By Meghan Hall
The American Dream and the prospect of owning a home are almost synonymous. For decades, the purchase of a house–sometimes with a white picket fence–was a signal that upward social mobility and stability had finally been achieved. In recent years, however, investors are now inserting themselves into what has been a typically privately-held asset class. With a dearth of for-sale, single-family product already an issue, the influx of major institutional money into the space now stands to risk crowding out those who can benefit most from such a purchase: regular, everyday, Americans.
“Whenever there’s a problem in the economy that’s hurting families and driving up prices, there’s a pretty good chance you’ll find a Wall Street scheme either causing it or taking advantage of it and making it worse,” claimed Senator Sherrod Brown (D-OH) at a recent hearing by the U.S. Senate Committee on Banking, Housing and Urban Affairs. “One of the reasons housing prices have gotten so out of control is that corporate America sensed an opportunity. Private equity firms, corporate landlords, investors, saw a shortage; they saw a captive market. They bought up properties; they raised rents; they cut services; they priced out family homebuyers.”
Both renters and homeowners were already hard-pressed to make housing payments prior to the pandemic. Before COVID-19 struck, more than quarter of renters were paying more than half of their income in housing–far beyond the recommended 30 percent rule touted by most housing experts as the benchmark for housing expenses.
Such a rule is tough to meet when housing prices continue to rise rapidly compared to wages. Between September 2020 and September 2021, the Case-Shiller U.S. National Home Price Index rose 18.6 percent. THE CEA noted that during 2020, the national-price-to-income ratio rose to 4.4, its highest level since 2006, according to the CEA.
“…While most of us see high rents and a lack of housing choices as a problem to solve, deep-pocketed investors see them as an opportunity for profit,” added Brown.
The rapid rise in the price of housing has also coincided with large-scale investors entering the market at seemingly unprecedented levels. Over the course of 2021, major investors purchased about one in seven single-family homes across major U.S. metropolitan areas, according to Redfin. The year marked investors’ most active in almost two decades.
During the last three months of 2021, investors became even more aggressive, acquiring 15 percent of all homes sold in 40 metropolitan markets. Redfin noted in its report that investors made up 18.4 percent of deals, up from 12.6 percent just one year ago. Single-family homes also made up 74.8 percent of investor purchases, the highest level on record.
“While record-high home prices are problematic for individual homebuyers, they’re one reason why investor demand is stronger than ever,” explained Redfin Economist Sheharyar Bokhari in a statement. “Investors are chasing rising prices because rental payments are also skyrocketing, incentivizing investors who plan to rent out the homes they buy. The supply shortage is also an advantage for landlords, as many people who can’t find a home to buy are forced to rent instead. Plus, investors who ‘flip’ homes see potential to turn a big profit as home prices soar.”
The investors who are buying up single-family product often have some of the deepest pockets in the game. Last year, Blackstone acquired Home Partners of America and its 17,000-home SFR portfolio for $6 billion. The company also invested $300 million in Tricon Residential, which also specializes in SFR.
Other major investors entering into the space include JPMorgan Chase, Morgan Stanley and the Arizona State Retirement System. Recently, Harrison Street and Core Spaces formed their own, $1.5 billion, joint venture in order to invest in single-family rental communities.
These investors are buying homes with the purpose to rent them. Or, they are investing into the single-family market to construct for-rent, instead of for-sale, homes. Currently, more than a third of U.S. rentals are single-family homes, and the sector is only expected to grow. 14,000 build-to-rent homes are under construction across the United States, according to Yardi Matrix. In 2021, about 6,740 build-to-rent homes were completed nationwide.
Investor interest in the single-family space is not entirely new. In fact, institutional investment into such assets were actively encouraged in the wake of the 2007-2008 Great Recession and the subprime mortgage crisis, according to a 2019 working paper published by the Federal Reserve Bank of Philadelphia’s Supervision, Regulation, and Credit Department. In the paper, the Federal Reserve notes that the First Look program put in place by Fannie Mae and Freddie Mac worked to increase investor presence in the market, a phenomenon that became useful at a time when individual homebuyers were unable to support the market’s recovery themselves.
When asked about current levels of institutional investment and its impact on the single-family industry, The Federal Reserve Bank of Philadelphia declined to comment, stating it did not yet have new data or insights.
A 2018 study by Berkeley’s Terner Center for Housing came to a similar conclusion, noting that, “Historically, purchasers of single-family rental homes were typically smaller companies, or “mom and pop” landlords. In the wake of the financial crisis, however, corporate investors with access to capital began to purchase the large inventory of foreclosed homes. Researchers and advocates have raised concerns about the impact of these institutions on tenants and neighborhood stability.”
The Terner Center also declined to comment on the trajectory of the market post-COVID-19.
However, with supply so constrained and an increasing number of buyers competing for limited inventory, institutional investors are far more likely to submit winning property bids, pushing regular homebuyers out. The situation, according to Joel Kotkin, Director of the Center for Demographics and Policy, creates a “Peter Pan-like” scenario where would-be homebuyers are unable to achieve one of the pillars of growing up: buying a home.
“[The situation] will make ownership more difficult. …What’s happened is that you get these private investors, the prices are too high for [normal] people because you have this bad phenomena where salaries aren’t high but prices are,” said Kotkin. “It’s a perfect situation for an investor to come in, buy up a bunch of single family homes, and rent them at a very profitable rate.”
Kotkin continued, stating, “People who in normal circumstances would be buying houses, now are renting.”
While personal anecdotes and economic theories abound regarding the impact of institutional investment on the single-family market, there has been little hard evidence collected proving investors’ influence in the market. At least, not yet.
Currently, institutional investors only own about 0.2 percent of all single-family homes, and just one-percent of rental homes, according to recent data presented to the U.S. Senate by The Heritage Foundation. The Heritage Foundation also pointed out that in no state, do institutional investors own more than 1 in 100 of all available housing.
“‘Institutional owners’ of rental properties are being scapegoated for the rise in home prices and rental costs,” Joel Griffith, a research fellow explained. “…The bottom line is that institutional SFR ownership is not measurably impacting local home price dynamics to the upside.”
Regardless of the data–or lack thereof–the general lack of housing affordability remains a huge problem, especially for low-income and minority Americans.
“This out of control price spiral means increased competition for fewer and fewer affordable homes,” stated Tobias J. Peter, an Assistant Director of Research at the American Enterprise Institute. “Potential entry-level buyers are increasingly pushed to the sidelines as they cannot compete with more deep-pocketed individuals, who experience the same competition only higher up the price spectrum. This is creating knock-off effects for people downstream. Left unable to buy a home, they remain in the rental pool, helping to drive up rents…Many who cannot afford these rent hikes will be pushed into homelessness.”