I am not about to predict a massive crash similar to 2007/08, but instead, a coming washout in the real estate market. I, for example, have especially noticed the PR agencies, hard at work spinning any kind of positive data they can about the real estate market despite cracks appearing at all levels. This is always the first tell that something is going on.

Ironically, I don’t think any of us expected the real estate market to recreate the scenarios from 2007/08, especially after making six movies about it, impacting the entire world, teaching it in financial courses, and producing countless videos, and yet, here we are, on the brink of a cash flow doom loop caused by rental property euphoria.

Three stocks will tell you everything you need to know about the leverage in the single family home market:

1. Invitation Homes (Ticker: INVH)
2. American Homes 4 Rent (Ticker: AMH)
3. AirBnB (Ticker: ABNB)

There are others, as well, but for now, let me explain the companies above and what they mean to a sizable event coming to the housing market.

Invitation Homes (INVH) has acquired 80,000+ single family homes in the last 10 years to specifically rent out in their own AirBnB model. American Homes (AMH) has done something similar to Invitation Homes. The two of them own nearly 200,000 single family homes specifically for rental purposes, while trying to turn a profit on these homes, pay taxes on them, maintain the homes with upkeep, pay for insurance costs, pay bonuses to senior executives, run tons of spreadsheets, and all the other things a corporation must do to survive.

Then of course, there’s AirBnB, which is a reflection of all the small and medium-sized investments people are making across the country, who are managing their own housing portfolios for rental purposes.

When you add up the sheer number of single-family homes specifically for rental purposes, or speculative purposes, between the large publicly traded companies and AirBnB, it eclipses 1 million single family homes. More shockingly, it is probably more like 3-4 million single family homes. That means the slightest turn of events in housing would quickly impact those 3 million homes for a very important reason: many of these homes were acquired and rented based on cash flows from another home in the portfolio, which was based on cash flows from another home in the portfolio, which was based on cash flows from another home, and so on.

Pull one card out, and it all tumbles. This story seems to repeat itself all throughout human history. What might cause this event?

The perfect storm is as follows and would impact many housing schemes across the country that are focused on renting out single family homes and then buying more single family homes based on those cash flows:

• Rental rates turn lower.
• Maintenance costs go up.
• Insurance costs go up.
• Taxes go up with previously rising values.
• Meanwhile, home values turn downward, which compounds on the above items.

If the above conditions become true, a fairly large portfolio of single family homes will go underwater, which in turn will sink countless real estate portfolios modeled entirely off of basing cash flows from one investment to the next. If one fails, the whole portfolio fails.

I often ask myself: If every speculator is buying homes because they think someone else will buy or rent them at a higher value, then who is actually buying the homes to actually use? Without a true end user, everyone is simply playing a game of greater fool. Modern Americans can’t seem to contain themselves with housing markets. Check out these stats about the recent wave of speculators entering the market:

• An estimated 20% of single-family homes sold in recent years have been purchased by investors for rental or speculative purposes. This trend has significantly increased since the 2008 financial crisis.
• In 2021 alone, institutional investors purchased approximately 18% of all single-family homes in the United States, marking a significant increase from previous years.
• Hedge funds and private equity firms have increasingly entered the single-family home market. Blackstone, for instance, was a significant player through its subsidiary, Invitation Homes, and has continued to invest heavily in the sector.
• Major investment firms such as BlackRock, Cerberus Capital Management, and Colony Capital have been active in buying single-family homes, contributing to the trend of institutional ownership in the housing market.

Now it’s an important time to say that I’m not the only one writing about this or covering this story. It also is one of the larger undercurrents happening at the government and political level as well. Pay close attention to several laws that my soon pass, and in turn, cause the exact cascade I speak of above:

• Some states have introduced legislation aimed at curbing the influence of institutional investors in the housing market. For example, California passed AB 1482, which caps annual rent increases specifically from investment firms.
• On the federal level, there have been discussions about implementing policies to limit the number of single-family homes that institutional investors can own in certain markets. These proposals aim to address affordability issues and ensure more homes are available for individual buyers.
• Cities like Atlanta and Charlotte have considered or implemented local ordinances to address the growing impact of institutional investors on their housing markets, such as restrictions on the conversion of single-family homes to rental properties.

I believe this is just the start.

I’ll update this post accordingly.