prices we almost cannot justify, or wait to see what the next few months will bring. What happens post-election with a possible new government? What happens as Winter sets in? Will there be a recession as the pandemic effects on the economy overtake the Federal Reserve’s open spigot monetary policy? Predictive analytics suggests that with both inventory levels and interest rates at all-time lows, and the huge population base of the out-of-state buyers wanting to buy the Idaho Dream, prices can only go up. Predictive analytics suggests future outcomes based on past data: there are X number of sales in a certain criteria range in a year, and there are X number of listings that support those sales. Take away three-quarters of the listings while keeping demand constant and there you have a classic sellers market. Where it gets interesting is when you consider the factors that drive the demand and influence the supply. It’s a multi-variable polynomial equation, with the hard data facts driven by the emotionality of politics, scarcity, civic unrest, climate change, and other forces that are difficult to measure, but all the same very real. How does one prepare then for 2021?

The first step is to ensure staying power: try to build up reserves. This is the priority because if a recession does appear in early 2021, it will be difficult to generate positive cash flow from normal operations. Homeowners stay wary! There’s about $10 billion in what I call vulture funds that has already been raised on Wall Street anticipating “distress sale opportunities.”

From a recent posting by Brad Kraus of James Capital: “The plan is to contact distressed homeowners first and offer the Wall Street version of a “bailout” program--it’s called the Single-Family Leaseback. Companies such as Invitation Homes and American Homes 4 Rent, along with a host of private equity funds, are tracking distressed mortgages with a simple action plan. Quite simply, they are approaching cash-starved homeowners with an offer they can’t refuse: Hey, we’ll buy your house at market and you get to rent it back for a reasonable rate.

With no other viable option, many homeowners will readily accept Wall Street’s terms and become renters of their own homes. As one consultant rationalized the practice to The Wall Street Journal last week: “Having plenty of home equity but reduced means to keep making payments could prompt many to sell while prices are high and exit homeownership with a cash cushion.” 

So now, Wall Street owns the house—as part of a huge portfolio of income-producing properties--and makes a lot of money renting the properties back to the former homeowners. Meanwhile, due to lack of new construction and overall affordability, younger potential homebuyers have even less chance than before to buy the home and to get their start on the American Dream.”

A business model that had its genesis in the aftermath of the Great Real Estate Virus of 2008 and has since been the buyer of two out of every ten home sales in the US is poised to become even larger. The home equity build-up that everyday families might have prospered from is now concentrated in the portfolios of a very select few corporations. There’s bound to be repercussions to the economy as a whole as the trend marches onward creating a growing and permanent renter class. For that, you don’t need a crystal ball: this is not good for the American Dream.

Raphael Barta is an associate broker with Century 21 Riverstone. He maintains an active practice in residential, commercial, and vacant land properties. raphaelb@sandpoint.com