Legislation to ban large investors from owning single family rentals is a solution in search of a problem.
Unaffordable housing is a hot button issue these days. Although it is particularly acute these days, it has always been targeted by DC. Over the years, the US Government has pulled out all the stops to make housing more affordable for people, and it usually has the opposite intended effect. Now that housing has become unaffordable enough to get voters to notice, DC is trotting out some new dumb ideas to fix the problem. Cue the subsidies and boogeyman attacks on investors.
The US housing market is already subsidized six ways to Sunday. The 30 year fixed rate mortgage is a distinctly American phenomenon. It couldn’t exist except without government subsidies. In most of world, mortgages are adjustable rate, which means that a borrower’s payment will increase if interest rates rise. This allows the bank to limit its interest rate risk. As people in Orange County found out the hard way, managing the interest rate risk of a mortgage portfolio is difficult. Second, the US taxpayer stands behind the vast majority of mortgage origination in the US. If it weren’t for the credit backstop, mortgage rates would be much higher. Finally, the interest paid on a mortgage is tax-deductible. It is safe to say that part of the reason why housing is expensive is because of policy in the first place.
In most of the world, the borrower bears the interest rate risk and the bank bears the credit risk. In the US, the bank bears the interest rate risk and the taxpayer bears the credit risk.
So now that voters are surly, here come the dumb ideas out of the political brain-trust to address the problem.
The latest brain bright idea is the push to ban investment funds from owning residential single-family houses. There is proposed legislation that would force the Blackrocks of the world to divest their single family properties. The basis is a specious argument that investment funds are bidding up the price of homes to levels that leave many people locked out of the residential real estate market. Nobody really likes Wall Street these days, so they make an easy target. Unfortunately a lot of people in the media actually believe that this is a serious policy idea and lawmakers in California, New York and Minnesota are pushing legislation that is a solution in search of a problem.
Why is it a dumb idea? For starters, the number of properties owned by hedge funds, professional investors and single-family REITs is miniscule compared to the entire US residential real estate market. For starters, there are approximately 127 million households in the United States. There are about 129 million occupied housing units in the US, of which 82 million are single-family houses and the rest are duplexes, 2-4 unit houses and apartments. About 50 million of these occupied housing units are rentals.
The typical residential real estate investor is an individual “mom and pop” type that owns under 1 or 2 properties. These investors constitute 2/3 of the single family rental market. Of course there are a sizeable percentage of 5+ units in the non-individual investor category, but a big part of that is for tax efficiency and doesn’t indicate that some vast faceless corporation owns the rental. It could be an individual investor who set up a LLC to take advantage of the tax benefits. Take a look at the chart below. The percentage of non-individual investors that own one unit properties is around 25% or so. The rest are just the typical retiree who is renting out their starter home for passive income.
When you think of big corporations owning single family residential real estate, the two names that generally pop up are the publicly-traded single-family residential REITs - American Homes 4 Rent and Invitation Homes. At the end of the year, Invitation Homes owned approximately 85,000 properties. At the end of 2023, American Homes 4 Rent owned 59,332 single family homes in its rental portfolio. That is it. Of the 50 million rental properties in the United States, the two biggest publicly-traded single family REITs own 144,000 of them, or just under 0.3% of the total rental market. The idea that someone who controls under one third of one percent of the residential rental market is having a measurable impact on supply and demand is ludicrous. When you take into account that these companies are building much of their supply, the logic gets even worse.
Simply put, investors are not out-bidding anyone in the US single-family housing market. Any sort of legislation to force corporations to sell off their rental properties is a feel-good measure for politicians who don’t really understand markets all that well. The bottom line is that this is “Something Must Be Done! This is Something! Therefore we must do it!” legislation which won’t have any effect on home prices or supply.
Another dumb idea being floated is a plan by the Biden Administration to help the first time homebuyer by writing them a $400 check each month. The problem with the housing market is one of supply, not demand. If anything, demand is too strong, and subsidizing homebuyers with a $400 a month payment will only exacerbate the problem. This smacks of election-year tactics and it probably won’t get passed in the first place. That said, between student loan forgiveness and first time homebuyer subsidies, the Biden Administration is throwing a lot of love to young adults.
Ultimately the housing affordability problem is going to be solved by more homebuilding, not by feel-good measures out of politicians.
"The typical residential real estate investor is an individual “mom and pop” type that owns under 1 or 2 properties. These investors constitute 2/3 of the single family rental market. "
Any data on how many of those types of investors exited the market due to COVID restrictions on evictions? My impression from the media reporting at the time was that it was a significant driver of the larger investor organizations buying up residential real estate.