Is Bedford Falls metastasizing into Pottersville? A new report has ignited consternation on the web that America’s neighborhoods are becoming absorbed by Wall Street hedge funds and that renters’ landlords will soon turn out to be the iconic Lionel Barrymore character from It’s A Wonderful Life. But will the home around the corner with a white picket fence and a dog named Skip be scooped up by powerful and lucrative investment firms? The Twitterverse is losing its collective digital shirts on reports that BlackRock and its industry rivals are “killing the dream” of homeownership as they acquire the Elm Streets and the Evergreen Terraces of the United States. But is this unjustified hysteria? Or is the American Dream dying a slow death? It is a case of free-market economics and cronyism.
Beware: Pension Fund Lives Here
The Wall Street Journal published a viral article titled “If You Sell a House These Days, the Buyer Might Be a Pension Fund.” It explored BlackRock, an American multinational investment management corporation with $8.6 trillion in assets, and other investment funds engaging in mass-purchase housing and converting single-family homes into rentals. In a housing market like Houston, TX, the company, led by billionaire Laurence Fink, accounted for one-quarter of the residential purchases. The objective is to underwrite pensions and support their accounting ledgers. BlackRock is chasing yield and accumulating "permanent capital” by transforming into an enormous force in the real estate sector.
Critics contend that this is hurting working families and preventing millions of Americans from building capital and equity. Chronicles journalist and associate editor Pedro Gonzalez told Fox News host Tucker Carlson that these actions are "killing the dream and giving us a nightmare of dispossession."
But others aver that homeowners are voluntarily entering into an exchange with buyers. Moreover, this is not a business practice that has popped up out of nowhere. For years, BlackRock and other financial institutions have invested hundreds of billions of dollars in real estate at home and abroad, even at the size of what WSJ is noting. Today’s widespread purchases stem from a plan initiated in 2018.
A History of Real Estate Investments
In October 2018, Jim Barry, the head of real estate assets at BlackRock, revealed to PERE that the company planned to double its housing assets within five years and then double that figure again. BlackRock has sought to enhance its real estate holdings in the U.S., Asia, and Europe.
Since then, the firm has established numerous property investment funds to attract yield-hungry investors. In May 2020, BlackRock raised $1.6 billion for its Europe Property Fund V. In September of last year, it unlocked more than $3 billion for a British property fund. In March, the business secured another Asian housing vehicle at $1.2 billion.
This is perhaps the best time to invest in real estate. Interest rates are at historic lows throughout the global economy, allowing BlackRock to secure the funds at the lowest rates possible. In recent months, the company's property exchange-traded funds (ETFs) have witnessed notable outflows, showcasing that investors are worried about future rate hikes by central banks.
Although the socialist left might disapprove of the commodification of housing, real estate investing has diversified. No longer do investors need to buy a home, go through the costly and heartburn-inducing process of flipping to sell at a higher price. Armchair traders can buy real estate investment trusts (REITs), a company that owns, operates, and manages income-producing commercial and residential assets. BlackRock has dozens to choose from that offer monthly and quarterly dividends.
Despite this being a sound practice, the genuine concern might be the cozy relationship between BlackRock, the federal government, and the Federal Reserve System. This is perhaps the real story.
Uncle Sam Contracts BlackRock
In the fallout of the financial meltdown in 2008, Washington tapped the company to superintend a $130 billion debt settlement of American International Group (AIG) and Bear Stearns. This was not the first time that Uncle Sam requested BlackRock's assistance.
In the early days of the U.S. central bank's unprecedented and ultra-aggressive pandemic rescue mission, the Fed picked up the phone and contacted BlackRock to buy and manage a portfolio of newly issued corporate debt and investment-grade bonds and ETFs. The Eccles Building also hired the company to monitor acquisitions of mortgages on commercial real estate guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.
While the no-bid contracts could be egregious enough, consider this finding: BlackRock bought more than $1.5 billion in investment-grade and high-yield ETFs in May 2020, with its iShares funds representing 48% of the $1.3 billion market value. In other words, BlackRock exploited the Fed's printing press to buy its own product. The Fed had been desperate to support the corporate bond market as part of efforts to relieve the private sector of its duties and concentrate on keeping their employees and growing operations.
From the Great Recession to the coronavirus-induced economic collapse, BlackRock's relationship has evolved from passive to intimate. The Campaign for Accountability, the non-profit watchdog group, launched the BlackRock Transparency Project and wrote:
"From the earliest days of the financial crisis in the fall of 2007 to early 2018, BlackRock has visited or spoken by phone with senior government and banking officials in the U.S. on almost 400 different occasions according to meeting logs.
More than 220 meetings and phone calls between BlackRock CEO Larry Fink and senior government officials; 98 meetings between Obama White House officials and BlackRock executives; 185 meetings and phone calls between senior BlackRock executives and Treasury Secretaries spanning the Bush and Obama Administrations; 37 meetings and phone calls between BlackRock and senior officials at the Federal Reserve.”
Is there anything illegal about this? Of course not. It is the status quo. But it illustrates the buddy-buddy camaraderie between Main Street and Wall Street. And can anyone blame the firm or its investors? In an atmosphere of putrid yields, why not park dollars and cents at BlackRock?
The Fourth Branch of Government?
So, is BlackRock the fourth branch of government? Not only is the company in charge of multiple U.S. government funds, but it also manages various accounts for governments (federal and local) and central banks outside of the United States. In the current administration, two of President Joe Biden's senior economic advisers were employed at BlackRock following the tenure of former President Barack Obama. Brian Deese is the National Economic Council (NEC) director, and Walley Adeyemo is the Deputy Secretary of the Treasury.
Perhaps the public’s energy is too focused on a common practice in the investment industry. Real estate investing is a profitable endeavor, and money managers have realized the potential of single-family housing rentals after dismissing the opportunity for a long time. The current developments are nothing more than economics. What lies underneath – be it backroom dealings or taxpayer-funded shenanigans – is what makes the nation’s capital a toxic environment.
Welcome to Pottersville. It is a beautiful day in the neighborhood.
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Read more from Andrew Moran.
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