The Long Way Home 3.22.24

Early in my business career, I heard, “Pigs get fat (fed), and Hogs get slaughtered.” Profound advice from wise, older mentors. Later, I’d listen to it from wise, solvent gamblers. 

It’s hard to slow down when the money comes in fast and furious—in a business or across the felt—but pacing yourself keeps you in the game. 

I’ve written that I’m ambivalent about capitalism. It has fed and fattened many pigs, even me. 

It revealed the hogs and exacted some retribution. There is not enough justice to prove the system can regulate itself, but enough to make honest people think. 

Capitalism, like the economy of a region or nation, requires ever more people, customers, vendors, and raw materials and values perpetual growth; the more aggressive, the better. Forgive the metaphor, but the only thing that needs aggressive perpetual growth is cancer. 

Two areas of the economy state the case--real estate and private equity, and in recent years, they have combined.

After World War II, the real estate business took off, providing housing for veterans and their families, giving them a place to live and build up some capital. Veterans got government-backed loans through the VA; the rest of Americans could borrow (get mortgages) at a fixed interest rate. Home builders were small businesses with local roots that worked and spent their money in relatively small markets—the definition of free enterprise in a nearly free market.

As the last century ended, more prominent builders entered the market, bought the small builders they needed, acquired more extensive tracts of land for development, negotiated volume pricing for materials, and spread their footprint across the country. Except for the custom home market, large developers now control a significant portion of the housing market.

It’s still possible to buy a home and see some capital appreciation, but there is a risk inherent with real estate. During the significant recession early this millennium, many homes lost as much as 70% of their value in a few short years. Homeowners lost their capital, income, and ability to keep their mortgage current. The crash was brutal. 

Private equity firms tend to get the media’s attention with leveraged buyouts of large, publicly traded companies. They take over, radically cut costs and services, and then sell the business, piecemeal or whole, at a significant profit.

They also engage in the rollup of industries with little public scrutiny. They buy up small businesses in selected markets and combine them to form larger entities. The combination creates a much higher-value business than the component companies would have if they remained independent.

You can see it in everything from hairstylist shops to propane sellers and resorts. Big money needs to see significant value growth, which they can see with roll-ups. 

Since the market crash of 2006-8, private equity has invested in the housing market. Using vast amounts of capital, these firms started buying single-family homes. They pay above-market prices and rent the houses, providing cash flow to reward investors. Paying cash at closing makes them appealing buyers for homeowners looking to “cash out.”

Sadly, this has led to unsustainable growth in home prices and shut out the average home buyer looking to invest hard-earned cash, 10-20% of the cost of a house, for a piece of the American dream: home ownership.

On the one hand, I love that capitalism still provides opportunities for entrepreneurs, even if not in historic industries. But I hate the effects of big-money capitalism that shake up existing markets and cause people to lose jobs, benefits, and homes.