Investors are buying up all the homes! The media hates them.
Do they have a point? Redfin reports that in the last quarter of 2021, investors bought a record 18.4% of the homes that were sold in the U.S. 74.8% of those homes were single-family residential, meaning the kind typically desired by nuclear families. 75.3% of investor home purchases were paid for with all cash, which makes it difficult for regular homebuyers to compete. “Ordinary folks are feeling the pinch,” says Redfin economist Sheharyar Bokhari
What’s causing this? Greed, say the politicians. “One of the reasons housing prices have gotten so out of control, is that corporate America sensed an opportunity,” says Ohio Senator Sherrod Brown. “They bought up properties, they raised rents, they cut services, they priced out family home buyers, and they forced renters out of their homes.”
Investors speculate more in Black neighborhoods, reports the Washington Post, which found that “30 percent of home sales in majority Black neighborhoods were to investors, compared with 12 percent in other Zip codes.”
“There is a massive racial homeownership gap in this country, which is a serious problem because owning a home is a key way to build intergenerational wealth and reduce racial wealth inequality overall,” says New Jersey Senator Bob Menendez. “I’m concerned that institutional investors in real estate are potentially squeezing minority first time homebuyers out of the market.”
A report from the ACCE Institute found that corporate landlords are more likely to raise rents. A 2018 study from the Department of Housing and Urban Development found they were 68% more likely to file eviction notices.
Some places are considering laws to discourage investors from gobbling up homes. In Newark, NJ, the mayor proposed a ban on investors soliciting offers without residents’ permission and a fee on property owners that increase rents over 5%. California passed a law that would stop investors from bulk-buying foreclosed homes. City leaders in Dallas, TX are considering a law to limit the number of homes real estate investors can buy.
But this problem is overrated. An RCLCO Real Estate Consulting report says institutional investors still own only 2-3% of all single family rental homes, and 89% of those are owned by small investors with 1-5 unit portfolios.
We should actually want more of these investors.
Small landlords are not necessarily better. Data from RentLogic, a site for landlord reviews, has found that small landlords are no more or less likely to have complaints filed against their properties as large institutional ones. They are however less likely to follow laws.
“Some smaller landlords do not fully understand tenant laws, or simply flout them. Rent from a mom-and-pop landlord, and you might get a handshake lease, an informal arrangement that could give you flexibility, or leave you both in a tenuous position,” reports the New York Times. Investors have the ability to hire a property manager that will be on top of repairs and hire lawyers to keep up with local regulations.
Investors often are not competing with regular home buyers, but rather against other investors. They’re more likely to buy homes that require significant repairs. Using economies of scale (for example by negotiating down prices by having a contractor work on multiple homes), they can lower prices. “It’s really hard for a homeowner to finance those repairs,” says Laurie Goodman of the Urban Institute. “That is where the real comparative advantage is.”
Additionally, interest from investors means more housing can be built. The economies of scale let these investors obtain permits faster; build housing cheaper; and enter riskier markets. While the New York Times wrote negatively about how such investors enter Black neighborhoods and “take” housing from locals, the benefits work both ways—if those homes are owned by said locals, they enjoy windfalls from selling to the investor.
The housing that investors add to the pipeline may also better fit modern needs. For example, demand for “build to rent” homes has increased, and companies like Invitation Homes satisfy that demand by building and managing suburban-style subdivisions where homes are rented, not bought. This gives people who are unable to purchase single-family homes the ability to live in one.
Lastly, the phrase “institutional investor” is itself a misnomer. When publicly-traded companies like Invitation Homes, BlackRock and other corporate boogeymen buy homes, it means ownership is technically distributed across millions of people who own shares in those companies. It enables democratization of wealth—even if a low-wage worker can’t afford to buy an entire home in his city, he can afford to buy shares of these companies, reaping the dividends of their work.
Not that small family landlords are bad, but cities do need a mix. Just as in retail, corner stores are good but so is Amazon, the real estate sector benefits from having various providers offer slightly different accommodations.
However, if people are really this offended by outside investment, note what causes it in the first place: the government-created home shortage. Freddie Mac estimates the country is short 3.8 million units, which has increased yields beyond what they would be.
“If we were building enough housing there wouldn’t be as much investing activity in the housing we have,” says Bokhari. “If we had enough homes to meet this demand, everyone would be able to buy a home.”
There’s good and bad when it comes to investors buying homes. But if supply increased, there would be less of a scarcity mindset about housing across the general public, which is what leads to complaints about investors snatching up homes.
This article was co-authored by Market Urbanism Report content staffer Rebecca Lau.