Goldman and Blackstone Enter Spanish Real Estate – Pain and Suffering for Poor People Immediately Ensues

Screen Shot 2014-10-24 at 11.47.54 AMLast year Madrid’s city and regional governments sold almost 5,000 rent-controlled flats to private equity investors including Goldman Sachs and Blackstone. At the time, the tenants were told their rental conditions would remain the same.

But as old contracts expire, dozens of people have received demands for higher rent, been told their rents will increase dramatically, been threatened with eviction or moved out to escape the insecurity. Thousands of Spain’s poor now depend for their homes on the generosity of private equity.

– From today’s Reuters article: Why Madrid’s Poor Fear Goldman Sachs and Blackstone

Less than a month ago, I warned the people of Spain that U.S. financial oligarchs had their sights set on the nation. The post was titled, Your Wall Street Slumlord Arrives in Europe – Goldman and Other Financial Firms Launch “Buy to Rent” in Spain, and in it I wrote:

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Mel Watt, Federal Housing Finance Agency Head, is Pushing Banks to Make Extremely Risky Home Loans

Screen Shot 2014-10-17 at 1.43.16 PMMel Watt is one of the most dangerous financial oligarch puppets operating in America today. The first time he came across my radar screen was back in 2009, when he “gutted” Ron Paul’s End the Fed bill while it was in subcommittee, something I outlined in the post: Leverage in PE Deals Soars Despite Fed Warnings; Amidst Insatiable Demand for Risky Fannie Mae Debt.

Then in May of this year, I zeroed in on his latest authoritarian maneuver after being appointed to head the FHFA in the post: New Massive Federal Database to Hold Financial Information on Hundreds of Millions of Americans. Here’s an excerpt:

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U.S. Vacancy Rate Rises for First Time Since 2009 in Wake of Apartment Building Construction Surge

Screen Shot 2014-10-02 at 12.25.50 PMThis is an interesting headline, and one that anyone paying attention to the domestic real estate market should pay close attention to. We know that millennials aren’t the ones buying new homes in America (that market has been cornered by private equity and hedge funds as well as foreigners laundering suspect money), but those millennials who do posses the cash flow to move out on their own definitely appear to be renting. Due to this trend of renting as opposed to buying by average citizens, there has been an enormous construction boom of apartment complexes across the U.S.

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Chinese Purchases of U.S. Real Estate Jump 72% as The Bank of China Facilitates Money Laundering

Screen Shot 2014-07-09 at 12.01.36 PMAmerican citizens already have a hard enough time affording a home. Squeezed out by financial oligarchs buying tens of thousands of properties for rental income, and faced with real wages that haven’t budged since the mid-1970s, the demographic of U.S. citizens that historically dominated the new home market has been forced to live in their parents’ basements. Just to kick em’ when they’re down, Americans now face the impossible task of competing with laundered Chinese money.

Of course, this isn’t a new trend. I first covered it in January 2013 in the post: Corrupt Chinese Politicians are Buying Billions in U.S. Real Estate. This was then followed up a couple of months ago in the piece: Zillow Opens the Floodgates to Chinese Buyers in Order to Keep Housing Bubble 2.0 Inflated.

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Leverage in PE Deals Soars Despite Fed Warnings; Amidst Insatiable Demand for Risky Fannie Mae Debt

Barely a day goes by anymore when I’m not confronted with a slew of articles flashing warning signs about the latest Federal Reserve fueled credit bubble. Just yesterday, I highlighted the investor feeding frenzy happening in junk bonds, driving yield spreads to the lowest levels since the prior peak year of credit exuberance in 2007 in my post: Credit Mania Update – The Chase for CCC-Rated Bonds.

Today, I am going to highlight two articles on very different aspects of the credit market, but both are illustrative of the investor buying panic happening in debt markets. All of this is terrifying, and it appears to represent the final stages of another crackup boom. One that is likely to implode sometime in 2015.

Let’s first take a look at this article from the Wall Street Journal that highlights the fact that the Federal Reserve is becoming increasingly concerned by leverage ratios financing the latest round of private equity deals. Apparently, the Fed is “warning” banks about this, which is complete disingenuous bullshit considering it is their low interest rate policy that is leading to all of this nonsense. Of course, they could always raise rates and put and end to this, but they know this will collapse the gigantic house of cards they have created. This is a total mess and one gigantic joke.

The WSJ reports that:

Wall Street banks are financing more private-equity takeovers with high levels of debt, despite warnings by regulators to reduce the amount of risky loans they make.

The Federal Reserve and the Office of the Comptroller of the Currency last year issued guidance urging banks to avoid financing leveraged buyouts in most industries that would put debt on a company of more than six times its earnings before interest, taxes, depreciation and amortization, or Ebitda. The Fed and the OCC also told banks to limit borrowing agreements that stretch out payment timelines or don’t contain lender protections known as covenants.

Still, 40% of U.S. private-equity deals this year have used leverage above that six-times ratio deemed the upper acceptable limit by regulators, according to data compiled by S&P Capital IQ LCD. That is the highest percentage since the prefinancial-crisis peak of 52% of buyout loans in 2007. Such lending all but disappeared during the crisis but has risen each year since 2009.

More references to 2007…

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Mortgage Standards Are Plunging – It’s Muppet Fleecing Time All Over Again

In February, I highlighted the fact that subprime loans were about to make a return in my piece: Subprime Mortgages are Back…This Time Marketed as “Second Chance Purchase Programs.” In that article, I posited that with the “all cash” private equity shops and hedge funds no longer able to make good returns through buying new homes to rent, these investors would need some sucker to sell to in order to realize a return (Blackstone’s purchases have plunged 70% recently). That sucker, as always, will be the retail muppets, and those muppets will be lured in through subprime. This is now starting to happen in earnest.

The following article from the Wall Street Journal is both depressing and disturbing. Rather than allowing home prices to reset at a lower level after the 2008 crash where to normal buyers could afford a sane 20% mortgage, our central planners decided to do “whatever it takes” to re-inflate the housing bubble. This was achieved through wealthy investment pools buying properties for all cash. The trouble is, with home prices now inflated by these financial buyers and no real increase in wages, homes are simply unaffordable. So what do you do? You bring back subprime and get the peasants long real estate with essentially zero money down all over again. Truly remarkable.

From the Wall Street Journal:

While standards remain tight by historical measures, lenders have started to accept lower credit scores and to reduce down-payment requirements.

One such lender is TD Bank, Toronto-Dominion Bank’s U.S. unit, which on Friday began accepting down payments as low as 3% through an initiative called “Right Step,” geared toward first-time buyers and low- and moderate-income buyers. TD initially launched the program last year with a 5% down payment. It keeps the product on its books and doesn’t charge for insurance. Borrowers also don’t need to put down any of their own cash if a family, state or nonprofit group provides a down-payment gift.

So a measly 5% downpayment wasn’t good enough. They had to drop it to 3%. Frightening.

The changes also are a recognition by lenders that the business of refinancing old mortgages, which had been a huge profit center for banks, is nearly tapped out. To generate future profits, banks will have to compete for borrowers who may not have perfect credit or large down payments.

Valley National Bank, a community bank based in Wayne, N.J., lowered down-payment requirements to 5% from 25% this month on mortgages for certain buyers in New York, New Jersey and Pennsylvania. Next month, Arlington Community Federal Credit Union, based in Arlington, Va., will begin accepting 3% down payments on mortgages up to $417,000, down from 5%.

Yes, you read that right, 25% to 5%. Holy fuck.

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Zillow Opens the Floodgates to Chinese Buyers in Order to Keep Housing Bubble 2.0 Inflated

Earlier this week, Michael Snyder made quite a splash in the alternative media world with his article: The Chinese Are Acquiring Large Chunks Of Land In Communities All Over America. Meanwhile, just last year I covered how corrupt Chinese are laundering their money through U.S. real estate in my post: Corrupt Chinese Politicians are Buying Billions in … Read more

Blackstone’s Home Buying Binge Drops 70% from its Peak Last Year

The whole story about how private equity firms and hedge funds have steamrolled into the residential home market to become this decade’s slumlords is a story covered on this blog before mainstream media even knew it was happening. I first identified the trend in January of last year in one of my most popular posts of 2013: America Meet Your New Slumlord: Wall Street.

Since then, I’ve done my best to cover the various twists and turns in this fascinating and disturbing saga. Some of my follow up pieces can be read below:

March 2013: Is the “Buy to Rent” Party Over?
May 2013: Carrington Bails: More Smart Money Leaves the “Buy to Rent” Game
July 2013: The Las Vegas Housing Market has Gone Full Chinese
August 2013: Welcome to the Housing Recovery: Rents are Rising, Incomes are Falling
October 2013: A Closer Look at the Decrepit World of Wall Street Rental Homes
February 2014: Is “Buy to Rent” Dead? – Rents on Blackstone Housing Bonds Plunge 7.6%

With all that in mind, let’s now take a look at the latest article from Bloomberg, which points out that Blackstone’s home purchases have plunged 70% from their peak last year. Perhaps they overestimated the rental cash flow potential of indebted youth living in their parents’ basements?

From Bloomberg:

Blackstone Group LP is slowing its purchases of houses to rent amid soaring prices after a buying binge made it the biggest U.S. single-family home landlord.

Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.

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Manhattan Apartment Rental Rates Drop for Third Month in a Row

Now this is interesting. Investors looking at real estate should be aware of two main things at the moment. Those two things relate to what is really driving this centrally planned, manufactured rebound in U.S. real estate. It’s really a tale of two distinct trends. In formerly hurting markets such as Arizona, Nevada and Florida, private equity investors have flooded into what is a now gigantically crowded to “buy-to-rent” trade. Meanwhile, in the prime markets such as New York City and San Francisco, we have seen the “money laundering trade,” where rich oligarchs move their often ill-gotten gains into trophy real estate assets abroad.

We have seen many signs all year that the first key pillar to the manufactured rise in housing was becoming strained, as rents continued to rise while incomes continued to fall. It doesn’t take a genius to realize that this can only last so long, and many of the early investors in “buy-to-rent” have already gotten out or are trying to.

As far as the second pillar, well at some point the oligarchs will have purchased enough homes in London and Manhattan and then what? Interestingly, the seemingly unstoppable rental market in Manhattan is showing signs of cracking. What this ultimately means is unknown, but it’s an interesting data point nonetheless.

From Bloomberg:

Manhattan apartment rents fell for a third month in November and the vacancy rate reached the highest in at least seven years, signs the market is weakening amid a spike in homebuying and the lure of leasing in Brooklyn.

The median monthly rent in Manhattan dropped 3 percent from a year earlier to $3,100, according to a report today by appraiserMiller Samuel Inc. and brokerageDouglas Elliman Real Estate. The vacancy rate climbed to 2.8 percent, the highest since the firms began tracking the data in August 2006.

“With the scare about rising mortgage rates, it poached a lot of demand from the rental market,”Jonathan Miller, president of New York-based Miller Samuel, said in an interview. “On top of that, what else is poaching demand from the Manhattan rental market is Brooklyn.”

Manhattan landlords agreed to offer concessions, such as a month’s free rent, on 7.2 percent of all new leases in November, up from 4.2 percent a year earlier.

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Luxury Home Foreclosures Soar – Up 61% Versus Last Year

I’ve always wondered what would happen once private equity players decided enough was enough and foreign oligarchs finished their real estate money laundering transactions. Well, we might be about to find out.

According to RealtyTrac, foreclosures for homes worth $5 million or more are up 61% this year despite the fact that overall foreclosures are down 23%. The question is, does this merely represent holdouts from the prior housing bubble, or is it a sign of things to come? Only time will tell. From CBS:

Foreclosures in the ultra-high-end housing market — homes worth $5 million or more — have skyrocketed 61 percent over last year.

That growth bucks the trend: Overall foreclosures are down 23 percent, according to a new report from Irvine, Calif.-based real estate information site RealtyTrac.

Until lately, that is. “Recently, we’ve been hearing from agents that they’re starting to see the high-end properties go to foreclosure and there turned out to be some data to support this notion that high-end holdouts are finally moving through the foreclosure process,” he said.

It may be a sign that lenders are now financially stable enough to start moving on ultra-high-end delinquencies and take the substantial losses these multi-million dollar homes represent.

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