Moneybeat: The wrong target

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning to you, David. 

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: Well David, the housing story moved from the business pages last week to the front pages. 

President Donald Trump saying he wants to ban large institutional investors from buying single-family homes; the White House framing this as an affordability move—arguing that big pools of capital have crowded out ordinary buyers.

Treasury Secretary Scott Bessent was at the Economic Club of Minnesota last week. The question came up there. Let’s listen now to a bit of what he had to say:

BESSENT: Bygones are bygones. We're not going to have a forced sale here--so this is not retroactive?--It's all perspective. And as someone who's in markets for 40 years, markets are made on the margin, and so we're pushing out the marginal buyer. So we haven't decided on the exact contours of this. We want to keep the traditional Mom and Pop owners in, we want to keep families who rent out to their other family members. So we will decide what the correct level is. Is it a dozen homes? Is two dozen? What makes you an aggregator?

So the questioner followed up and pointed out that the White House is aligning itself with Senator Elizabeth Warren. She's the progressive Democrat from Massachusetts who is a regulator’s regulator. And all Bessent could do is shrug it off and make a joke about it, saying that even a squirrel that has to wear glasses finds an acorn once in a while.

So David, walk us through this slowly. Did these “marginal buyers,” as Secretary Bessent says, drive housing prices up, and will driving them out lower housing prices?

BANSEN: Well, they most certainly did not, and it is incredibly easy to empirically establish that. Three of the markets that have had some of the biggest home price appreciation in America; Bend, Ore., Providence, R.I., and San Jose, Cali., have zero institutional ownership. Three of the worst performing markets had the highest institutional ownership.

To the extent we’re talking about total institutional ownership, people that own over 1,000 homes, and this is including multi-family which is what the President and Secretary Besson is not including. So there’s more institutional ownership in apartment buildings and they’re not even including, they’re not even talking about that.

But in single family, it is 0.4% of the housing stock. Now, some will say, "No, you can’t look at it in terms of total ownership, because the marginal buyer is the new buyer." 

Okay, well, the new buyer at the peak year was 3%, and you look at the largest institutional owner, a company called Blackstone which is repeatedly confused with BlackRock and makes for all kinds of fallacious statements on social media. But that’s a pretty understandable mistake to make once--it’s regrettable when people double down on it. 

Blackstone owns 0.06%. About 60 to 63,000 homes through conduits and subsidiaries in a country of 85 million homes. 

So we’re talking about something that is not remotely rational, but I will start with the basic idea that if it were true that people buying at scale pushes prices up, it is not Secretary Bessent or President Trump’s, or President Biden’s, or the next president’s business. 

When he says we have to pick with the contours, like, do we want them to allow 20 homes or 100 homes? That is called central planning.

There is not a buyer forcing a transaction. Whether it’s from a mom and pop seller or an institution, there are two sides to every transaction. The market is made where buyers and sellers together agree on a price, and I think we should be horrified at the idea of the government having an opinion whatsoever as to who a seller is allowed to sell to.

This doesn’t just affect the institutional owners, it affects the private parties that now are being told "you can’t sell your home to someone who owns 100 other homes."

If we’re concerned about affordability, this is the best argument. Why in the world would we want to take out one of the rare people bringing new supply to market? Being told you’re not going to be allowed to make a market here disincentivizes production.

It is understandable that politically, the President wants to address affordability. You and I have discussed affordability countless times in this podcast, it’s a very important issue. But we cannot turn to the left’s playbook out of political desperation. You do not generate the right solutions.

We all were very critical, understandably and justifiably, of Vice President Harris’s idea of "I’m going to give subsidized down payments to first time home buyers." Well, it would help the first time home buyer, and then it ends up getting priced in and so forth. Taking buyers out of a market is distortive.

Now there’s also a tremendous economic confusion here. People say, "Well, look, there’s a pretty fair amount of institutional buyers that came into Charlotte, North Carolina, and the prices went up in Charlotte."

Did the prices go up because institutional buyers came in, or did institutional buyers come in because they believed the prices were going to go up because it was an attractive market with good fundamentals, good wage growth, good job growth, good schools and low crime and all the other things that matter?

There’s so many factuals that prove my point here, and counter factuals that disprove the other. 

It’s a very discouraging conversation, but ultimately, the reason Warren, and Sanders, and Mamdani have been behind this for so long is it is class warfare rhetoric. It makes it sound like there’s some big, bad institution causing the problem, and it takes our eyes off the ball, Nick. We need new housing stock getting built. 

What is the government doing to state, local, federal, whatever the case may be, what are the issues that are keeping us from building the right amount of housing supply?

That’s what we should be focused on, and I think these issues keep us from having that important discussion.

EICHER: David, one other point that Bessent made in Minneapolis—beyond what we just heard—was historical and tax-related. He said that institutional buyers really entered the single-family market around the time of the Great Financial Crisis. They were the ones who had liquidity to do it. And he argued they have a tax advantage—things like depreciation and expensing—in ways that ordinary families don't.

Do you see that as a real distortion, or is that just the way business taxation works across the economy?

BAHNSEN: Last I checked, we didn’t write the tax laws; they did.

First of all, that is barely true with single family at all, it’s almost entirely about multi-family. And institutions did not come in at the time of financial crisis. They were also liquidity starved as well. 

They came in earlier, but it wasn’t right at the point of 08, 09. The whole point, Nick, was no one was coming in then. There was no market.

And when the market started to come back in 11 and 12 and 13, it’s because there were people willing to put capital in. You know who wouldn’t put capital in were banks, because of Dodd Frank, because of all the legislation and regulation that we did after the crisis.

Now there also was no capital going in because the market was overbuilt, oversupplied, and under demanded. So the supply demand equilibrium was different then.

Now it’s come the other way, but we can turn the assembly lines back on for widgets very quickly; houses take a while.

And if it weren’t for some institutional capital and multi family, we would be in a very, very precarious position.

But to the extent he’s talking about single family, it’s just such a tiny, tiny amount that came in.

Now, by the way, as an individual with six homes, I’ve owned plenty of investment property personally through LLCs, I can get the depreciation. So the fact that institutions benefit from it and an individual doesn’t, it’s an apples to oranges argument.

Individuals can get tax deductibility for construction, for investment real estate, and benefit from depreciation if they’re in the real estate business against their ordinary income.

So I really believe that we’re looking here to try to create a boogeyman for something that is the absolutely, we’re looking in the wrong direction.

EICHER: So it seems that we’re looking for a boogeyman because affordability feels scary and very real to a lot of people—and that’s why these ideas may find a willing audience, David. 

Is there something Washington could do right now that it's refusing to do, that would actually make homes more affordable?

BAHNSEN: Well, Washington could use the bully pulpit to try to get states to let up on their burdensome restrictions. Most zoning and permitting and Ceca, the environmental restrictions, most of these things are in a state, county, local level, and Washington could try to use its bully pulpit to do some of that.

But the problem here is that we’re all talking about stimulating demand, and this will get to another issue of what the President did this week was stating he wants Fannie and Freddie to buy $200 billion of mortgage bonds. 

Now these are all mortgage bonds that already have mortgages in them that are already originated. The home is already built, the home is already bought, and the borrower took a mortgage, and then a bunch of those mortgages got bundled together and put into a bond, and Fannie and Freddie create those bonds, securitize those mortgages, so that banks get the risk of the mortgage off their balance sheet and then it frees up liquidity for them to go do more lending. That’s always been the idea of Fannie and Freddie. 

And now Fannie and Freddie are very well capitalized, and the President is ordering them, because they’re under his purview, because they’re still in conservatorship from the 2008 failure, to buy $200 billion.

But here’s my question: what happens now as all these bonds get bought and there’s more liquidity going to banks and other lenders to then go out and buy more, and theoretically, because there’s all these non price sensitive buyers, this is basically quantitative easing.

But instead of the Fed doing it, it’s the federal government doing it.

As rates come lower, that stimulates demand, right? There’s now more people wanting to buy because the mortgage cost has come down because of a governmental intervention and distortion. But there’s no new supply for them to buy, so higher demand and lower or the same supply, what does that do to prices?

It pushes prices higher. It gets priced in, just like Kamala Harris’s idea of subsidizing a down payment.

So you can’t stimulate demand and not supply and solve your problem, because it will end up being reflected in the price equilibrium.

And so what it is is, case where you asked, What can Washington do? And I might suggest we could very well be in a position where instead of "Don’t just stand there, do something," maybe we need to say to Washington, "don’t just do something, stand there."

EICHER: So David, there are a couple of other areas where the administration is talking about doing something instead of just standing there. 

One thing that caught my attention this week is the President’s openness to putting a cap on credit-card interest rates. We talked about this during the Biden years, it was a couple of years ago. And I remember at the time you made the point that it would likely deny credit to lower-income borrowers and would end up hurting the very people that it’s meant to help.

So I assume your view on that has not changed simply because a Republican president is now embracing the idea?

BAHNSEN: Well, and he actually used the exact same number that was in Bernie Sanders bill that they literally put before the Senate 11 months ago, and of course, it didn’t go anywhere.

But he said, "Oh, credit cards are making plenty of money. The banks that issue these credit cards, I want to limit it at 10%." And the issue here is, once again, it’s what we refer to in economics, Nick, as the piety myth, the idea that something is okay if it has good intentions. 

This may very well have good intentions, but it does not have good consequences, because there is a certain pool of people that have a lower income and troubled credit history, and might be good borrowers now, but they’re in an overall risk pool where the credit card companies are going to have a certain level of defaults from people in this bracket, and they have to price that risk accordingly.

Now, if they have to issue the credit card below that price of risk, what do they do? They don’t give them the credit card.

And what are the people who need credit desperately but can’t get the credit card do? They go to loan sharks, they go to these other various much higher cost, unregulated elements providing short term credit and liquidity.

So it is again, a governmental intrusion that does more harm than good.

And I will say for the WORLD listeners, I do end up saying this more than I wish I had to. I’m not picking on the president here, I’m only talking about the policies objectively. And if anything, one of the reasons I feel like I could be more critical is because the President, in his general policy portfolio about deregulation, the way he understands supply and demand energy, he says, "I want to bring energy prices down, and I want to do that by promoting more supply."

He gets it with energy, so why do we not get it with housing and with the financial markets and these other areas?

So in a sense, it’s a compliment to the President that is forcing me to be critical, because I think there’s a certain inconsistency here. But there’s a number of these policy issues that are very troubling, and the element longer term, I don’t think any of this is going to happen, besides the Fannie Freddie deal. 

Now, in a future administration, or when a Mayor Mamdani in New York City, or a blue state governor, or someone else who does have the authority to do it comes along and says, "Let’s ban this. Let’s do this. Let’s regulate that. Some of these same things." What is the conservative opposition going to be against some of these things, when people on the right are sometimes promoting it?

We really, I think, have to be careful here to maintain that integrity, that consistency, and ultimately, that moral authority.

EICHER: All right—David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. We did intend to discuss some of the key issues raised in your annual white paper on the economy … but the news had different ideas, just prevented us from getting to that. I do hope we're able to next week, but in the meantime, you can read it for yourself. It’s published now at DividendCafe.com. It's up there, just head over and you’ll find it. David, thank you again, and see you next week.

BAHNSEN: Thanks so much, Nick.

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