Podcast 312: Does Wall Street Win in a Pandemic?

In the last economic crisis, Wall Street moved in when real estate prices were low and gobbled up a lot of the rental market. Will the same thing happen with COVID-19?

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Show Transcription:

Eric Worral: (00:00)
Hey everybody, welcome back to another episode of RentPrep for Landlords. This is episode #312. And today we’re going to be talking about the idea of if landlords get wiped out, wall street wins, not renters. So this is an article from Bloomberg that we’re gonna be covering today. I thought it was pretty good in that a lot of this seems kind of like a landlords versus renters during this pandemic, and you know, who’s gonna win or lose. But this article gives a pretty insightful narrative on the fact that it’s really, that Wall Street is going to win in this battle if landlords get wiped out. So we’re going to deep dive into this article from Bloomberg. I’m going to get to that.

Voice Over: (00:41)
Welcome to the RentPrep for Landlords podcast and now your host, Eric Worral.

Eric Worral: (00:46)
So today’s featured news story comes from Bloomberg business week. And as I mentioned, the title is If Landlords Get Wiped Out, Wall Street Wins, Not Renters. And this is by Prashant Gopal and Oshrat Carmiel. And the article opens up talking about a landlord in West Haven, Connecticut, and it says that nobody’s bailing out Connecticut landlord Maribeth Shields, more than half of the tenants and the 27 low-income apartments she owns in the city of West Haven and its vicinity aren’t paying and there’s nothing she can do about it. The state banned evictions until July and allowed tenants hurt by the pandemic to defer with no penalty, but Shields can’t pay either. Her profit last year came to only $24,000 and she’s behind on 1.2 million in mortgages like millions of other us landlords who owe lenders more than 1 trillion combined.

Eric Worral: (01:35)
Her fate is tied to runners now urgently focused on their own self-preservation. Now if you’re like me, you probably listened to that and thought while those numbers are pretty tight, she’s basically making around $900 per unit per year. So she, I mean, that’s crazy low, right? She’s only making maybe 75 bucks. So she didn’t really give herself a lot of wiggle room with these apartments. But you know, who knows what the situation is that led to that. Now. she says that my tenants think I’m rich. Shield says they have better cars, me, better nails and better tax refunds. The next housing crisis this year and this time it’s about rentals across the US landlords and tenants are wrangling over next month’s rent while on approaching avalanche of evictions threatens to bury them both to avert a damaging way before closures like the one that swept the country more than a decade ago, Congress included the provision in the two-point 2 trillion rescue package had approved in March that allows homeowners with government backed mortgages to defer payments for up to a year, but Washington stopped short of offering renters comparable relief on the assumption that those in distress would likely qualify for $1,200 checks for the treasury.

Eric Worral: (02:40)
I began mailing out in April as well as beefed-up unemployment benefits. So it was wall or I should say a Washington’s a mindset that these stimulus checks are getting mailed out and this will help renters to pay their ramp. But in an urban Institute survey, renters carried out from March 25th, April 10th, almost half said they had experienced material hardship in the previous month. Many US states have imposed moratoriums on evictions, but without a national rental market bailout, the economic pain is likely to spread as efficiently as the virus that caused it flowing upwards to landlords and their lenders. And the city’s losing property tax revenue. So about half of the 43 million rental units in the country are owned by small businesses such as Shields one-woman enterprise, unless help come soon. Both runners and property owners will slide down. The socioeconomic scale together says Emily Benfer, a visiting law professor at Columbia University.

Eric Worral: (03:36)
I always love how they throw in where they’re from. You’re like, Oh, law professor Columbia University, she knows what she’s talking about, but it’ll have a ripple effect. Rent doesn’t just go to the property owners. It pays for property taxes, mortgages, and salaries for the people who maintain buildings. So States with large populations of runners, which they say includes California, Texas, New York and Florida have instituted temporary bands on evictions. But 23 others among them, Wyoming, North Dakota, Arkansas, Ohio, and Georgia have adopted few if any, protections for renters says member who collaborated with researchers at Princeton University to create a state by state housing policy scorecard for the pandemic. I trade associations that represent landlords or library and Congress for a hundred billion to cover some of the rent shortfall with direct payments to property owners, but they have yet to unite behind any of the various proposals floating in Congress.

Eric Worral: (04:23)
Lenders could be collateral damage as particularly regional banks that often finance local property investors. At the end of 2019 there was one point 6 trillion of outstanding mortgage debt on multifamily properties in the US and according to Paula Munger, vice president of research at the national apartment association citing a federal study, I defaults in the last recession, reached 5% and could climb to as high as 10% during this much deeper downturn. She says so many landlords operate on thin margins, typically 9 cents for every dollar according to NAA, and have nowhere to turn for help if their rental income dries up. But most definitely or most don’t qualify for federal mortgage forbearance because only about a third have mortgages backed by Fannie Mae, Freddie Mac, or another federal agency. The small business administration is bolstering companies that keep workers employed, but many property owners don’t have a payroll.

Eric Worral: (05:15)
So Shields who tours the property with a lawnmower crammed in the back of your Toyota Prius handles most everything herself and hires contractors for the rest. Rich Uncle Pennybags, the monopoly game character, I didn’t know that was his name. Rich Uncle Pennybags. I don’t know if they’re making that up or I’ve never heard them called that, but I’ve been saying the monopoly character who tips his top hat with one hand and holds tight to a sack of cash and the other, maybe the most famous landlord America, but the stereotype is wrong. Many landlords aren’t any better off than their tenants and certainly aren’t rich enough to credibly pull off a bow tie says Jan Lee, who manages two buildings in New York’s Chinatown that his family has owned for nearly a century. That character of the white landlord and the suit who has a suitcase of money.

Eric Worral: (05:56)
In our case, every of us has a day job, says Jan Lee, who works at a general contractor and whose family over the years has run a laundry mat and home furnishing stores from its ground-floor retail space. Lee doesn’t have a mortgage, but he already knows he won’t be able to pay his full property taxes and that could mean the end of his family’s legacy on Mott Street. So there’s no forbearance for property taxes and the city can impose late fees, penalties and liens that he’ll never be able to get out from under. I’ll have a bad credit. I’ll lots of money and my entire family has worked for three generations, will be gone in Boulder, Colorado. Janet Meyer and her husband are in their sixties with a daughter heading to college. The townhouse they bought 24 years ago is at the center of their plans to fund retirement.

Eric Worral: (06:35)
Now they may have to dip into the retirement savings to cover the mortgage. The tenants are struggling and the Meyers want to help. Two of the three men in their twenties who share a $2,500 a month rent a lost restaurant jobs in March. The Meyers agreed to drop the rent by 400 hoping they’ll manage to keep up reply or we rely on the rental income to make everything work. She says, I don’t want to imply that if our tenant doesn’t pay rent, we’re going to miss a meal, but there is a very challenging balance around what is our responsibility to the unjust class system. Where am the pandemic has magnified the inequality of the housing market, which is sparking a new era of tenant activism than cities from New York and Los Angeles to Kansas city, Missouri where rents have been rising year after year. Activists are organizing rent strikes.

Eric Worral: (07:16)
Shane Riggins , 31, who has been unemployed since March joined the Philadelphia movement. He lost his temporary job in the mailroom of a law firm, enhanced unemployment benefits, kicked in and was able to pay for April and may rent, but now he’s talking to other tenants about what to do next. While he’s sympathetic to his landlord who has only one rental property and a mortgage to pay, he worries about saving enough money to survive the new economic crisis. It’s not like we want to stick it to this landlord who is only trying to make ends meet and pay bills, but we all lost our jobs. Riggins says every time I pay rent, it’s taken immediately and given to a bank. Is that really in this crisis? The best use of money renters were cash strapped before COVID-19 and it won’t take much to push.

Eric Worral: (07:55)
Many of them over the edge says Barry Zigas is a senior fellow at the Consumer Federation of America. Tenants who pay what they can are indirectly helping themselves. They’ll help keep your homes out of the foreclosure pipeline and give the landlord money to keep up with repairs. He says small investors own much of the naturally occurring affordable housing. In the US if they’re forced to sell or abandoned properties, most of the market might wind up in the hands of wall street firms, some of which who have built up large portfolios of rental properties over the last decade or so. New owners with deeper pockets might opt to reposition low-income units to target wealthier occupants. So landlords are not a popular class of business people for valid reasons and not Zigas says, but that obscures what the, what’s now the very symbiotic relationship of renters and owners, Shields mortgage lenders have allowed her to postpone payments, which she fears may only be delaying the inevitable foreclosure on her loans for her or other lenders. It may also mean evicting tenants who didn’t pay. As soon as the moratorium is lifted, renters are less likely to have enough savings to make up for months of lost income. And they also lack the incentive of homeowners to try to keep up. They won’t catch up. Shield says every tenants, we’re never going to recover from those.

Eric Worral: (09:09)
So a pretty gloomy article, like a lot of things right now, but what it’s highlighting, which I thought was interesting is it’s talking about the last crash and how a lot of wall street gobbled up a lot of cheap rental properties and just real estate in general. And that if the small-time landlord who is a high percentage of low-income properties ends up not being able to afford their mortgages, they’re going to default. And the people that are gonna swoop in and potentially scoop this up is going to be wall street backed firms. And the interesting part on that too is the idea that they said that these types of investors tend to flip properties and make them for higher-end. So if you’re looking at things such as gentrification and the worry that, you know people with lower income won’t have anywhere to go because there’s less affordable housing.

Eric Worral: (10:03)
This article is painting a picture that may actually be increased and accelerated as wall street gobbles up more property at an affordable price for them. So just another kind of wrinkle in the pandemic and how it’s affecting real estate is the idea that you could see wall street gobbling up a lot of properties in the coming future as you have landlords such as Maribeth Shields here in Connecticut that may not be able to afford her rent. So just a lot of stuff to kind of think about and it’s pretty interesting to see what the when we look back in five, 10 years at this to see what the impact is and how some of the bigger players come in and swoop in a good deal at the expense of not only renters but landlords as well.

Eric Worral: (10:50)
So I thought this was interesting. I’m going to link to the full article if you guys want to check it out from Bloomberg. Thank you for the authors, for creating this content and I’ll have that in the show description and I hope you guys are doing well. I know that you know, each week is challenging and we’re all kind of trying to fit, you know, a little bit too much in each day, especially if you know you’re doing childcare from home or, you know, both you and your partner are working from home. I know it can be tough, but you know, just try to enjoy it and really, you know, look at the bright side of things and do your best and keep your head up and we’ll get through this and I look forward to catching up with you guys on next week’s podcast. All right, guys. Have a great week and take care.