Bad residential? Investors and the housing market


The Wall Street Journal caught my eye with “Homeowners’ groups seek to stop investors buying homes to rent outwhich contained numerous claims such as “the rise in home purchases by rental investors has led to a decline in maintenance and made their neighborhoods less desirableand “Investors are also making it harder for local families to buy homes. There’s also the terrific claim that, “They come in, and they basically bully people with cash offers.” If someone shows up with a bunch of cash to pay the asking price or more for my house, “bully” isn’t exactly the first name that comes to mind.

Now, I confess that I approached this question with a bit of bias, having listened to Senator Elizabeth Warren decry the evils of private equity investments in Sandcastle Estates and similar investments (the rant begins at 1:36). Warren rails against private equity investments with the same frequency that most people breathe. (See my testimonial on the subject.) Of course, despite Warren’s best efforts to paint the industry as evil, most investors aren’t private equity giants. 2018 data suggest that 73% of single-family rental properties are privately owned, and only 19% of the same properties are owned by for-profit businesses.

I’ve also noticed comments like “some of the homes in the investor-owned housing estate now look shabby”. I have been a tenant for much of my life and take offense to the idea that my accommodation was in some way a threat to the general well-being. I never understood the idea that ownership or owners are inherently virtuous. Switzerland’s homeownership rate is only 41.6% (compared to 65.3% in the US), but I’ve never heard returning tourists call the country “a bit seedy “.

Putting aside all this emotional content, how should we think about this question?

First, this is nothing new and does not represent a fundamental change in the functioning of the housing market. (All figures to follow are taken from this Redfin Post.) Yes, the proportion of purchases by investors reached a new high of 18.4% in 4and quarter of 2021, but has been in the 10-15% range for a decade. It’s mostly the same thing.

Second, it would seem that the main concern should be that there is housing available to meet the families’ needs – either rented or owned. And also note that if people think renting is an inferior experience, all things being equal, they will abandon renting and buy instead. If rental demand is insufficient, investors will have no incentive to purchase homes.

Third, the exact character of an “investor” is a bit unclear. Redfin methods try to weed out all investors except corporate and institutional investors, but a family rental business could be organized as a limited liability company (LLC) – which is incredibly easy to do – and included. As noted above, this data may relate much more to Main Street than to Wall Street.

Finally, there is the matter of timing. Right now, US real estate markets are hot and the inventory of vacant homes for sale is at an all-time high. As it takes time to convert to a rental property, it takes some of the inventory off the market and the overall supply (rent plus property) will be reduced a bit. Going forward, however, an important way for the Fed to fight inflation is to raise interest rates. This will slow the demand for owner-occupied housing and people might be grateful for the increased rental supply.

Ultimately, the data does not indicate that the investor vs. owner-occupier ratio is something that warrants federal intervention.


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