Wall Street is Locking You Out of the Housing Market

Dave:Expenses are skyrocketing throughout our industry from construction costs to insurance rates to repairs and pretty much everything else, prices are going up and interest rates usually get most of the blame or tariffs or general inflation, but there is actually something else going on. Something Wall Street is doing that no one is really talking about and that is corporate consolidation. And this term, it may sound benign or like something that’s just tangentially related to real estate, but Wall Street is coming for the housing market in ways you probably don’t notice and it is having a big impact on home sales, on construction costs, on everything you pay to maintain your properties and ultimately on your wallet. A few companies are trying their best to control everything in the real estate market from materials to labor to real estate brokerages. And while it may not be making the news right now, less competition means higher prices for homeowners and real estate investors alike.So today in the show, we’re going to shed some light on this under-reported story in our industry. We’re going to talk about what’s going on behind the scenes, how this impacts you and what you can do about it.Hey everyone. Welcome to On The Market. I’m Dave Meyer. Thanks so much for being here. Today on the show, we’re talking about something a little bit new. We’re going to talk about one of the reasons costs are going up across our industry and how I believe Wall Street in some hidden ways is making it harder for small to medium size investors like us to succeed. And no, it is not the stuff that makes headlines usually I am not talking about institutional buying. Personally, I actually think that story is a little overblown because institutional buyers only own about two or 3% of the housing stock. Today we are talking about something else. We are talking about corporate consolidation and how just a handful of companies control massive parts of the real estate economy. And this might not sound that important, but I think it’s one of the most important yet under-reported issues in our industry.Corporate consolidation, as you’ll hear in this episode, is one of the main reasons housing has gotten so unaffordable, which in turn has led to a slowdown in housing. It’s one of the reasons your maintenance costs are going up. It’s one of the reasons cashflow is so much harder to find. It’s a sneaky problem, but it impacts almost everyone’s portfolio. And today on the show, I’m going to explain the issue, why it’s gotten worse in recent years, where it’s likely to head, and most importantly, what you should do about it. Let’s get into it. First up, what is corporate consolidation? Because this is what we’re talking about on today’s episode. I’m going to reference it a lot. And basically what I mean, the big picture here is less competition in a given industry. Corporate consolidation is what happens when industries that used to have a ton of competing players get absorbed into just a handful of large companies through mergers, acquisitions, buyouts, that kind of stuff.And at the end, only a few really dominant players ultimately control most of the market. So just as an example, instead of a hundred HVAC contractors or companies in your city, maybe now there are only 20. And corporate consolidation has been happening across almost every sector of the American economy for just about, or actually more than 40 years now. Talking groceries, stores, airlines, banking, healthcare, media, and now even the trades and real estate services that directly affect your business. In fact, right now there are 225 different industries where four companies or fewer control more than half the market. That is a lot of corporate consolidation. 225 industries where four or fewer companies control more than half the market. That means there is far less competition than there used to be and competition is crucial, absolutely crucial to capitalism. It’s why we have antitrust laws in the first place to fight monopolies because when there’s less competition customers and vendors, they have nowhere else to go.So they’re just forced to pay the prices that these few companies set. And for real estate investors, this isn’t some abstract thought. It actually shows up. It shows up in your contractor invoices, in your material cost, in what listings you actually get to see. And corporate consolidation is actually getting more intense right now. It is a long story. I’m not going to get into it in this episode. Let me know if you want me to go into more detail on this on another episode, because I did a ton of research and backstory into this, but I’ll just shorten it for everyone in this episode and tell you that basically a policy decision was made back in 1982 that changed how antitrust laws. Antitrust laws are just what the government uses to ensure competition in the marketplace is fair. They break up monopolies, that sort of thing.But back in 1982, a policy decision was made about how these antitrust laws would be enforced. And long, long, long story short, it’s made corporate consolidation much easier for these businesses and therefore much more prevalent. So that’s the backstory. That’s what corporate consolidation is and sort of the trend, what it has been over the last 44 years. But let’s talk about how this is actually impacting the real estate industry. And there are three major buckets that I’m going to talk about the trades, material costs, and brokerages. So let’s go through each of these one by one so you can see how this is impacting your specific business. First up is the trades. Now the trades, when I say that I’m talking about real estate services, things like HVAC contractors, electricians, plumbers, that sort of thing. And the trades traditionally for most of American history have been really fragmented.Basically there’s been thousands, tens of thousands of family owned local businesses. It’s usually your local plumber, your electrician, your HVAC tech. They’re not part of some giant conglomerate corporation, but that is changing fast and it’s not something I think most investors have noticed at least as of yet, but private equity has been rolling up these companies, meaning that they’re taking a bunch of fragmented companies, 10, 20, 30 different HVAC companies in a single market and rolling them up into a single organization. And just in the last couple of years, this has happened hundreds and hundreds and hundreds of times all across the country and that’s just for the ones that we know about. Private equity, it’s not public information. So those are just the ones we’re aware of. It’s probably happening tens and thousands of times. And the playbook is basically these companies, these larger organizations, it could be a hedge fund, private equity fund.It could even be publicly traded companies, but they go out, they buy these local operators, they centralize the operations, they standardize the pricing, they optimize for profit, and then they sell it. They go and sell it to an even bigger company. And the reason I think a lot of people don’t even notice this is that a lot of times the playbook entails keeping the local name so the name of the business doesn’t change, the branding doesn’t change. So you think you’re calling the company that you’ve been calling for decades or years, whatever, but you’re actually calling a national bigger organization that has a call center. They have dynamic pricing software and there is some good things to that. There are efficiencies that come from that. There’s maybe better communication, there’s maybe better organization, but there’s also some trade-offs with that as well because a lot of times what you lose are things like loyalty pricing where if you’ve been working with the same organization for decades, they might know you.They might prioritize your scheduling. They might give you discounts because you do so much volume with you. You used to work with someone who knows your properties, you have a relationship now and now you’re getting routed through a bigger corporation and some of that personal touch does get dissolved, or at least can. I shouldn’t say every company loses that, but that can happen. You’re probably seeing this, right? Go out and call an HVAC company right now and you see you call for one thing and they try and upsell you to something else or they try and pitch you on a subscription service because these companies love subscription predictable revenue so they’re trying to get you on some subscription service. And although there are trade offs and there are some benefits very often, this does come with increased costs as well. And I’ve tried pretty hard to quantify what this means, how much prices have gone up.It is very, very difficult to do, but the information that I have found, the quantification is hard. But what I have found is that 84% of HVAC businesses, which is kind of a private equity favorite, have raised prices and we just know sort of bigger picture without a doubt. The research on this is very clear across the entire economy that when these roll-ups happen, when there is less competition, it raises prices. This is the whole reason the government tries to break up monopolies in the first place is because it’s anti-competitive and it can ultimately hurt consumers and ultimately it can also hurt innovation. So while I can’t put a number and say service businesses and real estate have gone up by X amount, we see this anecdotally and we see it in under industry and I feel pretty darn confident that that is happening. And even though this is of course not every single business, there are still independent companies out there.They have to compete. They are struggling and they have to spend more money on marketing or whatever because now they’re competing against these bigger organizations that have a lot more resources and it makes it hard for real estate investors to find high quality service providers for our businesses. So that’s the first bucket. We are seeing big corporate consolidation in the trades, but there are two other buckets that are probably impacting your business as well, which are materials and brokerages. We’re going to get to the materials part, but we got to take a quick break. We’ll be right back Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about corporate consolidation and how it’s probably impacting your business more than you realize. Before the break, we talked about the trades and how roll-ups with private equity firms are creating less competition in that industry, which has its pros and cons, but probably does lead to higher costs for you, for your repairs, for renovations, all that kind of stuff.The second area of corporate consolidation that’s probably touching your business right now is materials because contractors, when you get that bill right now and you see it for repair and your eyes go out of your head and you think, “Oh my God, this is insane.” I mean, this happens to me all the time, right? It’s so shocking to see some of these bills. It’s not just the contractors. That’s just half the problem really, because every job, as you know, it’s contractor and labor, but it also requires materials and material consolidation compounds every cost increase that you are seeing. Just since December 2020, building materials have risen 40%, which we all know there’s been a lot of inflation since 2020, but that is far outpacing general inflation. We’ve seen crazy things, steel prices going up 128% in 2021. We all remember what happened right with lumber during COVID at 300% above normal.It’s not just those. I mean, those were kind of unique in COVID, but we also have things like gypsum, which goes into drywall. We have concrete, copper, all dramatically higher and haven’t even come close to getting back to pre-pandemic levels. The supply chain disruptions of COVID are a part of that, don’t get me wrong, but materials, the markets for those were already consolidating before COVID hit. A few companies are controlling material prices, whether it’s lumber or steel or drywall, the competitive pressure is less than it used to be. And so those companies have no incentive to bring prices back down. In fact, if there’s only four companies controlling all pricing for an industry, they might not be directly working with each other, but no one really wants prices to go down so they all keep their prices high. When there is less competition, pricing power replaces market pricing and the investor at the end of the chain, us, we absorb it.Right now, drywall is essentially controlled by five different companies, all the drywall, essentially five companies. Lumber, highly concentrated into about 10 companies. Paint, paint might be the worst of all of them. Three companies control more than 70% of the market for paint. So there is no wonder when you go buy some paint right now, it’s like $80 for a gallon. It’s insane. And if you’re thinking, oh, five, 10 companies, that’s enough for competition, not really. Actually, you really need a lot more competition. I don’t know exactly what the number is, but if you had 20 paint companies controlling 70% of the market, I guarantee you prices would be lower right now. It almost really becomes a cartel where people are almost, even if they’re not directly talking to each other, they are all incentivized together to keep prices higher. You need more competition for prices to come down.And think about the layered effect. Your concentrated contractor business is paying higher material costs and they are extracting higher margin. So you’re getting hit twice on a single invoice for repair or maintenance or new construction. And that ultimately means for investors that renovation budgets that worked a couple years ago don’t work today, not because you’re doing anything wrong, but because the cost structure of the entire supply chain has shifted against you. And again, I’m not saying these companies are necessarily evil. I’m just saying this is what happening because the change in the way the government enforces antitrust has made this a lot easier and it’s profitable for companies to do it. So they’re going to go out and do it. We all, whether you’re a homeowner or investor, are just unfortunately the people who have to absorb those costs. All right, that’s the second bucket, but there is a third one and this one is happening in real time.Stuff with the contractors and materials, that’s been happening for years, but brokerages, real estate brokerages are consolidating really, really rapidly. There are about a hundred thousand real estate brokerages in the United States, but the transaction volume is starting to get more and more concentrated really into three big companies, Compas, Anywhere Advisors, and EXP. And you might see them called different names, but they control about almost 20% of the industry’s total sales volume right now or over 570 billion. And if you expand that to just the top 10% of brokerages, you’ve accounted for 42% of total sales volume. There have been three major brokerage deals closed or been announced in just the last 13 months. Compass acquired Anywhere Real Estate, that was them getting 340,000 agents, Rocket acquired Redfin, Reels acquisition of RE/MAX. It’s all consolidating and it’s not as bad as paint, for example, but I just want to call attention to this because the trend is there.And you might think maybe this doesn’t matter, like these brokerages are competing and they should be able to grow. And I agree with that. There is some truth to that, but it does also just impact you. And I want you to be aware of some of the trade-offs of these situations because it’s not entirely about commissions, although I think you could argue that less competition keeps commission rates higher, which if you’re an agent, you might like. But as an investor, I think where this really gets a little interesting and potentially impacting our businesses more in the short term is this sort of MLS access problem. This is where the real consequences come for real estate investors because the MLS has sort of always been this great, it has problems, do not get me wrong. MLS is not great, but it has always been sort of this great equalizer because it’s the system that gives every buyer and seller and every agent equal access to listing information regardless of which brokerage they use.That is a great equalizer because everyone got the same information, but corporate consolidation is threatening that because you see this right now, Compass, this is getting more and more in the news, but Compass is giant real estate organization, very aggressive in consolidation and acquiring other brokerages. They have been very public about the fact that they are increasingly trying to keep listings that they have in- house and out of the MLS. So think about that. If this becomes the biggest brokerage in the country and then all of a sudden all the listings that they have, or not all of them, but many of the listings they have don’t go on the MLS where every agent, every real estate investor can see them, right? They will have a private listing networks only showing homes to its own buyers first and collecting both sides of the commission. It totally changes the way real estate works.And this is just beginning, but I do think that for real estate investors, the impact could be pretty direct and honestly pretty immediate because off market deals and relationship based access to listings have always given an advantage to sophisticated investors. But if consolidated brokerages start routing their listings through internal networks before the MLS, a lot of these advantages disappeared. You might not hear about that pocket listing or you might just not see some MLS deals that you used to. You might have to work with a different agent to get access to all these listings. So this is a really big issue. It is being litigated. There’s all sorts of conversations about this, but this type of consolidation can really impact real estate investors and it’s one we all need to be paying really close attention to. So those are the three buckets, right? I talked about services, I talked about materials and I talked about brokerages, each of them, which could be having impacts on your business today, but you also have to think about the compounding effect and what this means.And we need to understand where this is going so we can figure out what to do for our own businesses. We’ll get to that right after this quick break, stick with us.Welcome back to On The Market. I’m Dave Meyer. Today we’re talking about corporate consolidation and before the break, we talked about the three big buckets where you might be seeing this in your business. This is in the trades, basically real estate services. You might see this in material costs. In fact, you almost certainly are and you might be starting to see more and more of this in real estate brokerages and what listings you actually get access to. And you could probably see how this compounds. We talked about how when you get one bill for repairs now, you are experiencing in two ways already. You’re already feeling the impact of higher labor costs and bigger margins for service companies and from higher prices on materials. You also might not see as many listings as you used to. And none of these things in isolation is going to ruin your business, but you can see that all of them together running simultaneously compounding over time is sort of a structural shift in the economics of small real estate investing.This is not some market cycle, right? We talk about how deals are thinner right now and it’s not this part of it. This is not the only reason, right? Interest rates, inflation, all that stuff really does matter. But I’m just talking about this piece of it is not really cyclical, right? This is structural. This is a structural change driven by 40 years of policy that have allowed this to happen and the investors who don’t understand this probably keep blaming interest rates or bad luck or whatever, but the ones who do understand it can start making smarter decisions about where and how they invest. And before we get into that and like what specifically you should do about it, I just want to be honest that I don’t really think this is going to change. When I look at all the things our government has prioritized, this is absolutely not one of them.I haven’t heard a politician talk about this in quite a long time. So the idea that we’re going to have some policy reform, whether I don’t even know if that’s the right answer, but I’m just going to say, I don’t even think that some sort of policy reform is even on the table and even if it was, it’s going to be slow. So like I personally, with my own investing, I’m going to expect these things to continue. So what then can you do? What can you do as a real estate investor? Because I don’t think the answer is not invest. I don’t think the answer is just get mad and do nothing about it. To me, what real estate investors can do is build stronger relationships. I know that sounds low tech, but that’s exactly the reason I think it will work. To me, the solution really is all about individual relationships.And I know we say it all the time, but real estate truly is a relationship business and this consolidation that we’re seeing makes it even more so. So just a couple pieces of advice, things that I’m personally going to try and do and I think is worthwhile for you as well. Number one, build and protect your contractor relationships really actively because the independent trades businesses that stick around are going to be worth gold in the future. A good contractor is already worth gold, but I just think fewer and fewer of them are going to exist. And I’m not saying that contractors or individual techs or people who sell to private equity are not good people. I am just saying that they have a different business model that might not be aligned with how your business works, right? You might not want to be on a subscription.You might not want to be upsold. You might not want to go to the end of a queue where random tech comes out to service your business, which maybe they’ll do and they’ll do a fine job of. But for a lot of investors, myself included, I would prefer to have someone who’s been to my property before, who’s been there for 20 years, who knows me, who gives me good pricing, fair pricing for fair work because we’ve had a relationship over time. And so try and cultivate those relationships as best you have and be proactive about it. This is just everything from obviously paying on time. You should be doing that anyway, but also give them referrals, talk to other investors and recommend people and make sure that they know that you are recommending them as well. Overall, you just have to treat these relationships almost like an asset.It is an asset in your business and you can’t write them off. When you find contractors, you should already be doing this, but it is more important than ever to treat those relationships like gold. So that’s number one. The second thing is to try and build off market deal finding networks because I don’t know how this brokerage thing is going to play out. We have a lot of agents who listen to this show. I would be very interested to hear what you think about this, like what you believe is going to happen with companies like Compass saying they’re going to try and create their own essentially private listing networks. For me as an investor, that worries me because I like when my agent calls me and tells me they got a pocket listing for me, right? I like that certain MLS deals squander on the market, sit there for a long time and then I can see all of them.I don’t have to go to Compass’s website, then Zillow’s website, then another website to look for all the listings. So I think it’s more and more important, even if you’re not doing direct to seller marketing to build off market deal finding networks. And this might be relationships with more agents. In fact, I think that is probably a good way to do it because even if you have a buyer’s agent that you rely on, different listing agents might have access to different inventory in the future. I don’t really know how this is all going to settle out, but if it were me and it is me, I’m not going to wait. I want to network. I want to be out in my community working with and talking to as many listing agents as I can, telling them what my buy box is, letting them know what I like to buy, what I don’t like to buy so that if the market consolidates and ultimately comes more fragmented, that’s kind of weird, right?The brokerages are consolidating, but that could mean fragmentation in what listings you see that I’m still able to see all of them. That is what you should be focusing on. How do you get to see as many potential deals as possible? Because when your funnel dries up, if it gets lower, that just means your probability of finding a great deal is going to go down. So find agents who work with motivated listings, talk to wholesalers who are going to be finding these deals and maybe doesn’t want to list it with Compass, but instead wants to go direct to an investor, build those relationships with agents and wholesalers because I think right now the best way to ensure you get the best deals is through person to person relationships. So that’s advice number two. The third thing I would say, and this is something we’re working on at BiggerPockets, which I’ll explain in a second, but the third thing is collective action through small investors, right?Because these companies are consolidating that gives them pricing power. And we’re small investors. I’m just a guy who goes out and buys rental properties, does some flips, does some private investing and lending, right? I don’t have pricing power, but if we work together, we can actually create some or replicate at least some of the advantages that these institutions have through networks and communities of independent investors sharing resources, sharing referrals, sharing contractor relationships. So you should be doing this at a local level, right by going to meetups, by meeting with agents, to getting to know other investors, go on BiggerPockets forums and go meet other investors in your area and figure out how you can work together to get better deals, right, to get access to all the MLS listings, to share the best contractors that value relationships with investors. Do that in a localized way.We are also at BiggerPockets doing our part to try and help do this at a macro level. We have launched something called Pro Perks where if you are a BiggerPockets Pro member, we have essentially collectively bargained for our community to get lower insurance costs through steadily or to get discounts on loans through Kiawi. This works even though we are not technically consolidating to get that purchasing power and collective bargaining power by being a part of the BiggerPockets community and by working together, we can replicate some of the benefits of that. So if you’re interested in that, you can become a BiggerPockets Pro, but you can also do this at a local level and figure out which institutions want to be well known among investors as valuing those relationships because those are going to be super valuable if this corporate consolidation continues, which I really think it’s going to.So that is my advice on how to deal with this. And just to summarize what we’ve talked about today, this corporate consolidation, it’s decades in the making. A policy decision back in 1982 wound up that it is easier for companies to consolidate and because it is profitable to do that, they are doing that and that is what it is. I personally would like to see an environment where small local businesses can compete fairly, but for right now as real estate investors, what we are likely to see is a lot of consolidation and that means we need to be very deliberate about which service providers we choose to work with and to value those relationships. It means we need to do what we’ve always done, but even more so, which is working together to get that collective pricing power to identify the great individuals, the great agents, the great contractors in their area who want to be the essential part that they are of the real estate investing ecosystem.If you do that, which you absolutely can, you can figure this out. You can weather this just like everything else in real estate investing. The key is just to know what’s going on and you do now for listening to this episode and adapting your tactics, your strategies and your priorities accordingly. Hopefully this episode has helped you do just that. That’s our show for today. Thank you so much for watching this episode of On The Market. I’m Dave Meyer. I’ll see you next time.