Investor-owned housing helps renters

Newsfeeds and social media are full of stories about how institutional investors like BlackRock are buying up housing and fueling the housing crisis. People as politically far apart as former Vice President Kamala Harris and current Vice President J.D. Vance have blamed private equity firms for high housing prices and rents. Not to be outdone, at least half a dozen states saw legislation introduced to restrict private equity ownership of housing, again ranging across the political spectrum from California to Texas and from Georgia to Minnesota.

The common thread from stories to political campaigns to proposed legislation is the claim that institutional investors buy up homes to rent them out for profit, and in doing so, crowd out families who want to buy homes to live in. At the same time, these investors also drive up rents and tend to be absentee landlords who don’t take care of properties. But a closer look at what’s actually happening in the market shows that almost the opposite of all that is happening: Institutional investors are actually helping renters.

The first clue that institutional investors are not likely to be the driver of housing costs or rents is that they only own about two percent of the total single-family housing stock in the United States, though they own almost 40% of apartment buildings. There are good reasons for both numbers.

When the housing market crash triggered the Great Recession in 2008, millions of mortgages went into default, and many of those homes wound up owned by banks and by federal lending institutions Fannie Mae and Freddie Mac. At that time, only institutional investors were in a position to buy those homes from the lenders and get them back on the market. In fact, before 2011, no investors owned more than 1,000 units.

A similar shift occurred during the pandemic, as thousands of landlords saw their rental income plummet, leading many to sell out or walk away. Again, institutional investors had the capital to get those homes back into the rental market. Without institutional investment in stores, millions of homes likely would have sat vacant for years.

Neither of those crisis opportunities for institutional investors is happening today. Housing analyst Kevin Erdmann has pointed out that almost all purchases of homes by institutional investors happened at the time of crisis, and their growth has been minimal since then. A shift in ownership years ago is not what is driving housing prices and availability today. Erdmann notes that in 2004, there were 33 million rental households, which grew to 44 million by 2016. But during that same time, only three million single-family homes were built, so about eight million single-family homes shifted from being owned to being rented. Despite that shift, census data shows that the homeownership rate in the U.S. increased by over two percent since 2015, even as investor ownership grew.

In fact, in the subsequent years, while the rate of homeownership was growing, the rate of building permits was half the rate at the peak of U.S. homeownership, and the rate of construction of new homes was flat. So, homeownership was growing as homes shifted back from being rented to being owned.. Institutional investor-owned rentals have not been crowding out homeowners; instead, rising numbers of homeowners combined with slow growth in housing stock mean homeowners have been crowding our rental housing!

Meanwhile, there’s no evidence that institutional investors are letting the housing they own fall apart. The Urban Institute argues that institutional investors tend to purchase homes in need of repair and “can repair these properties more quickly and efficiently than an owner-occupant generally can.” It makes sense: Fixer-uppers cost less, and with economies of scale, it will cost less per unit to remodel and repair a large number of homes in an area than just a single home alone.

Banning investor-owned housing doesn’t work—Dutch city Rotterdam tried it in 2021 and promptly saw rents increase and displace low-income families. In truth, fears surrounding investor-owned housing are just red herrings in trying to understand the housing crisis.

The real culprit is local government restrictions on housing supply. Homeownership growth since 2016, not investor-owned housing, has crowded out rental housing. If rental housing permits and construction had kept up, increased home ownership would not be a problem, but permitting of new rental housing has not kept pace with demand.

Persistent regulatory barriers, including zoning restrictions, minimum lot sizes, limits on multifamily housing, and long and costly permitting processes, have made it difficult, if not impossible, to adjust to the rise in demand in a cost-effective way. According to a recent paper from the National Bureau of Economic Research, barriers to building have led to fewer homes being built: “If the U.S. housing stock had expanded at the same rate from 2000-2020 as it did from 1980-2000, there would be 15 million more housing units.”

This is why states as politically diverse as California, Texas, Vermont, and Montana have passed laws in the past few years that require local governments to allow more housing to be built and reduce restrictions, costs, and delays on new housing.

It really works. Austin, Texas, pursued one of the most aggressive efforts to change policies to allow more housing construction, allow more density in parts of the city, and allow a wider range of housing types. The result is that average rents dropped by 22 percent, about $400/month.

It is not the infusion of capital from investors that disrupts housing markets; rather, it is local government policies that fail to allow supply to keep up with demand. Banning institutional investors will not help, but allowing housing supply to fulfill the needs of both renters and owners will.

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Source: https://reason.org/commentary/investor-owned-housing-helps-renters/