Institutional Investors Aren’t the Villains of America’s Housing Market

Much of the recent shift away from homeownership can be attributed to increased regulation following the 2008 financial crisis

By Caleb Petitt. He is a research associate at the Independent Institute. He has a PhD in economics from George Mason University.

"Homeownership is increasingly becoming out of reach for Americans. Federal, state, and local lawmakers have turned their attention to targeting large institutional investors in the single-family rental (SFR) market over the past decade. People are worried that these institutional investors are raising rents and making it more difficult for families to buy a home. Those opposed to institutional real estate investors have pushed for restrictions or outright bans on SFR ownership by institutional investors.

However, the fears associated with institutional SFR investors are misguided, as are the policy prescriptions proposed by some lawmakers.

First, it is important not to overstate the role played by large institutional investors. Most SFR investment purchases are actually made by small investors. Approximately 60 percent of metropolitan rental-home investor purchases are made by investors with ten or fewer houses, while investors who own 1,000 or more homes never make up more than 2.5 percent of home purchases and rarely exceed 1.5 percent of home purchases. America’s housing market is not dominated by large corporations.

Next, institutional SFR investors improve and increase the supply of housing. Large institutional housing-investment companies were rare before the 2008 housing crisis. After 2008, Fannie Mae held a large number of foreclosed houses and needed to remove them from its portfolio. In 2012, the government passed the Real Estate Owned-to-Rental Initiative to help Fannie Mae sell off foreclosed houses in bulk.

Once Fannie Mae sold off most of the foreclosed houses, institutional investors needed ways to expand the number of houses they owned. Today, they employ two methods: purchasing and renovating individual houses, and partnering with developers to build entirely new communities. Both methods are good for the housing market because they increase the supply of homes.

When institutional investors buy existing houses to rent, they usually make significant renovations before listing the house: $15,000 to $39,000 is a typical range for what investors will spend on renovations, whereas new homeowners spend around $6,300 on renovations in the first year of owning. Institutional investors have the incentive and the means to improve the quality of housing.

Instead of putting upward pressure on rents, institutional investors actually lower rents by increasing the supply of rental housing. Research published by NYU professor Joshua Coven shows that institutional investors are responsible for both an expansion in housing supply and decreases in rent in the American SFR market. For example, the city of Austin’s rental supply increased by 14 percent, and the median rent has fallen by $400 thanks to policies that promoted development.

One reason that institutional investors may be frequently blamed for rent increases is that they typically invest in regions with growing rental rates. This helps them profit from their investments and slow the growth of rents in those regions, but it could be the cause of the belief that they create high rents.

Institutional investors also do not appear to have a significant impact on homeownership rates. The American homeownership rate peaked in 2005 and then steadily declined as the subprime mortgage housing bubble popped. Since 2015, homeownership rates have steadily grown to the point where they exceed the pre-1995 average. Homeownership has more than recovered from the housing-market crash despite the new presence of large institutional SFR investors. Research suggests that institutional SFR investors put some upward pressure on home prices, but supply responses mitigate most of the effect.

Implementing bans on institutional investors in SFRs would create supply constraints, raise prices, and push out lower-income families. For instance, after Rotterdam implemented an SFR investment ban, rents increased by 4 percent and displaced low-income families.

Much of the recent shift away from homeownership can be attributed to increased regulation following the 2008 financial crisis. Since then, mortgage lending has been more heavily regulated, which has caused the average FICO score of borrowers at mortgage originations to increase. To actually solve the problem of high rents and housing affordability, the mortgage market should be deregulated to facilitate more homebuilding, and zoning laws should be rolled back to make building easier."