Dustin Chambers for The Wall Street Journal
In the depths of the last housing crisis, self-storage billionaire B. Wayne Hughes flew to Las Vegas and Phoenix to lay the groundwork for a new bet. His plan: Buy foreclosed homes, spruce them up and rent them out. He tested his ideas on three houses in each market and then dispatched deputies to buy tens of thousands more across the U.S.
Nine years later the land grab is paying off as an economic downturn, the rising unaffordability of homeownership and a global pandemic push a new generation to suburban home rentals. Home offices, yards and space between neighbors are becoming must haves. Investors who spent the last decade gobbling up these types of houses are emerging as beneficiaries of the Covid-19 era.
Few firms are better situated to benefit from this shift than Mr. Hughes’s American Homes 4 Rent, which has about 53,000 suburban houses in 22 states and collects about $1 billion in annual rent from tenants who are typically pet-owning parents in their late 30s with six-figure incomes. In May, its showings to prospective tenants were up 22% year over year and more than 2,400 leases were signed, the most in a month since 2015. The Agoura Hills, Calif. company is racing to add even more houses amid the current economic upheaval, including building thousands expressly to rent.
It wasn’t the first time the 86-year-old Mr. Hughes— the son of an Oklahoma sharecropper who migrated to California during the Great Depression—turned a hyperlocal transaction into a national empire. Five decades ago he noticed that Americans were accumulating more stuff than their houses could hold, and that many of them would rather rent space in which to stow it than part with grandma’s old sofa or whatever else they were hoarding.
He and a partner pooled $50,000 and in 1972 opened a storage facility in El Cajon, Calif. Today his Public Storage has thousands of locations marked by the company’s bright orange signs, some 170 million square feet of rentable space and a stock market value of about $34 billion.
The idea that suburban houses could be owned and rented out on a national scale, like apartment complexes or office buildings, took shape following the 2007 housing bust. Mr. Hughes believed he could do for rental homes what he had done for the then scattershot and loosely managed storage business. Consolidate ownership, centralize operations, use computers to do the jobs of people whenever possible and establish more aggressive market rates.
The first house that Mr. Hughes bought in Las Vegas had three bedrooms, a nice yard and rented for $1,050, the going rate for such properties. It was a steal. Apartments nearby with only two bedrooms were renting for $1,400 a month. That was all the evidence he needed that rents could be pushed higher.
Mr. Hughes and his lieutenants had bought about a hundred houses and were tinkering with their business model when a man from Alaska’s state oil fund called their offices in Southern California. The oil fund’s managers were looking for a way to play the housing crash and wanted to know what Mr. Hughes had planned.
He told them he was approaching landlording backward. He considered the type of tenants he wanted and then sought houses to suit them.
Families with school-age children were the prize. They were likely to stay in houses longer than singles, willing to swallow annual rent increases if it meant not uprooting their children from schools and neighborhood friends.
“Some of you have had children, I’m sure,” Mr. Hughes told the fund’s trustees during a 2014 meeting in Juneau, according to audio recordings. “They don’t ever want to move.”
Dustin Chambers for The Wall Street Journal
Landlording is an ancient business, but leasing thousands of far-flung suburban houses had never been done before. The foreclosure crisis gave investors the chance to gain critical mass on the cheap while a leap in cloud computing and mobile technology enabled them to orchestrate thousands of purchases and efficiently manage the properties thereafter.
The benefits for suburban renters are that they can live in a well-maintained, family-sized suburban home and send their children to good public schools without committing to decades of mortgage payments, tying up their savings in down payments, or risking entrapment in another market collapse. There is a big potential cost, though. By renting, they forsake the method by which most Americans build wealth.
Homeownership allowed the U.S. middle class to cling to its share of the country’s overall wealth in the decades following World War II, despite losing major ground to the wealthiest Americans in terms of income, according to a 2018 paper by University of Bonn researchers Moritz Kuhn, Moritz Schularick and Ulrike I. Steins.
The wealth of the bottom half of wage earners doubled between 1971 and 2007 despite incomes that were stagnant once adjusted for inflation, they found. Most Americans weren’t really making any more money at work. They were richer because they owned homes that rose in value.
The housing crash wiped away a lot of wealth, though. People born in the 1970s were hit especially hard. They started out owning homes at much higher rates than their predecessors, but by their 20th high-school reunions, once the dust had settled from the housing collapse, they had fallen way behind. Their homeownership rate at age 38 was 52%, according to a 2016 study by John Burns Real Estate Consulting, lower than the 61% rate for Americans born in the 1950s and 63% among those born in the 1960s.
It has been difficult for many to reclaim homeownership and regain their economic footing. The median-earning household—$63,179 in 2018—can’t afford the median-priced home in many American cities even on the off chance they manage to save a down payment while keeping up with ever-rising rent.
Dustin Chambers for The Wall Street Journal
The situation is even more bleak for people born in the 1980s. Nearly one in five lives below the poverty line, according to the consulting firm, the highest percentage for any cohort since the generation born during the Great Depression in the 1930s.
Mustering a down payment to buy a house is nearly impossible for many of these younger adults, who are buried in student debt. They know the financial pain that can be inflicted by falling home prices. And thus far at least, they are not generally wedded to the notion of ownership.
Investors realized that there would be a lot of people who would have to rent the suburban lifestyle to which they were accustomed; they started showing up at foreclosure auctions across the country in the early part of the last decade. A Who’s Who of real-estate investors including hotelier Barry Sternlicht, Donald Trump confidante Tom Barrack and Stephen Schwarzman’s Blackstone Group Inc. sent buyers to auctions with duffel bags of cashier’s checks. At one point, Blackstone’s Invitation Homes was buying $150 million worth of foreclosed houses a week.
I’d become a landlord around the same time, reluctantly. My house plunged way below what I owed the bank. I needed to move but couldn’t sell. I lost a lot of money and sleep landlording from afar. So it was surprising to see the zeal with which major investors were piling in.
Compared with the sleepy and sparsely attended foreclosure auctions I’d attended as a newspaper reporter in coastal Alabama during the early days of the bust, courthouse-steps sales in the places where Wall Street was putting down roots, like Atlanta, were Roman orgies.
Investors circled the first Tuesday of each month on their calendars and booked flights to be in Atlanta. That is the day when every county in Georgia held foreclosure auctions. American Homes 4 Rent’s bidders would gather at a Sheraton Hotel along the interstate north of the city the evening before and divvy up $20 million or so of cashier’s checks. Then they’d fan out to different counties to buy houses.
Their instructions were strict. Nothing older than 20 years or so. Nothing too rural. Nothing smaller than three bedrooms and two baths. Nothing without a garage. Nothing that cost less than $100,000. Nothing that would rent for less than $1,000 a month. Decent schools were a must.
The financiers view their spree as a stabilizing force for a housing market that had spiraled out of control. “One of the main things that was a benefit to society of us getting in and buying homes is that we basically created a floor for falling home prices,” said David Singelyn, who accompanied Mr. Hughes when he bought his first rentals and is chief executive of American Homes.
Companies like Invitation and American Homes proved so profitable that they kept buying even after the foreclosures dried up. They took to the open market. To find the best properties before other buyers, they deployed house-hunting computers programmed to think like Mr. Hughes, who retired from the American Homes board last year. He declined to comment through a spokeswoman.
The computers all really loved Spring Hill, Tenn., a suburb at the southern edge of metro Nashville that boasts the cheapest houses in one of the best school districts in the state.
The local General Motors Co. plant had ramped up production and the housing market was red hot in April 2017 when a three-bedroom, two-bathroom home was listed for sale there. The sales agent hardly had time to pound a sign into the yard before he started fielding offers.
The sellers had four to weigh within a few hours. The high bid of $208,000 came from a couple with a child looking for their first house. American Homes matched, all cash.
Unlike the family, American Homes didn’t need to borrow a penny to buy the house. Its offer was without contingencies. The company wouldn’t fuss over scuffed floors or ugly paint since it would be renovating the house, using the same colors, flooring, and appliances as those in its hundreds of other houses around town.
About a month later, the house was back on the market. This time for rent, for $1,575 a month.
The family whom American Homes beat out was precisely the type of tenant that the company hoped would rent it.
—Adapted from “Underwater: How Our American Dream of Homeownership Became a Nightmare,” by Wall Street Journal reporter Ryan Dezember. The book will be published by Thomas Dunne Books, an imprint of St. Martin’s Press, on July 14.
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