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Housing Sector Recovery Favors the Wealthy

By on October 4, 2013

In the wake of the housing sector decline, homeowners across the nation were thrown into economic upheaval. Subsequently, nearly everyone who owned a home witnessed his or her equity take a significant hit. On a national level, countless homeowners were forced into short sale and foreclosure situations. However, a recent report by The New York Times acknowledged that the housing sector collapse disproportionately impacted middle to lower-income Americans while leaving the upper class largely unscathed.

As a result, wealthy Americans are now in a position of power. The hardships experienced by the lower and middle class have afforded the wealthy opportunities to generate significantly more wealth than in the past. Essentially, the increased rate of foreclosures witnessed in the recent decline provided a platform for cash buyers to profit from flipping distressed properties.

Popular misconception believes that the housing sector decline was directly correlated to the increasing presence of so-called “McMansions.” However, more than half of the homes that were subjected to the foreclosure process between 2007 and 2012 were in the lowest price tier at the time of their purchase. Furthermore, most of these homes were located in areas classified as middle to lower income. It is no secrete that the crisis impacted lower to middle-income Americans the most.

Conversely, those of a wealthier pedigree were less impacted. In fact, many upper class Americans managed to preserve profits and benefit from the housing sector decline. While foreclosures continued to increase in the face of plummeting property values, wealthy investors capitalized on the resulting bargain prices. The disparity of the lower classes served to facilitate potential profits for the rich. Conditions at the time prompted large private-equity firms to purchase distressed properties at a torrid pace. Blackstone, one of the nation’s largest, acquired approximately 30,000 homes around the country at a discounted price.

Investors who took advantage of the discounted inventory during the decline, primarily the wealthy, are now reaping the rewards of the current recovery. Investors are cashing in on all of the properties that they bought at a discount because of the increase in property values. According to statistics released by RedFin, an online real estate valuation site, banks have managed to sell three-quarters of the nearly 2 million homes that were foreclosed on in the years following the downturn.

Examples of resale profitability can be found in practically every neighborhood. A house in Redwood City, Calif., for example, was sold in a foreclosure auction in 2011 for less than half what the evicted owner paid in 2006. After a period of ten months, it was flipped for close to its previous price.

The discounted prices investors received on foreclosed properties allowed for very generous profit margins. As the market continues to recover, those margins will only continue to increase. To put the profitability into perspective, RedFin compiled data on 87,062 foreclosures that were purchased by corporate investors at auction. Of those houses, nearly a quarter of them generated at least $100,000 more than the investor originally paid. The RedFin projections do not take into account renovation and miscellaneous costs.

Further demoralizing the economic status of the middle and lower class are rental rates. Rents have risen at twice the pace of the overall cost-of-living index, partly because middle-class families can’t get the credit they need to buy. That means “landlords can raise rents with impunity,” says Glenn Kelman, chief executive of RedFin.