A symptom, not the cause: Institutional investors and the housing crisis

Understanding the origin of the current housing crisis is the key to solving it. While many policymakers have been busy drafting policies to expand supply and increase funding to affordable housing programs, some believe the real problem lies elsewhere: institutional investors in the market for single-family homes.

In news reports, on social media, and even in state legislatures, housing market speculators have been catching some blame for high housing prices in the United States. Sen. Jeff Merkley (D-OR) introduced two federal bills in 2023 to restrict investors from buying houses, and at least half a dozen states have seen similar legislation. In February 2025, Rep. Adam Smith (D-WA) proposed the “HOPE for Homeownership Act,” which aims to impose additional taxes on hedge funds purchasing single-family homes.

There has been growth in the role of institutional investment in the housing market throughout the last 20 years, but speculation by major financial players is far from the primary culprit behind current sky-high home prices. Lagging housing supply remains the largest driver of high housing costs. Rather than being a cause, persistent high prices in the housing market have attracted these investors who are aware of the major shortage. While supply remains the most significant challenge to high home prices, a deeper look at the role of investors in the housing market can help us better understand the current crisis and how policymakers should proceed.

What is institutional investment?

Under the broadest definition, institutional investors are entities that purchase housing with the goal of making a profit. This is primarily done through flipping and/or renting out properties.

Many of these major players own housing as an asset, so the term “institutional” investors is an attempt to distinguish between small-scale, regional investors and those that may be large enough to induce a broader trend in the housing market. Despite thorough media attention, the definition of the term “institutional investor” seems to be different to everyone. Some consider the worth of the cumulative holdings of an entity. Others are more concerned with the quantity of units owned. Another approach still focuses on the status of ownership entities as “hedge fund taxpayers.”

The wide variance in definition has made data-driven analysis of the role of institutional investors especially challenging. Researchers at the Urban Institute have even created their own stratification system for investors in the single-family home market, where “mega investors” are those with over 1,000 units in diverse locations, “small investors” are those with between 100 and 1,000 units in diverse locations, and “local investors” are those that own over 100 units that are concentrated in one geographic area. The most common umbrella criterion that characterizes “institutional” is holding over 1,000 units, so this article uses this definition.

These large investors first made a substantial appearance in the aftermath of the 2008 financial crisis. In fact, before 2011, there were no investors who owned more than 1,000 units. After the housing market crash, investors anticipated a rebound and purchased thousands of foreclosed homes. Some of this market entry was even facilitated by government-sponsored entities like Fannie Mae. Some argue that this counterbalanced the mass exit of individual homebuyers and propped up a cascading housing market. Since this initial entry, housing has gained a reputation as an increasingly lucrative and stable investment. Today, major investors own about 2% of the total single-family housing stock in the United States. Observing purchases since 2008, transactions involving these types of players make up a small share of overall market activity (see Figure 1). While their presence seems insignificant on the aggregate, institutional investors have a substantial presence in some high-growth areas, especially in the south and southeast (see Figure 1).

Figure 1: Corporate Landlords Buy Only a Tiny Sliver of US Homes

Figure 2: Estimated Share of Single-Family Market Held by Investors with over 1,000 Homes in Selected Areas, as of 2022

The arguments against investors

Critics of major investors in the housing market have multifaceted concerns. First, they are worried that investment firms with massive amounts of capital will be able to outbid individuals in the market and therefore drive up prices. Further, they worry that through buying properties and renting them, institutional investors are detracting from the for-ownership supply and limiting homeownership opportunities for families.

Major investors do have substantial capital at their disposal, and their increased activity has presented an additional shock to demand in the single-family housing market. Standard economic theory suggests a price increase should follow, and it has. This is precisely what happened in the aftermath of the housing crisis. Economic theory also suggests, however, that in the absence of restrictions, supply should respond to this price pressure and expand until the price level falls. While the price increase is observed, in part due to the entry of investors, the predicted subsequent supply expansion has had a more difficult time manifesting. Persistent regulatory barriers, including zoning restrictions, have made adjusting to the rise in demand in a cost-effective way difficult or even impossible in many places. While increased presence and bidding in the housing market may have had some influence on the original price increase following the crash, the persistence of high home prices across the United States suggests an underlying supply-side problem with market adjustment. Beyond supply and demand, the argument for homeownership is based on principles.

Some believe that suburban neighborhoods should be a hub of homeownership, not renting. Often, major investors will rent out their single-family holdings for a steady stream of income and guaranteed long-term returns. However, renting in these single-family neighborhoods is nothing new. The Joint Center for Housing Studies analyzed the proportion of all renter households living in single-family homes. In 2001, before substantial entry, about 30% of renter households lived in a single-family home. By 2021, that number rose to 33%. This is an increase, and while not substantial, it presents one effect of investor entry into the housing market. Recent research suggests that the entry of institutional investors into a neighborhood is associated with a decrease in for-ownership properties and an increase in rentals. These rentals are occupied by lower-income individuals on average compared to the homeowners that surround them, though this isn’t always the case. While this trade-off has been documented, a relative increase in rental properties is not necessarily a negative thing.

Single-family rentals are an integral part of the housing stock and meet the needs of a specific kind of tenant. David Howard, chief executive officer of the National Rental Home Council, stated that “Single-family rental home providers offer residents a more affordable option to live in neighborhoods that offer the kinds of things families really care about—access to quality schools for their kids; proximity to good jobs; opportunities to be a part of a community. Why should it be that homeownership is the only avenue that makes these things possible?”

What are the investors saying?

The presence of institutional investors is undeniable, but they are a symptom of price pressure, not the cause. With a consistently suppressed supply through excessive regulatory burden, and the fallout from the 2008 financial crisis, upward price pressure made housing an extremely lucrative investment. Rising prices have signaled to investors that housing is a safe, reliable, and relatively low-risk investment. Investors themselves have revealed why they are entering the market.

In 2021, Jeff Bezos backed Arrived, a company that allows individuals to invest small amounts into the single-family rental market. Currently, their single-family residential fund has over 21 million dollars in assets, with 53 properties all over the country. This is just one of their several investment avenues. While not yet large enough to qualify as an “institutional investor” under the definition employed here, statements made by company heads give insight into the motivation behind housing market entry.

When initially asked about why he was launching this venture, the CEO, Ryan Frazier, noted that housing is a less volatile asset than alternatives, and that “the persistent demand for housing [has been] outpacing the supply of new homes over the last decade.” Stagnating supply and existing barriers to additional construction are what make entry into the housing market lucrative for investors. Should barriers be reduced, not only would prices fall, but it might spark a reduction in the presence of institutional investors.

Conclusion

The presence of institutional investors in the housing market has grown substantially in the past 15 years. Despite an inconsistent definition and mounting criticism of their involvement, these players are responding to price signals—regardless of whether those signals reveal an over or undervalued asset. Housing has gotten more expensive, and large firms are noticing. Rather than being a cause, the increased involvement of investors in the housing market should be a wake-up call to policymakers. Housing supply should be able to adjust to both the needs of the entire single-family rental and for-ownership sectors of the broader housing market. Policymakers must address the need to expand the housing supply rather than cracking down on investors.

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Source: https://reason.org/commentary/a-symptom-not-the-cause-institutional-investors-and-the-housing-crisis/