Blackstone’s rental-backed securities revolutionary: Shiller

New York /
Nov.November 04, 2013 04:12 PM

Private equity giant Blackstone has been a massive force in the U.S. housing market, buying up thousands of foreclosed homes and converting them to rental properties.

Yesterday, the FT’s Tracy Alloway and Anjili Raval reported that Blackstone will launch a “novel security”  this week that will pay investors with the rental income coming from these properties. This caught the attention of newly-minted Nobel Prize winner and housing markets guru Robert Shiller for his opinion, who Tweeted that this could “mark a revolution.”

We reached out to Shiller for more color.

“I am excited to hear about this new possibility,” he responded.

Shiller told us he believes this would provide the market with more current and accurate pricing information, thus making the housing market much more efficient.

“My first thought is that this securitization might develop the markets further, and that the two markets might support each other,” he added.

“On a deeper level, regardless of its impact on the futures market, if the REO to rental securities take hold, and become liquid, it may increase the efficiency of the market for single-family homes,” he added. “That market has been extraordinarily inefficient, as [Karl] Case and I showed in an American Economic Review article 25 years ago. Momentum persists for years. That would all change if professionals could really play a liquid market, and did so on a large scale.”

Housing market derivatives are not news to Shiller. In 2006, Shiller and Case collaborated with S&P and the Chicago Mercantile Exchange to launch a futures contract on single-family homes.

“That contract is still going today, though weakly, see homepricefutures.com, a site maintained by John Dolan,” he told us.

Indeed, these contracts sound like a good idea in theory, but in practice they haven’t been very successful.

“[T]here may be difficulties actually finding a market for these securities, as there was for the securitization of shared appreciation mortgages (SAM) in the 1990s,” said Shiller.

Those SAM mortgages occurred when a lender agreed to receive a lower interest rate in exchange for a percentage of the appreciation of the house at the time of sale. They failed to catch on because, when they were first proposed in the U.S. in the late 90’s, no one was worried about price declines, according to Harvard Business School’s Robin Greenwood and Luis Viceira.

Reuters’ Adam Tempkin reported last week that prospective investors pitched by Blackstone were fairly receptive to the new security, although they apparently had some concern about whether Blackstone had enough “skin in the game,” as well as overly optimistic “broker price opinions,” or BPOs, of current home values.

Given that Shiller has recently said he’s starting to see signs of another bubble, it may be in everyone’s interest to increase efficiency as soon as possible.


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