How The Great Recession Turned Cleveland Into A Rental Hot Spot

Ryan Dezember embraced the American dream. In 2005, the Bay Village native got a job at an Alabama newspaper covering the highly speculative vacation real estate frenzy along Alabama’s Gulf Shore, and bought a $137,500, 1,000-square-foot house with his wife. But two years later, he found himself the subject of his own story: When the national housing market crashed, Dezember's home value, like so many others, tanked. Dezember, who now reports for The Wall Street Journal, explores how the aftermath of the foreclosure crisis created a generation of renters in America in his new book Underwater: How Our American Dream of Homeownership Became A Nightmare ($28.99, Thomas Dunne Books). We talk to Dezember about his new book, and how Cleveland is becoming a hot spot for out-of-town investors looking for cheap rental properties. 

What was happening in Alabama when you arrived?
People were starting to trade these unbuilt vacation properties like stocks and bonds with almost no money invested. That started to spread to subdivisions and developments. You started seeing people that you knew couldn’t afford a million-dollar condo on the water have the rights to two of them with plans to flip them. Of course, the developers thought it would go fine, but then they got these people who couldn’t close and then the development started going under.

Why did you buy a house even when you saw the industry declining?
I thought, I’m buying a house for shelter. It’s not like I’m trying to flip it or counting on making a bunch of money. But I had a total failure of imagination on the downside. I thought, Oh you can always sell a house and move. Even if you don’t make any money, you get what you paid. What I should have known is that if everybody around you is using houses as investments and speculation, you might as well be, too, because that’s the market. 

After you moved to New York to work for The Wall Street Journal, what was it like to be a landlord from afar?
I’m dealing with all kinds of situations that you can imagine happening in south Alabama where the neighborhood has gone to seed. Everything you do when you are renting a house remotely is much more expensive. The thing that would cost me 20 minutes and a couple bucks at the hardware store to fix all of a sudden, you're paying a plumber $100 an hour, but it was what I needed to do to get by.

You recently wrote for the Wall Street Journal that Cleveland is becoming a house-flipping hot spot, profiling Lakewood company Prosper Cleveland, who flips decrepit houses and sells them, often to investors in places such as California. What makes Cleveland desirable to rental investors?
The really interesting thing that they found is that rents don’t vary that much from place to place. With the exception of New York and some places in California, the rent might be a few hundred dollars different than a three-bedroom, two-bath house outside of Cleveland. The difference is that you can buy the house in Cleveland for maybe a tenth of what you could in California, but the rent is the same. So when investors are looking at it, their home run is getting a property where they collect 1% of its cost or more in rent each month. If they can get $1,200 a month in rent, that is a home run. There's not a lot of places where that math works because home prices have shot up so much, but that math still works really well in Cleveland, Pittsburgh, Detroit, Toledo, Akron — these sort of Great Lakes cities.

What effect does this out-of-town rental trend have on communities?
It can be good and bad. When I followed Kelly Stumphauzer (of Lakewood’s Prosper Cleveland) around, she was taking eyesores of blight and making them into nice places. One of them was a disaster, raccoons and squatters. That protects property value and makes the neighborhoods where she’s doing this, such as parts of west Cleveland near Lakewood, safer. It creates housing stock where there wasn’t. We can argue that’s good. What the big Wall Street firms are doing is a little different. A couple years ago, I went to Spring Hill, a suburb just outside of Nashville. It basically has the cheapest housing and best schools in the state. There, you could find subdivisions where 15-20% of the houses were owned by two companies — 5-7% of the houses in the city were owned by four companies in the matter of a few years. What that does is it basically eliminates competition. You know if you need to rent a house there, you’re going to have to do it through them, and you’re going to have to pay what they charge. 

The economy took its steepest drop in 70 years due to the pandemic, but at the same time, the stock market is up and the housing market, especially locally, is booming. Are we on track for a similar foreclosure crisis to the Great Recession of 2007-08?
The short answer is we don't know, but it seems like it probably has to. Whenever there is a hurricane, you get this letter from your car company, your credit card company, your student loan company, whoever you owe money to, and they say, "The state or the feds have declared this a disaster zone. You don’t have to pay this month, and we’re not going to charge you a late fee." That’s essentially what the federal regulators have done with coronavirus for the whole country. But the big question is do people who didn’t pay for three months while they were furloughed or out of work just owe three months of back mortgages? Or is there some sort of thing where the government is going to basically add three months on the end of their mortgage? There are all of these questions that haven’t been answered. So right now, you've got all the people who have been sitting on the fence. You’re getting a lot of pent-up demand. Now, what happens when all those people get into their houses, and they're all settled, and then the government stops preventing lenders from foreclosing, and we realized that the economy is 10-20% smaller than it was a year ago because all these service businesses are closed? In all likelihood, people will lose houses, and the Wall Street guys and their imitators, those smaller investors, will be there to buy the houses when prices fall. And that means more rentals. Every foreclosure creates not only actual rental houses but also potential renters. It's this really perverse situation.