Institutional Investors are Buying Up a Huge Number of Homes. Should We Be Worried?
A new study provides a mixed view of an emerging dynamic.
Following the financial crisis, large institutional investors became increasingly bigger players in the housing market — buying up massive numbers of foreclosed homes and turning them into rentals.
They have become a massive presence in some of the nation’s hottest housing markets. A recent report from the Government Accountability Office found that institutional investors are particularly present in the sunbelt — in the Atlanta area, as one example, around a quarter of the single-family rental market is held by large investors.
What is the impact of having these large investors buy up homes? Is it making things harder for homeowners and renters — and consequently, maybe we should start cracking down on institutional ownership? Or is it making things easier, and we should keep calm and carry on? Or should we have a more nuanced takeaway?
A new job market study produced by New York University PhD student Joshua Coven, who researches finance and real estate, offers a mixed picture.
“I find that they lower rents on net because these institutional investors increase the rental supply. I find that for each home that an institutional investor purchases, the rental supply goes up by .58 homes. And I find that this increase in rental supply, on net, lowers rents,” Coven told me in an interview.
But there’s a tradeoff.
“I find that these investors do raise prices and lower home ownership, but both forces are less than you would expect. So you might think that for every home that the investors purchase, home ownership decreases by one — because maybe they're buying an owner-occupied home and turning it into a rental. But when they buy a home, prices increase,” he told me. “This causes builders to build homes, and this causes small landlords to potentially exit the market. So when you incorporate all of these forces for every home that they buy, they don't decrease home ownership by one they decrease it by around .23 homes. So for me, this was a smaller effect than expected. It's smaller than if you didn't consider supply responses.”
The rise of institutional investors had less many policymakers who have blamed on increased prices to introduce policies to reduce their presence in the market.
As part of his paper, simulated several policy responses to see what would happen if we implemented these policies.
“I simulate what removing the investors would do to the economy, and I show that it would raise rents because it would lower the rental supply, and I show that it would decrease home prices as well,” Coven explained. “Additionally, I simulate another policy…the current White House, mentioned that they were considering a 5% annual rent increase cap for corporate landlords. So I simulate this type of rent control on these investors by lowering their rent growth expectations, and I find that this makes the market less attractive for these investors, so they don't supply as many rentals and own as many homes, which increases rents.”
Coven emphasized that his study had a limited scope. There were some effects that he didn’t study — like the possible use of deceptive fees that can impact renters and homeowners alike. His study was focused on market power and economies of scale and seeing how they’re impacting prices.
But his paper does offer evidence that these institutional investors aren’t all good or all bad for people who are in the market for housing. There’s real tradeoffs for renters and homeowners that policymakers can take into account before responding.
The concern I have is that it creates institutional incentives to manipulate the housing market. In countries like Canada, New Zealand, Australia and the UK, fortunes have been made by limiting housing development and finding ways to profit from the shortage of housing and the corresponding rising prices. These institutional investors now have a stake in a housing shortage, their interest in this market suggest they are they are betting on it.
America is the only English speaking country to largely avoid this trend, I am sure these institutional investors are very aware of that.
Thanks for this!
I think there's a good chunk of the populist left/right that's just incoherent on housing. It typically goes like this:
1. Homeownership is good, because it's the only way for middle class families to build wealth.
2. Blackrock buying homes is bad, because it raises housing prices, which makes it harder for middle class families to buy homes.
3. Therefore, to help middle class families, we should prevent Blackrock from buying homes, lowering prices.
BUT YOU CAN'T BUILD WEALTH IF HOUSING PRICES DROP!
Personally, I suspect a lot of this angst is coming from people that also want to be landlords. But as a renter, I don't care if I rent from an institution or from a small landlord. At least the institution doesn't act like I'm taking food away from his family when I request some repairs.