: Today we're featuring a guest essay by one of the most successful
financial publishers in America, Bill Bonner, the founder of Agora.
Mr. Bonner recently launched a new venture,
Diary of a Rogue Economist
to share his 30+ years ofeconomics andmarket experience with as
many interested readers as possible. We hope you enjoy his
Stocks,bonds , gold -- all bounced around last week.
And as we've mentioned before, Americans continue to turn into
And here's the latest example...
"Wall Street is running a newprofit game," writes Shabnam
, "by buying foreclosed houses and renting them back to their
Yes... nice business. Even better than it looks. It's why the
rich get richer... and the 1% are way ahead of the other 99%.
"Every day, it seems a new report comes out praising the
ongoing housing recovery. In Georgia, home prices are up 5% over
last year, a year in which we also had one of the
highestforeclosure rates in the country. Seems a little odd,
doesn't it? Don't foreclosures usually drive down the
That's because the housing "recovery," as they're calling it,
is fueled almost entirely by Wall Street privateequity
firms,hedge funds andthe Fed 's unwavering support. After
creating a massive bubble in home prices that eventually burst
and caused oureconomy to go into a tailspin, these guys have
decided to come back for more and figured out a way to profit off
their destruction -- by turning foreclosed homes into rentals and
securitizing the rental income...
Blackstone Group (
, the biggest player in the new REO [real estate owned] to rental
market, has spent $2.5 billion in the last year purchasing 16,000
homes, a number that amounts to over $100 million per
Property records show that many of the homes Blackstone has
acquired in [Fulton County, Ga.] over the last few months were
purchased on the courthouse steps at the monthly foreclosure
auction, or through short sales -- when alender agrees to accept
less than the amount owed on a loan. The vast majority of these
homes are not empty, but occupied by homeowners who fell behind
during the GreatRecession ...
Gone are the days of calling up yourlandlord to let them know
rentwill be there on the 7th instead of the 1st this month. As
more and more Americans live paycheck to paycheck, and wages
continue to decline or remain stagnant, paying rent a few days
late could lead to a negativecredit score , impacting their
ability to secure resources and move up the ladder of the middle
"Paycheck to paycheck."
That's the way serfs live
. In someone else's house. On someone else'smoney . Often driving
in someone else's automobile. And sometimes even sitting on someone
Got a health problem? Oh, yes -- check into someone else's
Want an evening out at a restaurant?Put it on acredit card ; let
someone else pay for it.
Serfs don't necessarily live poorly; they live badly. Because
they're not in control of the resources they need to live well.
They are dependent, not independent.
We saw an ad for a new Smart car. "Just $199 a month," said the
People don't own cars anymore. They just lease them... or not
even. Alot of young people use Zipcar -- a car-sharing service by
which you "rent" a car using your iPhone. You never go to a rental
agency or see a rental agent. You get a code sent to your iPhone.
You then use the code to unlock the car. Easy. Peasy.
Some young people we know don't own anything. They say it's
"liberating." But that is something else. Not owning anything can
be a smart financial strategy. But not owning a house because it
was foreclosed... and not owning a car because you can't afford
one... does not sound very smart.
The suits take over
You want a smart financial strategy?
Look at Blackstone
. One of the houses it bought -- probably much like the others --
was bought for $90,000. It has amortgage on it of $200,000. The
former owners are still living in it. Instead of a mortgage,
they're now paying rent. Now they're serfs.
Do the math. If they bought the house in 2005, they probably had
a 6% mortgage. Six percent of $200,000 is $12,000. Add in another,
say, $3,000 inamortization and charges... and they probably had a
monthly payment of about $1,250.
Now the suits take over. Thanks to the conniving of other suits
at the Fed, they are able to borrow 30-year money for about 3.5%.
Let's add another $10,000 to their purchase price (closing,taxes
and maintenance) to make the math easier.
That gives them a monthly capital cost of less than $300 per
month. And because these guys have big hearts as well as big
wallets, they reduce the renter's monthly payment to only
Everybody comes out ahead. The former homeowners don't have to
move. They save money each month. And Blackstone -- which may have
only about $10,000 of its own money in the deal -- earns (are you
ready for this?) as much as $6,000, net, per year.
That's about a 60% rate of return on itscash
But wait. It gets better. Because Blackstone is not counting on
a realbull market in housing. Nope, the geniuses at Blackstone are
making a big bet on interest rates.
At no extra cost, they have gotten a free "put option " on
thebond market. That's right: They're short the bond market in a
major way. When bond prices finally fall (perhaps this process has
already begun), Blackstone is going to get another big
And this payoff is practically guaranteed. Blackstone's got its
money-printing friends at the Fed to make sure it
: Bill Bonner is a
New York Times
bestselling author and founder of Agora, one of the largest
independent financial publishers in the world. If you would like to
read more of Bill's essays, sign-up for his free daily e-letter at
"Bill Bonner's Diary of a Rogue Economist."
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