Do Corporate Rentals Raise Home Prices? | Jim Righeimer

Corporations have been getting involved more in the housing market over the last decade and a half. Imagine you're a first-time home buyer and you're barely trying to buy a home and a company shows up with cash making an offer in the same property. Now there's discussions of banning corporations from buying homes. Our guest today is Jim Rickheimer, who's a developer and housing expert. He's here to tell us what's the impact of corporations getting banned from the housing market and are there other ways to unlock this housing market? But Zillow actually had a division that bought houses, resale houses, different than houses that a builder just built it to rent. What we had happening then is companies like Zillow would come in, evaluate the house, make an offer, close in a very short amount of time, three weeks, four weeks, have really no requirements to paint the house, clean up the house, they'll take the house as is and there's no requirement that they have to qualify for a loan. Because they were cashed? Because they're cash. So you think about that, you're a seller and you may not be real excited about some corporation buying your house, but you're like, wait a second, there's no contingency, you're gonna close in three weeks, you're gonna give me a check. I'm Siamak and this is Market Insider. Jim, it's great to have you back on, welcome back. Great to be here. There are some changes in the housing market right now. There's talks of banning corporations from buying housing and then there's also discussions of potential crash in housing values. Can you tell us what's happening? Well, I think what you're talking about is President Trump came out and said he's gonna do an executive order that says corporations can't buy houses, corporations can't live in a house so therefore they shouldn't be able to buy a house, is kind of the pitch they make on it. And there's a good argument saying that if you just allow corporations to buy up houses, first time home buyers won't be able to buy those houses. What you really need to look at is kind of segment up the whole housing industry across the country, it's completely different. The whole concept of what they call build to rent housing, BTR, build to rent housing, is really happened in the last kind of eight, 10 years and it all started back when we came out of the bad recession 2008 when the whole collapse happened, right? Corporations owned apartment buildings with three, four, 500 units, they owned shopping centers with thousands of square feet, they owned office buildings but they didn't like owning houses. They felt that it was a mom and pop kind of business where some person has their own home but then they go buy another house and make it a rental and then they fix it up and maybe they buy another house, kind of the mom and pop thing for retirement is really what it ended up doing. And a lot of companies didn't wanna be in that business. Well, when the market crashed and there were so many foreclosures out there. Was it hard to manage those? Cause they probably thought- Well, it is different to manage, not necessarily harder but I mean, mom and pops had been managing the houses, there was a way to do it. It's not as efficient. You have a manager for a building of 250 units, it's hard to be a manager of 250 houses all over town and that's why they started buying whole tracts but that's another story. But basically you had a situation where when the market crashed, there was a free fall in the value of housing and at some point, someone's gonna come in and buy those houses. So all through, if you remember the times, Orange County, Inland Empire, everywhere on the country, values had crashed. And what happened is Wall Street kind of stepped in or actually smaller players first started coming in, buying up foreclosed houses. And it kind of actually put a floor in the market that at a certain point, someone's gonna buy that house, they can buy it. Interest rates were very low or lower than they are now and it rents out and makes a positive cashflow. So people started buying up houses, then small companies started buying up these houses, then Wall Street, the big companies came in and started buying up portfolios of houses. And this is again, kind of put a floor into the market and then the prices started to rise. Out of that came a whole industry called build to rent where they said, well, instead of having houses all over the place, when a builder or a land developer like myself comes in and puts in 300 lots, they would buy the whole 300 lots and build a bunch of houses and rent out all the houses. That's in certain markets. That's not everywhere. That's not really in Orange County, California and California in general at all. That's in areas that have a lot of room to grow, Arizona, Austin, Texas, outside of Atlanta. I mean, there's just different markets in the Southwest and the Southeast. That could build tracks of homes and companies would come in and buy it. That's a very different than when a few years after that all happened, companies, if remember, forget this, companies like Zillow, who we know is when you wanna look for a house, you go online for Zillow or Redfin, one of those companies. But Zillow actually had a division that bought houses, resale houses, different than houses that a builder just built and built it to rent, okay? And what we had happening then is companies like Zillow would come in, evaluate the house, make an offer, close in a very short amount of time, three weeks, four weeks, have really no requirements to paint the house, clean up the house, they'll take the house as is. And there's no requirement that they have to qualify for a loan. Because they were cashed? Because they're cash. So you think about that, you're a seller and you may not be real excited about some corporation buying your house, but you're like, wait a second, there's no contingencies, you're gonna close in three weeks, you're gonna give me a check. And what happened is they would come in and do it, and it was in an upward time when values were going up. So like all corporations, they think, oh, we got this great model. We buy houses at a low price, fix them up or rent them out for a while and sell them for a higher price. Oh, that's just genius. That's just called a cycle. It's not like a business model to go into, like it's gonna continue to go up every year. You had a situation where these companies did, everybody forgets that Zillow, that corporation lost like $300 million. In the end, their formula just didn't work. They made money on their first deals, but as prices went up, there was not much margin left in there. This whole thing about stopping corporations from buying houses probably is a little late. When they were buying houses, competing for a resale house against a buyer who wants to move into the house, maybe that would have been a time to say, no, we're just gonna let regular home buyers go in and buy these houses or have some kind of rules around it. Now we're just saying, period, corporations shouldn't be able to buy houses. And in reality, there's a lot of areas around the country that they're still building homes, but they're not selling that well. And so the builders still wanna sell it, but guess what? There are renters for those homes. There are people that want to live in that neighborhood, would like to buy a house in that neighborhood, but they think interest rates are too high right now. So they would rather go ahead and rent. They don't wanna get locked into a price. They don't wanna get locked into an interest rate. And in fact, those builders are building houses that they sell to these companies that rent them out, invitation homes. There's just different companies out there that do it. The only reason these companies are doing this is because there is a demand to rent it. So again, what I talked about before in the housing ladder, a unit's a unit. If you can get more houses built, you wanna get more houses built. It's when you don't have any houses on the market in an area, usually in a urbanized Orange County, New York, Chicago, whatever area where there's no other houses. When corporations come in there and compete to buy houses with home buyers, they're maybe more problematic in that. I'm not real big on telling companies they can't buy houses because I think that destroys the whole system in our country. Like when the home market crashed, nobody cared then that Wall Street came in and bailed out people and started buying up houses to put a floor in the housing market. You're gonna want that. Just kind of different anywhere in the country, whether built to rent is a good thing or a bad thing, quote unquote. So you don't think that the companies coming in, buying these homes, they're competing with the homeowners. Do you don't think it's gonna impact homeownership? First off, where are the companies, I'm just using our example of our area around here, Orange County. Where are the companies, big corporations, the Blackstones and all those companies, buying up houses in Orange County? They're not. They're not here because there's not enough demand to rent a very expensive house. It's not really a good business model. If you go to Nashville, it might be more of a market. There's some houses being built. There's excess supply out there. And there are people that don't wanna buy yet, but would want to rent. And they'd like to rent a new house or a newer property. So they're willing to do that. The other thing that happened out of COVID is that people would live closer to the city in apartments. And when COVID happened, there's more people back at work now, but there's still people that can live pretty far away because they don't have to go to work too often. Instead of living in town or in the city, they'd rather live out in the suburbs a little bit more and rent a house there than rent an apartment in the city. What I'm saying is that if you're in a market that there's no new product and the only buyers in the house are resale houses, and the only people that are buying them are people just trying to get into a house, I could see there saying, hey, in those areas or those type of houses, a resale house, maybe corporations should not be competing. But to say a corporation can't buy 10 houses in a track of 500 to make them into rentals, that's just getting rental stock out there. That's a good idea. But we don't have that in the highly urbanized, high expensive New York, Chicago, LA, San Francisco areas. We don't have a bunch of tracks of homes brand new that there's no buyers for. So you think there's different kinds of markets, the markets that have a lot of inventory, that actually are building, and then there are the markets that are not building and they don't have space or they have other issues. Corporations are not buying any more in these areas that are hard to build. They're buying- If they're hard to build or if they're already built out, resale homes, it doesn't make a lot of sense. They're not necessarily like they were doing a few years ago going out there and taking a whole track of 300 homes and making them all- They're not doing that anymore? They're doing less of it, a lot less. I mean, what's interesting is that a lot of colleagues and stuff in that industry, and interest rates were at 3%. So interest rates, if you can borrow at three, this whole thing makes sense. You're basically borrowing a ton of money. Your rent is gonna cover more than your interest payment and your operations cost. Everything's fine. Then interest goes to six. Let's just say six. Doubles. Well, now all of a sudden, your biggest cost in real estate is the interest at 70, 80% of your expense. That just doubled. It was amazing talking to colleagues of mine. I'd go, how are your deals going? Oh, they're fine. We're gonna work it out. I'm like, your interest rates just doubled and everything's okay? I'm finding that hard to believe. It's like another year and a half, two years later, you go, yeah, that deal didn't really work out real well, Jim, or what are you doing with it? Well, we decided not to build the houses and when the market comes back, we'll probably sell the project or the streets and roads, let's say, are in. We'll go sell it to a major home builders to sell houses to home buyers. But they took the risk. They went out there. It happens. There's a lot of talk about a housing crash. Last time the 2008 happened, people were forced to sell. There was a lot of foreclosures. What are you seeing right now? Well, the difference now in housing and in my business is that my business is buying land, putting the streets and the roads in and the school sites and whatever and then selling the lots to the public home builders. In my business, when the market went down, it gets real shaky and developers have borrowed a bunch of money, can't keep on going and they lose the project or they have to sell it for pennies on the dollar because they had debt. This last go around, nobody got debt. Very few people got debt. It's kind of the same thing in the housing market is you have a lot of people that have, quote unquote, a lot of equity, equity being I bought the house for A that now sells for B and I have this big swath of equity in here because that's what the houses are going for, quote unquote, in my neighborhood. That's kind of what the houses are going for in your neighborhood when there's one for sale or two for sale. But if 20 are for sale, the price may start to go down so your equity may not be as much as you want but in the big picture, there's a lot of equity out there so people don't have to sell but over time, there's still a cycle and over time, people get married, they get divorced, somebody passes away, somebody loses their job and at some point, people have to sell. The thing that I think you're talking about is people are looking at some of these prices, especially in these high-end, not even high-end, in these high-priced suburban urban areas like Orange County, like Northern California around San Francisco and the different counties up there that these prices are pretty crazy. I mean, when you look at- It doesn't make sense with the incomes. It doesn't make any sense. If you use the basic standards of pay one third of your income towards housing or don't buy more than so many times your pay, these things make no sense whatsoever and what it is that I see and this is anecdotal but what I see is there's just not a lot of sales because there's not a lot of houses on the market. Like I said before, people have a 3% interest rate. They really don't want to sell the house unless they have to. There's enough buyers coming in to kind of keep it going but a house that's sold for $750,000 that's now selling for two million, please, there's just no way the average- The person who bought the house at $750,000 who's gonna live in that neighborhood at $750,000 is the same person later. I mean, it's not like all of a sudden you've got a bunch of Hollywood moguls moved into your neighborhood. You have your same neighborhood. It's gonna have the same engineers or architects or there's certain people in that community who live there. If there's nothing for sale, okay, this person can get in. Their in-lodge loaned them some money. I call it getting some of your inheritance sooner. They had some capital to do something but how many people are available out there to buy a house for a million eight or a million nine? I mean, what are the payments on that? At any interest rate, they say interest rates 6%, go to five. Oh, at five, my interest rate, my payments are only 26,000 a month? I mean, that's crazy. And for people just to keep blinders on and not see that, it's like, so the argument, there can be a crash. Yeah, there can be a crash if more and more people have to sell their house. Right now, they still don't have to. But over time, life changes and life things happen and people start to have to sell the house. And that's what makes the difference. The only thing that keeps it from happening, forcing them is they don't have a lot of debt and they have cheap debt. If there is corrections in your thoughts, it may not be significant correction unless the economy changes significantly or there's a major shift that causes them to wanna get out. It depends on where you're at, okay? You go to the Phoenix area right now, prices are down, I don't know what, I can't remember the number, but they're down, 5%, 6%, 7%, 12%, they're down. That means that what a house sold for last year is selling for 10, 12% less than they did a year ago or two years ago. That's real. That's not like kind of fake, that's absolutely real. Just because it's not happening along both coasts doesn't mean it's not real. So those prices are having downward pressure. The thing that everybody talks about and the president talks about is we just need the lower interest rates. To solve the housing problem, it's real simple. You need more units, you need more housing or you need less people here. You get to get the balance, you gotta have either less people in the country or you have to build more housing. That's what does it. Lowering interest rates, does that create more supply? No, all it does is push up the price. So if you lower interest rates even more, what happened last time they lowered interest rates to 3%? Did people have their payments go down? No, there weren't enough houses, so everybody bid up to up to that same payment. So if your payment was $3,000 a month at 6% and it was, I'm making up these numbers, $300,000 or a $250,000 loan, now for the same amount of money, you can get a $500,000 loan for the same payment. You just paid more for the house. So people go by the payment. They go by payment and if there's not enough houses, lowering interest rates only pushes that up. What you wanna do is do something that brings in supply. But the problem is in the areas you can build, it's hard to sell. Right, right, right, exactly, exactly. But there's one thing, one thing that could get a whole boom in housing happening right now and it could increase supply, dramatically increase supply. And that is to get rid of capital gains tax on people when they sell their own personal residence. Now think about that for a second. There's one thing, one thing that the president and Congress can do and the legislators can do that would bring a supply of housing on, a large supply of housing. So remember we have all these people with these low interest rates and they don't wanna sell their houses. There's also- Because they will lose the loan. Because they would lose the loan and they wouldn't have that lower interest rate of a loan. But you have all sorts of other people that want to sell their house, but the capital gains, the tax they have to pay to the government to sell their house now than it had ever been done before is an outrageous amount of money and there's no way they wanna do it. So let me walk you through some basic numbers, okay? A husband and a wife, we have a husband and a wife and a family, they own a house and they sell a house for more than they paid for it. They get a $500,000 without tax on it. So let's say they bought the house, I'm making up these numbers, bought it for 500,000, they sold it for a million and a half. The 500,000 is their basis, $500,000 is tax free, 500,000 is taxable. That taxable with the capital gains tax is gonna be, well, in California, it's gonna be like 33% or whatever the number is. So it'll be $150,000, $160,000. $150,000. Sell your house, you have to pay $150,000 in taxes and you're just trying to buy down to a smaller house and you just took $150,000 off the table. Because if you wanna downsize, let's say you wanna go get an apartment, live in a more. It just cost you 150,000, so people are like, why would I do that? That doesn't make any sense. Yet you've got a lot of people with a bunch of equity. Now, for people in the country that they think a million dollars or $500,000 is a ridiculous amount, all you're doing is giving taxes to rich people. On coastal cities, on both coasts, a million dollar for a house is not an outrageous number, but it's what it takes to live in the house. Maybe you bought it for 250, now they go for a million. That's just what it is. And you need to live in a house. So if you made this capital gains, no capital gains, for your own personal residence only, not anything else, yeah, would the benefit go to people on the coast? Absolutely it would, more so than the middle of the country where $500,000 is already taken care of, that you don't pay tax on the first 500,000 is a no big deal. On the coast, it makes all the difference. The amount of houses that would come on the market would be a boom, especially if you said it's only good for 24 months. So then it will unlock a bunch of people. It totally would unlock a bunch of people. It would get people into the house they need to do. It would get people to get their capital out. The people that get their capital out are gonna spend it on another house or maybe not or a smaller house. All the money people spend when they buy a house, new carpet, drapes, furniture, washers and dryers, all that kind of stuff gets the economy going phenomenally. It's non-inflationary. Now, when a bunch of those houses come on the market, are the prices gonna go up or are they gonna go down? They're gonna go down. So how do you help put downward pressure? How much they're gonna go down, I don't know. But how do you put downward pressure on it? Instead of having one house in the neighborhood on the market, you have 10. How do you get 10 to get in the neighborhood? There's a bunch of people that'll say, you know what, I'll sell my house for a little bit less maybe. Maybe they don't even think about that at the time until the offer comes. But I'll sell my house for a little bit less because I'm gonna save $150,000 in income taxes. So I'll sell my house for 30 or 40,000 less. That helps everybody all the way across the board. And we just have to, you know, again, we're gonna have a lot of legislators that are gonna say, oh, that's just money for the rich. It's not rich, it's just people selling their house. Again, it'd only be for your own personal residence. You'd have it. Remember back in the day before Clinton was president, you could sell your house and buy it. And if it went up in value, buy another house as long as you bought the same or equal value minus the closing cost, you didn't pay tax. Now people sell their house. They are stunned when they get the tax bill. So people have figured it out. They'll go ahead and sell their house and they did real well and they're retired and they're moving somewhere else to a lower cost state. And they sell their house in California for a million and a half and they find out they have to write a check for 175,000 or whatever. It's stunning to people. So people figured it out and they decided for many reasons. And on top of that, you lose the low interest loan. I got the low interest loan gone. I had prop in California, I had prop 13 taxes. You give up everything to write a big check, I wouldn't do it. But if the president and Congress got together and said, we're gonna go ahead and do this, you would see an absolute massive amount of supply come onto the marketplace, especially if you limited the time. If you said you get it for the next 18, 22 months, 24 months, they can maybe expend it later. I don't know. Anyone that wants to move, they will quickly. I mean, I'm open to changing that a little bit, but the point of it is time to go, guys. Do something because you've got this opportunity to sell your house tax-free. Selling your house tax-free is a reason for a lot of people to get out of the big house they don't wanna be in, to move, to retire, whatever they wanna do, which they just don't wanna do now because the taxes are so high. So you think because the market is locked right now, some people are having houses that they don't really need. Correct. So they have maybe more housing. Maybe they have a big house. Their family is already, the kids are grown up. They can go to a smaller one or go to apartments, but they are not selling because it doesn't make financial sense. Right, it used to be you would down, let's say you wanna downsize, but still live in the same community. You sell your big five bedroom for the one story, two bed, whatever, and it costs a little bit less, but if you have to write a check in between for 150 grand, you're like, well, we're just staying. I mean, it just doesn't make any sense to sell the house and pay a massive amount of tax. And quite frankly, until these last chunk of years, especially on the coast where prices went crazy, remember we had all these people come into the country and it just pushed up all the different prices. And we discussed it before, the housing ladder. I know that people who come and don't make a lot of money don't move into expensive houses, but it all moves up. It always moves up. There's a ladder. You want a bigger supply of houses or houses available will bring prices down. Dropping the capital gains tax on people's personal residence would do that. And remember, we've never in this country looked at people's own home as a way for the government to make money. I mean, people kind of always looked at it. It's your house, you sell it. There was always some kind of limit of you don't pay tax on so much, whatever. What's happened when houses go up, you know, 50, 60%, and you have to live somewhere. So it's not like, you know, you made any money on your house, right? Cause you live there. It doesn't matter the value, you still have to- It doesn't matter, you gotta live somewhere. When everybody tells me I bought my house and I've made so much money, I go, you really didn't make any money. You've locked in your cost of housing, but you have to live somewhere. If you buy your second house as an investment, yeah, now you can start telling me how you made some money, but the house you have to live in, you have to live in. In other parts of the country, normal everyday people can put 3% down, get an FHA loan. They live a normal life. On the coast, it's very problematic. Based on what you're seeing, for people that are thinking about buying or people that are thinking about selling, do you think this looks like 2008 in terms of the inventories? Or do you think that's like, that was a one in a lifetime kind of situation? Okay, that was a one in a lifetime situation, and today's gonna be a one in a lifetime situation. There's different factors that come in it. Remember back then, people had a lot of debt. They borrowed a bunch of money, okay? Because housing prices were going up and they borrowed a bunch. They didn't borrow as much now. But we've been stopping, restricted the market with these low interest rates. So it's kind of like, that has to be worked through the system. So if you say these houses have to work through the system and they haven't worked through the system yet, you're gonna say, chances are there's not gonna be upward pressure in the pricing. There's gonna be downward pressure in the pricing, okay? But then where are you? Are you on the coast? Are you in second tier size cities across the country that have more room to grow? So it kind of matters where you're at, what's gonna happen. But I always tell people, you get a house because you need a place to live and you have to place your family and you wanna stabilize yourself. You don't wanna have a situation where, or you'd rather not have a situation where all of a sudden you're told you have to move, the owner sold the house or whatever. It gives you more stability. It's good for communities to buy into the community, to own in the community. There's a lot of reasons for people don't. Buy for that reason, to get into the neighborhood you wanna get into or the place you wanna get into if you can. If you can't, don't go borrow to death and get all sorts of debt and everything else to be upside down. Wait a little bit. See how the market shakes out. And don't be against the idea of moving. You don't have to live where you've always lived. You're not a tree. You can go someplace else and people have to start looking that way. Part of it has always been, well, I wanna be here, all my family's here. Well, a lot of people go West Young Man or whatever the different things were left to go to a better place that worked for them. Go to a place that you can afford a house where your kids can be in a decent school and maybe you have to move or maybe you have to change your job or whatever. Don't be against that idea, especially if you're saying, I'm gonna go into massive amounts of debt and borrow money from all my family and friends and set yourself up to fail. Don't do that. The builders, you're involved with the development company. Did they not build enough in the last couple of decades? After 2008 crash, did things change in terms of developing homes? Builders will build wherever they can sell houses. The large public builders build in all the same towns. They're just probably not right outside of New York City or right outside of Chicago or right outside of San Francisco because there's no land there. So they go to where they can sell homes to first-time buyers where there's growth. What you start to see is some of these second tier cities, and I don't mean that in a negative way, but just they're not the major cities. You're having a lot of corporations go there now and move. Look at the whole thing that's happening with the chip manufacturers across the country. Look at the billions and billions of dollars from foreign companies that are coming to the country to build. Those are really good jobs. And you go to those places, and there's not new tracks of homes. Well, the builders will go there and they'll build houses. They'll always build houses wherever they can sell houses. And if the area makes it hard to get a track approved, they'll go someplace else. So if land's available, like I've talked before, the Central Valley of California, and you just can't get through the environmental process, shame on you, California. That's why it can't be done. You're too interested in making your environmental side kind of like just stop everything. That makes no sense. There's a county, and I'm forgetting the name, where a bunch of billionaires have bought the whole county, and they want to start a whole new community. And it's like, no, we don't want to have that. Just stop that. You know, people are trying to figure some way to create housing. Let's get government out of the way a little bit so they can go ahead and do that. And builders will build houses there, but they're not gonna build houses where they're not welcome to build houses. It makes no sense. For investors, you mentioned these areas, capital is coming, they're building. Somebody wants to invest in housing. Should they go to those areas? I mean, I don't know exactly which area. Kind of look at where it's at. How do you get there? How do you take care of a property, whatever, because I'm saying it may not be where you live. But if houses are selling for 10 or 15% less somewhere else, that sounds like a better buy than paying the 15, 20% more. The reason that the prices are down is because there aren't buyers or there's maybe less renters or whatever. Look at what triggers family formation, which triggers that. And if it looks like this area is gonna grow and do fine, then buy the house for 15% less because they're selling for less now. It's already built into the market. In terms of the interest rates, some people are waiting for the interest rates to go back to 3%, 2%. Do you think that was a one-in-a-lifetime situation? Depending on how old you are, for me, that's one-in-a-lifetime situation. I will not be around when it gets to 2% or 3% again. And remember, except it was crazy what happened and COVID and drove interest rates, all these ridiculous things that made it happen, that's not gonna happen again. We're not gonna shut down the economy again, just turn it off one day, and then find some way to, we'll just keep on cutting interest rates to keep people employed. That's really not gonna happen. Normally, the interest rates don't necessarily go up just because you have more full employment. I mean, sometimes that's just called productivity and it's good for the economy, it's good for everybody. So rates, no, I don't see them going down to that. Are they gonna go a little bit lower? Probably. Does that make the difference? I don't know, depending on where the area in the country is and the different sub-markets, if it makes sense or not. But lower interest rates will help buyers. It does not help supply. Jim Rickheimer, developer. It was great to have you back on Market Insider. Great to be here. What do you think about the impact of corporations in the housing market? Do you agree with Jim or not? Let us know in the comments. I'm Siamak, this is Market Insider. We'll see you next time.