The U.S. and Canadian housing markets have been subject to increased volatility and valuations recently. Who is involved? Let's discuss.

"For Sale by Owner", "SOLD", "Foreclosed". Familiar signage strewn about residential lawns across North America. The problem? Housing. The solution? To be determined. The cause? A topic for debate.

So, let's dive in...

There are myriad reasons that could explain why the housing market is in the state it currently finds itself. High interest rates, record inflation, unemployment; the list could go on and on. And while still in the throes of the turbulent market, economists, media, and citizens struggle to rationalize what they are currently seeing, and how we got here.

The gravity of the situation is poignantly captured in the opening paragraph of an article written by CityLab's Kriston Capps in April of this year;

"By this point, the severity of the U.S. housing crisis is not in question: It’s a five-alarm fire marked by record home prices, spiking rents,?proliferating homelessness — and more recently, ominous inflation. Yet what’s less obvious is how overlapping policies enacted by governments at the local, state and federal level produced this emergency, or what governments can do now to stop it".

(Disclaimer: If you would like to cross-reference any of my referenced material--particularly screenshots--click on an image and you will be redirected to the source.)

A look at recent headlines help drive the point home that something is awry with our housing market.

With little effort, one will encounter article after article--with varying degrees of in depth-ness"--painting a picture that is getting more and more vivid as time goes on.

Exacerbating matters, we see these conditions have crept North, also plaguing the Canadian housing market.

The problem getting so bad in Canada, in fact, that the current administration has moved to ban home sales to U.S buyers, as the value of homes has skyrocketed beyond the means of what many Canadian citizens can afford.

"Home prices in Canada have soared more than 50% over the past two years. The market saw a record monthly increase in February as buyers acted ahead of rate increases by the Bank of Canada, taking the benchmark price of a home to C$869,300 ($693,000)", one article writes;

Again, a quick search of internet publication and media show a similar landscape.

So, what is going on, here, and wherein lies the rub?

From what I have seen, heard, and personally researched, it would appear that financial institutions--a handful in particular--are descending onto the market and buying up property in droves?

"But why"?, you ask. This is a very reasonable question.

I feel that financial institutions, burdened with the crushing weight of excess cash reserves, are using the housing market and doing a bit of balance sheet rebalancing of their own; a la the Fed.

Now, before we proceed, I think it prudent to make two important distinctions:

1. Quantitive Easing. The short answer for why financial institutions are flush with cash. Serving as a measure to stimulate the economy, quantitative easing (or "QE", for short) is a central bank, in this case the Federal Reserve, or "The Fed", purchasing securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses, according to Forbes.

Now, you may be wondering "Why quantitative easing?"

The short answer is Covid. The onset of the recent global Covid-19 pandemic crippled supply chains, caused many to lose jobs, and threatened the very fabric of our society.

As a response, the government sprung into action and printed money at exorbitant rates.

2. Risky Business. A lesser-known fact is, banks don't want your money.

I'll explain. A common misconception is that banks are essentially warehouses packed to the brim with cash, a la Scrooge McDuck's money pool; but this is not true. In fact, according to FRED, "banks hold about $75 billion in their vaults at any moment, which translates to about $230 for each U.S. resident. This doesn’t seem like a lot, as many people have more than that deposited in an account".

So, "who is FRED?", you ask.

Short for Federal Reserve Economic Data, FRED is an online database consisting of hundreds of thousands of economic data time series from scores of national, international, public, and private sources. FRED, created and maintained by the Research Department at the Federal Reserve Bank of St. Louis

Now, back to the risky business. There are many reasons why banks do not want excessive amounts of paper tender on hand. Excluding the obvious, such as bank robberies and property damage, there are more fiscal concerns at play when it comes to the greenback. Business Time states "Deposit insurance premiums increase for banks as they hold onto larger and larger amounts of cash, and so, increasingly,?customer deposits are coming to be seen as a cost for banks, not a means to make money".

As told by the Washington Post another reason is "there is too much money sloshing around the financial system. And everyone knows that when there’s too much supply of something, prices —?or, in this case, savings rates —?don’t rise. It’s been a painful dozen years or so for savers".

In short, there are inherent and intrinsic risks surrounding financial institutions having too much money.

With that said, let's discuss a measure employed by financial institutions in efforts to free themselves of that left over QE money; BUYING PROPERTY.

Now, it is not uncommon for financial institutions to diversify assets and portfolios alike by investing in different verticals. One of these verticals is often real estate, as it is a very "liquid" asset; meaning it can be quickly exchange for cash. Another attractive aspect of real estate investing is that the invested capital no longer shows as a liability on the books of institutions who engage in the practice.

And while traditionally reserved for the commercial property market, institutions made a pivot in recent times, which lead to an influx of [QE] money to the housing market, causing property values to skyrocket.

With all of that said, let's move on to our main focus for the article, our "star" financial institution, and their role in the housing market condition.

(Yes. That was all preamble. For those who wish to press on, the remainder of this article will likely double its length)

The Rock!

No, not beloved former wrestler, now actor who loves a good jungle scene. The Rock we are concerned about is the financial powerhouse known as BlackRock Inc. Boasting an impressive $10 trillion in assets under management, BlackRock is the world's largest asset manager.

My previous research started with the below February 18th article.

Between the days of January 25, 2022 and sometime in mid February, the iShares MSCI Kokusai exchange-traded fund (ticker "TOK") saw nearly $4 Billion flow in and out after starting out the year with less than $200M in total assets.

The article mentions that BlackRock declined to comment, but quoted an analyst on what could be the cause behind the nearly $4 billion:

• The sudden influx of cash could indicate a large asset manager is tweaking a model portfolio allocation
• The three week lag between the inflow and outflow also mostly negates guesses that the flow is a tax optimization re-balancing trade, known as a “heartbeat"--a smart tax strategy which removes a negative from the investment process (James Seyffart). And according to Cinthia Murphy, director of research at the ETF Think Tank, heartbeats don’t usually exceed the net asset value of the fund
• “We can only speculate that they are either washing assets in something else, like an SMA or an offshore product, or it’s a trade for a big institutional investor looking for exposure for a day, or maybe an options-related trade, something like that.

The same article goes on to quote Todd Rosenbluth, head of ETF Research at CFRA--is a leading provider of independent investment research--“It’s extremely rare for an ETF to be way below the radar and have no underlying or limited trading and then gather $3 billion in one day".

Rosenbluth goes on to provide a couple more theories:

• The inflow might be a Japanese investor seeking to diversify outside of the country, although there are more liquid, cheaper and larger products to execute such a strategy
• The sudden influx of cash also has all the hallmarks of a so-called model portfolio allocation, which is are a diversified group of assets designed to achieve an expected return with a corresponding risk, according to?smartasset.com. Historically, a model portfolio would typically have been created in-house at an advisory using a package of mutual funds, according to the above mentioned Bloomberg article.

Naturally, i was curious about the mysterious $3.7 billion inflow-outflow, so I continued digging for where the $3.7 either came from or went, and came across the below article with a possible lead. The article mentioned Carlyle Group Inc.'s plan to acquire iStar Inc.'s net lease business for $3 billion.

So, who is Carlyle Group?

Per Bloomberg, Carlyle operates as a global investment firm. The Company manages investment vehicles that invests across four segments which includes corporate private equity, real assets, global credit, and investment solutions. Carlyle Group serves clients worldwide.

And who is iStar?

"iStar Inc. (NYSE: STAR) is focused on reinventing the ground lease sector, unlocking value for real estate owners throughout the country by providing modern, more efficient ground leases on all types of properties.

Further investigation shows us BlackRock's ownership stake in iStar.

As we can see based on recent 13F filings on Fintel, we can see BlackRock reported owning 13,421,862 shares of iStar,Inc., an increase of 148,779 from their previous position, which imputes 19% ownership.?

Safehold

"Real estate is one of the largest capital markets with an estimated?$7 trillion?of institutional-quality assets in the top 30 U.S. markets. Safehold? ground leases can provide an attractive capital solution in each of these markets and become part of the capital structure across almost all property types".

"As the founder, investment manager and largest shareholder of Safehold Inc. (NYSE: SAFE), the first publicly traded company to focus on modern ground leases, iStar is helping create a logical new approach to the way real estate is owned, and continues to use its historic strengths in finance and net lease to expand this unique platform", per?Yahoo Finance

Looking at Fintel's Safehold ownership page, we see a couple familiar names, with iStar owning nearly 65%--64.9%, to be exact--and BlackRock just shy of 5% at 4.97%. At 5%, an investor enters"beneficial ownership". Per the SEC, a beneficial owner is anyone directly or indirectly shares voting power or investment power). beneficial ownership is reported through a 13D filing.

You've made it this far, so let's quickly recap...

• QE resulted in financial institutions having too much money on hand
• Financial institutions began investing heavily in real estate
• BlackRock inc, the world's largest asset manager, appears to be orchestrating a conglomerate of power surrounding the real estate/housing market with

1. Carlyle, who operates as a global investment firm. that manages investment vehicles that invests in real estate and other verticals. This relationship is indirect.
2. iStar, who is unlocking value for real estate owners...by providing modern, more efficient ground leases on all types of properties. This is a direct relationship.
3. Safehold, who is the first publicly traded company to focus on modern ground leases, iStar is helping create a logical new approach to the way real estate is owned. This is also a direct relationship.

"But wait, there's more!"

In previous research, I also happened upon the below article, which sparked some curiosity; and again, I began to dig.

Fun Fact: In my haste, I initially read the above headline as ICE.. to Acquire?BlackRock. Turns out that was wrong, however, all roads led back to BlackRock, anyways... So, here we are.

The article begins,

"Intercontinental Exchange, Inc. (NYSE: ICE),?a leading global provider of data, technology, and market infrastructure, today announced it has entered into a definitive agreement to acquire Black Knight, Inc. (NYSE: BKI),?a software, data and analytics company that serves the housing finance continuum, including real estate data, mortgage lending and servicing, as well as the secondary markets."

and continues,

"The Black Knight ecosystem adds value for clients of all sizes across the mortgage and real estate lifecycles by helping organizations lower costs, increase efficiencies, grow their businesses, and reduce risk."

"Black Knight has been on a successful journey to transform the mortgage industry by providing our clients with powerful, interconnected solutions that help them achieve greater efficiency and better serve their customers,” said Anthony M. Jabbour, Chairman and CEO of Black Knight, Inc. “We believe this combination is the right next step in that journey."

So, you may be asking yourself "What does ICE have to do with BlackRock?"

Well, according to Fintel, a LOT! Fintel data shows us that BlackRock has a 27.92 stake in ICE, with over 46M shares.

As for Black Knight, Inc, Fintel data shows us BlackRock ownership of 12,673,477 shares, or 8.20%. Remember that per the SEC, a beneficial owner is anyone directly or indirectly shares voting power or investment power, which is denoted by ownership of 5% or more of a company's shares.

Did you catch that?

BlackRock has nearly 28% ownership in ICE--a leading global provider of data, technology, and market infrastructure--and 8% ownership in Black Knight, an ecosystem adds value for clients of all sizes across the mortgage and real estate lifecycles by helping organizations lower costs.

Enter Blackstone... And likely the culprit of the aforementioned transaction of nearly $4 billion.

On May 19th, Blackstone Real Estate Income Trust announced the completion of their acquisition of all the outstanding shares of Resource REIT.

FUN FACT: The acquisition of those outstanding shares of common stock of Resource REIT... was completed for $14.75 per share in an all-cash transaction valued at $3.7 billion...

Resource REIT is a self-managed real estate investment trust that owns a diverse portfolio of suburban apartment communities in targeted markets across the United States. The REIT owns 42 multifamily properties across 13 states as of March 31, 2022.

Global News Wire gives us more detail on the transaction that was announced on January 24th of this year--the day before the mysterious inflow-outflow of the BlackRock ETF.

"BREIT [Blackstone + REIT; per the acquisition] will acquire the REIT’s portfolio of multifamily, garden-style assets comprised of 42 apartment communities totaling more than 12,600 units. The assets feature significant green space and amenities and are located in some of the strongest and fastest growing submarkets spanning 13 states, including Arizona, Colorado, Florida, Georgia and Texas".

Who is Blackstone? You ask.

Blackstone invests across industries in both established and growth-oriented businesses across the globe to help companies "realize their growth potential".

The Blackstone BlackRock connection...

If you will recall with me the 13D filing mention from earlier, and that its purpose is to legally report at least 5% ownership of a company's shares; a benefit that brings with it voting power.

Well, as luck would have it, BlackRock has filed two such filings with the SEC; one for Blackstone Group Inc, and the other for Blackstone Mortgage Trust Inc

Now, if you were to ask BlackRock, they would emphatically deny any involvement in such things as establishing a monopolistic chokehold on the housing market. How do I know this? They said so, themselves, as they made it a point to "set the record straight", and deny all culpability.

Now, it may just be me and a bit of skepticism, but I find the working of BlackRock's denials interesting.

"BlackRock is not buying individual houses in the U.S.", and "...we are not among the institutional investors buying single-family homes"

To me, this reads as BlackRock only saying they are not buying individual and single-family homes. It appears they tried to take advantage of addressing the same style of home twice to reinforce their innocents by making two statements denying their involvement. Either way, their statement say nothing to address purchasing large blocks of homes, multi-family homes, etc, etc...

Another quick recap, but visual this time...

In addition to BlackRock's denial, some media and news outlet would also do their best to paint a picture of everyday citizens purchasing all of these homes and inflating home value. CNN Business going as far as to propose that would-be homeowners are in such desperate need of new homes, that they're willing to pay $1M over asking.

Personally, I have difficulty taking stock in this school of thought--dare I say, laughable--especially when considering some facts.

Information provided by Statista states,

• Eviction moratoriums being lifted led to mass evictions across the country, leaving many homeless and jobless, and many lost jobs due to Covid
• A U.S. government survey conducted surrounding the recession crisis showed citizens have little to no confidence in their ability to make rent payments.

Further dispelling the belief that home buyers can afford paying over asking, let alone $1,000,000 over asking is salary. An April 2021 memo from the U. S. Department of Housing and Urban Development reports the national family median income for FY 2021 was $79, 900, and 1.78% increase from 2020's national family median income.

Wrapping things up...

We may never know whether institutions are responsible for, and/or played a significant role in the events that led to the current state of the housing market, both in the U.S. and abroad. However, when we follow the money, we see some interesting activity around businesses that either directly or indirectly touch the housing market in one way or another. In analyzing the relationships between some of these businesses and financial institutions, we can come to a reasonable conclusion about what is really going on, and who the players are.