On July 11, Congress passed the Twenty-First Century ROAD to Housing Act, a rare display of bipartisan action aimed at addressing affordability concerns. An amendment incorporated into the bill, however, undercut that effort by blaming institutional investors, feeding Washington’s near-insatiable appetite for cheap villains and easy fixes to multifaceted challenges.
Homeownership may be the ultimate signifier of the American Dream: private property serving as both shelter and investment. But that dream may be out of reach for a growing number of young people. The central explanation, an undersupply of roughly 10 million homes, is statistically correct and yet seemingly emotionally unsatisfying. Stringent building regulations artificially increase the cost of construction or outright ban new developments. A shortage of homes causes stronger competition for the existing units. This increased buyer competition is reflected in the Home Price to Income Ratio which in recent months has surpassed the levels recorded during the peak of the housing bubble.
The 21st Century ROAD to Housing Act eases these tight restrictions on the supply of housing by streamlining permitting processes and providing public funds to convert underutilized commercial buildings. But the bill also reflects economically ill-informed idealism: a provision restricts institutional investors from directly or indirectly owning single-family homes. “Homes are for people, not corporations,” reads the catchy title of Section 1001.
Blaming institutional investors for escalating housing costs is ostensibly coherent. If investors are gobbling up the alarming number of units politicians often imply, how can the average family compete with Blackstone? But such claims are not just statistically unfounded; they are logically inconsistent.
The American Community Survey found that only 0.5 percent of all single-family homes are owned by large institutional investors (companies owning more than 1,000 homes). This market share does not give investors, let alone any one firm, the power to increase average prices substantially. But even if it did, it is worth asking: what are investors doing with all of these homes?
Institutional investors are not capable of inhabiting a house; purchasing a home is not the same as occupying it. Institutional investors renovate then either sell or rent the units they own, to the same American families with whom they compete at closing. The Urban Institute found that, contrary to popular belief, institutional investors increase the supply of housing and expand affordability through build-to-rent projects that reduce the cost of development.
Later amendments to the Senate bill narrowed the scope of the ban to allow for build-to-rent and other kinds of exempted purchases, including grandfathering in all the stock institutional investors already owned. With these significant carveouts, the ban symbolically attacked institutional investors without expanding the number of listings available to American families.
But broadening the supply of housing is politically feasible. In November, Massachusetts residents will vote on a “Legalize Starter Homes” proposal to reduce the onerous building regulations that make their state one of the hardest places to buy a house. Currently, the state government delegates most of the zoning and permitting power to its more than 300 municipalities. The land-use regulations created by these local governments in turn reflect the interests of a few established and involved homeowners. The National Zoning Atlas reported that the state’s average minimum lot size for single-family homes is over 40,000 square feet, one of the highest in the nation. Such regulations can add 20 percent to home prices, making it impossible to build starter homes and strongly tipping the scales in favor of established homeowners and against those entering the housing market. The ballot measure would cap the minimum at 5,000 square feet statewide, which advocates estimate will increase home building by thousands of units each year.
For incumbent owners, this increased density evokes fear of plummeting home values and construction chaos. With seemingly innocuous ideals like neighborhood aesthetic and historical preservation, these “not in my backyard” naysayers often block the “undesirable” development that young buyers desperately need. While local planning is valuable in that it responds to the needs of constituencies, the unintended consequence is often freezing whole communities in amber and closing the urban frontier for those unremittingly pursuing the American dream.
Institutional investors can act as a bridge between housing units in relative disrepair and prospective future buyers. Institutional investors can better afford the upfront costs of repairs and use economies of scale to renovate more efficiently. One plumber is hired to work on ten properties, and the tiling team follows him, reducing transaction costs. Disincentivizing this kind of investment could diminish the quality of the housing stock and exacerbate unaffordability rather than give American families a competitive edge.
The appearance that institutional investors contribute to higher prices may be a classic case of correlation and not causation. Institutional investors own a greater percentage of single-family rental units in areas with a higher cost of living, including cities like Atlanta (28.6 percent) and Charlotte (20 percent). But this relationship only shows that investors are attracted to popular and growing areas. Jerusalem Demsas said it best: “Investors are not driving unaffordability; they are responding to it.”
Compared to the small local landlord, large investors are more likely to own newer and larger properties and operate within higher-income census tracts. The prevalence of mega-operators in relatively wealthier areas may signal that these institutional investors are not revamping deteriorated houses but rather improving the quality of the housing stock by building newer units. Moreover, these investors aren’t simply building luxury condos in strictly wealthy areas. The Urban Institute reported that, in Atlanta, the median tract income for mega operators was $6,512 more than for small rental investors. This phenomenon shows that to the extent that large institutional investors have an effect on single-family home prices, this effect would be concentrated in units that are presumably not starter homes.
Limiting the presence of institutional investors in the housing market isn’t likely to expand homeownership for first-time buyers. And that misdirection, along with the wasted effort and political will in the housing bill, is not without cost. As Demsas wrote for The Atlantic, institutional investors serve as a scapegoat that exempts politicians from grappling with the real drivers of high home prices — institutional constraints that inhibit residential development. Housing narratives and bills that don’t grapple with these constraints will never touch the problem.
Policies like “Legalize Starter Homes” flatly name the real source of high prices. For all its fable-like allure, blaming institutional investors distracts the national conversation from the real drivers of high home prices. The goal of federal and state action on housing should be to unbind the complex mesh of local interests and restrictions that keep neighborhoods from becoming dynamic environments capable of absorbing new families. Penalizing institutional investors may be emotionally satisfying, but it cannot build a single home. In this economy of attention, it is important to focus on what is really exacerbating the housing crisis. Until policymakers confront the local rules that keep homes scarce, affordable housing will remain a flickering chimera, further receding into the distance.
