America's Collapsing Middle Class, “Inland Empire”, Blackstone Group, Capitalism, Class Consciousness, Corporate State, Financial Elite, Governor Jerry Brown, Gross Inequality, Jim Jarmusch’s 'Down By Law', Oaktree Capital Management, Political Economy, Real Estate Bubble, Regulatory Capture, Rentier Class, Ronald Reagan, San Bernardino County, Southern California, The Elite 1%, Wall Street Fraud
Jim Jarmusch’s 1986 masterpiece “Down by Law” with its rolling panorama of bleak pre-Katrina Louisiana, and distant, blank character stares suggesting inchoate malaise, effectively captured the unarticulated angst of the ascendant Reagan generation.
Like canaries in a coal mine, Jarmusch and other artists of the era anticipated the contemporary assault on class consciousness with pinpoint precision-decades in advance of the more cognitive punditry in evidence today.
This brings us to an interesting development in today’s post crash histrionics, which provides a conveniently compact diorama on display for all to view and interpret. We begin with what is intuitively obvious to any who care to observe, and that is the dynamic change in the character of the residential real estate market in most parts of the country, but especially evident in those areas hardest hit by the bursting bubble of speculative real estate.
This can be nicely cataloged by examining the infill areas of Southern California know as the “Inland Empire”.
Pre-2008 crash, these areas offered semi-affordable buying opportunities for homeowners priced out of the highly desirable coastal California markets, as well as respite for inner city residents looking to escape gang violence. Properties could be had for 1/3-1/2 of the price of a comparable dwelling in the more desirable areas near the coast and employment centers, but in return a 30-50 mile one way commute was extracted as compensation. In the era of $2/gal gas, this was deemed acceptable, especially as around the water cooler scuttlebutt yielded the notion that such a property could be bought and sold at a 50% profit 3 years later, with the proceeds used to buy a house closer to the employment centers thereby rendering the commute temporary.
This became a de rigueur business plan of many lower middle class workers, who one must acknowledge otherwise had a 1 in 10,000 chance in aggregating enough savings to achieve even a modicum of survivability in retirement.
I would make the case that the motivations were at the very least in line with the conventional bourgeoisie wisdom of bootstrapping one self’s upward in the social mobility chain by taking on some risk and making investments to better one’s life standing.
This explanation of course runs afoul of the current bourgeoisie narrative, which seeks to demonize those that participated in such shenanigans as irresponsible slobs and layabouts, lying on loan applications in a blatant attempt to defraud the salt of the earth folks in the financial industry of their hard earned capital. Because to concede that these people were simply following the time tried examples set forth by their more well endowed peers would be to point out structural cracks in a system that is perennially corrupt and unworkable.
So it goes something like this, if I do it and succeed, I shall be valorized, if you do the same thing and fail, it’s because you’re a dishonest layabout gaming the system.
OK, so now here is where it gets interesting.
The combination of rising gasoline prices, massive job losses and a real estate market in free fall meant that the “Inland Empire” was to become a major epicenter in residential foreclosures. To add insult to injury, the daily commutes to employment centers had become traffic nightmares, with a typical 40 mile commute taking 2 hours each way, so naturally private companies put in toll roads and toll lanes on state owned freeways and charged substantial toll fees to avoid this congestion.
As is well documented today, when 15 homes in a tract of 40 homes goes into foreclosure, no one else can sell their home either.
So guess what happens? Groups of institutionalized investors swoop in to buy these properties for pennies on the dollar, paying for them in cash as no realistic mechanism for property appraisal exists when such a large percentage of homes are in foreclosure.
All this anguish comes in pursuit of a modest home in the exurb of San Bernardino County, the epicenter of the Southern California housing crash. Plummeting values here sparked a vicious wave of foreclosures.
But it’s precisely because prices fell so far here that Sepe can’t buy a house now. In a sharp irony, many would-be homeowners in hard-hit markets can’t compete with a flood of all-cash offers from investors, some backed by Wall Street war chests.
So they’re missing out on the only upside of the real estate crash: historically low prices and interest rates.
The repeated rejections come despite Sepe’s solid qualifications: a stable job as a cell tower technician and a pre-approved home loan. He watches as houses hit the market, then get scooped up within an hour. He offered a battle metaphor to describe his plight.
“I am this little country,” he said. “And it’s like this huge country is coming and attacking my country, and I can’t win.”
No one thinks to consider this effect in terms of class consciousness, as the investors are of course valorized and the free market is commended for saving the real estate world in general, and those hapless former homeowners in particular. It is important to realize what is happening here, before our very eyes, and that is a.) the erasing and transference of an entire generation of home owners into permanent renters, and b.) the beginning of capital consolidation into the rentier class, effective displacing mom and pop rental property owners by big investment conglomerates like Blackstone Group and Oaktree Capital Management.
San Bernardino County, as well as two of its largest cities, Ontario and Fontana, stirred a national controversy when it recently considered — then shelved — a plan to use eminent domain to seize and restructure underwater mortgages. In a testament to the lasting effects of the crash, about 40% of borrowers in the region still owe more on their properties than they’re worth, according to mortgage tracking firm CoreLogic.
But a turnaround is well underway, thanks in part to deep-pocketed investors snapping up bargains with cash. The housing supply is now so tight that it’s common for home shoppers to put in 20 or 30 offers before securing a house, real estate agents say.
Aware of the destructive dynamic and further slide down the slope of income inequality, the county (with support from the State under Jerry Brown) put forth a proposal to seize the blighted properties under eminent domain laws, and then once owned by the county, to issue a county bond to provide funds at below market rates to loan back to the foreclosed homeowners allowing them to keep their homes.
Note the issue here is not so much below market loan rates, but availability of a lender (the county) to fill in for private mortgages, who will not loan under any circumstances into these blighted neighborhoods.
But of course this well meaning effort was drowned in the bathtub by the small gubymint crowd, you can well imagine the hew and cry of the conservative bourgeoisie when faced with such an obvious interference in the “free market”. Imagine the perceived travesty of a government entity intervening to prohibit free market evangelists from extracting their pound of flesh and smashing down an entire generation of the middle class back to the stone age and, I hope it goes without saying, perpetually converting these hapless suckers into a permanent revenue stream while they pay rent.
Private equity groups, including Oaktree Capital Management and Blackstone Group, have formed or partnered with companies dedicated to buying single-family homes. Unlike the flippers made famous by the housing boom, these institutional investors are in it for the long haul. They’re buying homes in bulk, then renting and holding them to reap long-term price appreciation.
Some of these private equity giants and Wall Street firms have employed former homebuilding pros and partnered with big apartment managers. Their plan is to transform the single-family home rental business, once a largely mom-and-pop affair, into a full-scale industry.
The Santa Monica real estate investment firm Colony Capital, founded by Tom Barrack, last year won an auction by the federal government to purchase 970 foreclosed homes in California, Arizona and Nevada from mortgage titan Fannie Mae for $176 million. Most of the California properties were in the Inland Empire.
Carrington Mortgage Holdings, based in Aliso Viejo, has partnered with Oaktree to buy and rent out single-family homes. Carrington spokesman Rick Sharga acknowledged that cash buyers have an advantage. But he said competition has helped revive a depressed market.
As promised, this neatly packaged diorama shows the full circle of exploitation and alienation of a full blown class war, in one easy to grasp trajectory:
– Financial capital consolidates and exploits the residential home mortgage market, securitizing these lousy loans for huge profits.
– When the boom goes bust, the same actors campaign aggressively to prohibit any mortgage relief, forcing widespread bankruptcies and foreclosures.
– The marketing arm of the financial capitalist spends tens of millions of dollars socializing the idea that these homeowners were and are morally deficient, and deserve no recourse. They are to be punished for their transgressions.
– These same financial capitalists with prey now firmly trapped then look for ways to further exploit their captives, and find examples in privatizing freeway systems to extract more revenue from commuters trapped in gridlock.
– The conservative and tea party fanatics interrupt their sheet-less Klan party long enough to advance the popular notion that further deregulation is needed, and demonize any government participation that might circumvent capital’s relentless desire to crush all but the few. In their capable hands, it becomes fashionable to decry government of any kind with a full throated call of Statism, and a groundswell is created to “restore liberty” and allow unfettered capitalism to thrive.
– Having discouraged any state intervention by conflating ideological association to diminished freedom, the mark is ready for the takedown. Large groups of investors swoop in with pennies-on-the-dollar all cash purchases of distressed properties en masse, displacing large segments of the population, and sometimes even renting the properties back to the original homeowner.
The upshot of this large scale displacement by capital effectively unwinds 70 years of New Deal and post WWII governance. State encouragement of home ownership was thought to be a useful means to ensure “skin in the game” for the working class, as in encouraging home ownership, labor strikes were thought to be less likely to occur with heady financial commitments hanging overhead, as well as community ties, might discourage labor activism.
They were right.
So this leaves a vulnerability and an internal contradiction, as large groups of former homeowners become permanent renters, they are disinclined to invest in the community, local economic spending goes way down (what renter will invest in the property?) impacting local business, and property crimes go way up as alienation and other side effects of visible and blatant exploitation percolate to the surface for the working class. Ironically, the size and magnitude of police state intervention will rise significantly as compared to the aborted eminent domain intervention, as now the upper middle class and general bourgeoisie will demand increased police (State) action to knock down property crimes and lawless behavior. Think police checkpoints and constant aerial drone surveillance of these communities.
The other effect as mentioned is the consolidation of the rentier class, wherein these large investment groups begin to “brand” the single family residence as part of a larger portfolio of related revenue streams, e.g. grouping big box stores nearby corporate owned rental developments in backdoor revenue sharing arrangements, eventually degrading to a truck system to more efficiently extract any remaining surplus from the working class. This large scale consolidation will bring the capitalist death spiral to small scale rentiers who own only a few rental properties, they will face exclusionary tactics wherein associated mercantilist outlets will give discounts to large company renters, but not to renters of the small independently owned properties. Further, the coercive laws of competition will be brought to bear on the independents, wherein access to community pools and other trinkets will be offered free or nearly free by the large corporate rent factories, and marketed as “lifestyle” destinations with corporate parties for renters only extending into the domain of social reproduction.
The demise of the independent rentier, or more aptly, the petite bourgeoisie, will follow almost as quickly as the former homeowner himself.