Institutional Investors and Housing
Another housing bogeyman
Several years ago, it was Airbnb. Housing prices were skyrocketing while Airbnb’s were proliferating. People concluded, understandably but incorrectly, that the latter was responsible for the former. Various cities decided that short-term rentals were at least partially responsible for the increase in housing prices, and steps were taken to either limit or ban them. New York went the furthest, resulting in around 10,000 short-term rentals disappearing overnight.
Of course, that didn’t solve the problem. Short-term rentals were never the main or even secondary cause of rising housing prices in most US neighborhoods. Because short-term rental bans didn’t do the trick, people began to cast about for a new bogeyman. They soon found one: institutional investors. Large corporations were buying up hundreds of thousands of properties and renting them out. Hardworking Americans were priced out. Soon, members of both parties, as well as President Trump, argued that institutional investors should be banned from buying houses. This will then lower housing prices.
It isn’t going to work.
First, institutional investors don’t own much of the US housing stock. Real estate investors bought 18.4 percent of the homes in the fourth quarter of 2021. That is a significant chunk, but most of these homes were not bought by “institutional investors”, that is, companies with at least 100 properties. They were bought by individuals who started LLCs and have a portfolio of ten or fewer homes. When it comes to institutional investors, the numbers are much smaller. Estimates vary, but one study found that about three percent of all homes are owned by large corporations. Three percent isn’t nothing, but especially as it’s spread out across hundreds of firms, isn’t enough to generate any significant market power. The biggest villain, according to the narrative at least, is the investment firm Blackstone, which owns around 275,000 rental properties. That might sound like a lot, but it pales in comparison to the 146,770,711 housing units estimated to exist by the U.S. Census Bureau.
The problem, as I’ve written about previously, is the lack of supply. Cities across America have made it impossible to build new housing. The only way, the only way, to make housing affordable is to allow people to build. Banning Airbnbs or institutional investors or foreign owners is bailing water out of the sinking Titanic. Sure prices might decrease a percent or two if institutional investors are banned from buying residential real estate, but it won’t ever solve the problem. It can’t solve the problem.
The truth is that residential real estate investors are a symptom, not a cause. There is a reason that one in every six homes is now being sold to investors: owning homes is a good investment. Over the last 15 years, those who have invested in real estate have made a fortune. In fact, other than 2006-2016, people who have invested in residential real estate have printed money for the last 40 years. It used to be that owning rental properties was hard work. You bought a house, dealt with tenants, and made a bit of money on the side. It wasn’t a way to make significant cash. Now, anyone who bought rental properties before Covid is in the money.
This is a major problem. Housing cannot be both a high-return investment and affordable. Period. It has to be one or the other. As a society, we have decided that housing should be a high-return investment. We have enacted rules that ensure housing prices go up, and those who buy homes accrue wealth at a rate not dissimilar from picking a good stock. Anyone who bought several rental properties outside of the housing bubble has done very well. Good for them, but this is not good for society, and is only happening because the government has made it so.
Housing should not be a high-return investment. It should be a wise investment, in that it should be a way for middle-class families to slowly build a moderate store of wealth over decades. That’s how the system worked until the 1980s. People bought homes, those homes appreciated at similar rates to inflation, and then families retired with a decent asset in their back pocket. Some unlucky families bought homes that lost value, and stayed underwater for years or even a decade. Some lucky families bought homes in areas that suddenly became more desirable and made a decent chunk of change. The norm, however, was neither. Then, homeowners realized they could use the law to punish those who wanted to build housing, and the whole system unwound. Slowly but surely, homeowners blocked more and more development, forcing up prices.
Don’t blame Airbnb. Don’t blame Blackstone. Certainly don’t blame BlackRock, another investment company that doesn’t own single-family homes but is constantly confused with Blackstone. Blame city hall.