Wall Street Placing Bets on House Flipping
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Your Money Briefing. Money and market stories from the Wall Street Journal. I'm J.R. Whelan in New York. Wall Street is getting into the home flipping business. But what did Wall Street learn from the 2007 housing crash? We'll have details in a moment. First, these money headlines.
What is driving Wall Street firms to enter the house-flipping market?
We're getting signs that $70 a barrel oil is starting to reach into consumers' wallets. Average U.S. retail gasoline prices are climbing toward $3 a gallon, the most expensive in more than three years. The national average was around $2.86 at the end of last week. In states such as California and Washington, prices have already breached the $3 level after rising as much as 24% from a year ago. Economic growth has boosted demand for oil. If that growth continues, most consumers should be able to afford to pay more to fill up their tanks. But conflicts in oil-producing regions could mean even higher gas prices. posing a threat to U.S. growth as the cost of fuel and gasoline weighs on drivers, airlines, delivery companies, and other big consumers.
And among S&P 500 CEOs who got raises last year, the 10% who received the biggest pay increases scored as a group in the middle of the pack in terms of total shareholder return. That's according to a Wall Street Journal analysis of CEO pay data. One reason for the mismatch is that boards often set CEO pay by benchmarking the average compensation for leaders at a peer group of companies and setting performance targets accordingly. In 2017, only two out of the 20 highest paid CEOs who did not leave their jobs before the end of the year landed in the top 20 for shareholder return. This is your Money Briefing from the Wall Street Journal. Welcome back, everybody. House flipping is nothing new. The process of buying and renovating a home in order to sell it quickly has been the topic of TV shows.
But now Wall Street is getting in on the act, and that's significant. Wall Street Journal reporter Ryan Dezember joins us to discuss. So, Ryan, Wall Street firms have had their toes in this area for a while, but some firms are actually ramping up their bets. on the loans for flipping homes. Can you just briefly explain how they do that?
There's sort of two ways that Wall Street and big investors in Silicon Valley as well are playing this. Some are backing originators of these loans, usually regional people that lend to home renovation companies and individuals with long track records of doing this profitably. And then sort of the newer thing is to buy the loans that are generated by the originators. KKR, Goldman Sachs, some other big investors are involved in that.
And some attractive components of these loans for these companies is that they are short term, but also the interest rate.
Yeah, they're double, triple, maybe even more a typical mortgage. Usually start around 8% and upwards of low teens is pretty common. So they're very attractive in an era of low rates. And as you mentioned, the turnover is very fast. Sometimes these loans, KKR's portfolio, they turn over in an average of about seven months.
Oh, wow. So when you think about a 30-year loan, this is like just a blip.
Yeah, yeah. And it's up to the borrower has to either sell the house to pay it back, or a lot of cases, these homes are being rented, so they have to line up refinancing.
But like a lot of things in the economics of this country and just in the economy in general, this is not a sure thing. The lender could actually wind up owning the house.
Yeah, that's true. That's the big risk. And so far, the default rates have been pretty low on these loans. I talked to one firm that we mentioned in the story that they bought about 200 of them over the last year or so. And they've had to take possession of about four properties. There's been some loans that have been bundled together in securitizations and bonds. And those have reported similarly low default rates. Now, of course, these haven't been tested in a down market. Real estate prices are running up. There's a shortage of homes, particularly on the low end.
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