How Hedge Funds Are Worsening the Housing Crisis

CEO Khai Intela
San Francisco: Modern Housing in The Golden City. Image © Blake Marvin This article was originally published on Common Edge. The housing crisis in America has plagued communities for years, and now reports have emerged...

San Francisco: Modern Housing in The Golden City. Image © Blake Marvin San Francisco: Modern Housing in The Golden City. Image © Blake Marvin

This article was originally published on Common Edge.

The housing crisis in America has plagued communities for years, and now reports have emerged that private hedge funds are exacerbating the situation by purchasing detached houses and townhouses. The implications of these acquisitions are dire, as it is unlikely that these properties will return to the real estate market anytime soon, if at all.

How Private Equity Is Making the Housing Crisis Even Worse

Why is this happening? Hedge funds typically hold residential properties in their portfolios for 5-10 years, but when they decide to sell, these homes are unlikely to appear on local real estate service platforms. Instead, the bundled properties are sold to other funds, transforming residential properties into assets traded among institutional investors. This trend is also affecting the rental market, as private equity firms purchase market-rate properties and raise rents.

This bundling of homes into assets means that individual buyers will no longer have the opportunity to purchase properties from these bundles. These homes become part of the rental market, exacerbating the shortage of new and existing homes for sale. Sadly, the nation is unable to build enough homes quickly and inexpensively to bridge the gap between housing supply and demand.

The most troubling aspect of this structural issue is that funds can pay more than individual homebuyers because they foresee the appreciation of a scarce asset. With tax-sheltered cash flow from rents and depreciation expenses, hedge funds have a significant advantage in a competitive housing market. Not only are they cash buyers who can waive inspections, but they can also offer higher prices.

While some may compare this situation to the financial crisis of 2008, I do not believe that equity funds pushing individual homebuyers out of the market will lead to a catastrophic collapse or a significant correction in the next decade. The annual demand for housing remains constant, and unmet demand carries over into the following years. Housing demand is an inherent part of society, like gravity; it cannot simply vanish.

In my opinion, there are three core problems exacerbating the housing supply issue:

Not Enough Income to Afford Rent or Save for a Down Payment

For the past 20 years, wages have remained stagnant while housing costs have steadily increased. Many individuals simply do not earn enough to afford rent or save for a down payment. Despite recent increases, wage growth has not kept pace with rising housing expenses.

Unequal Distribution of Pain

Although the housing crisis affects the entire country, regional real estate markets experience varying degrees of price increases. People continue to flock to dynamic metropolitan areas for employment, education, and healthcare, regardless of double-digit annual hikes in home prices and rents.

Shortage of Skilled Construction Labor

The housing construction sector has long suffered from a shortage of skilled labor, hindering productivity. Skilled labor is critical for increasing production, and until there is an adequate supply, the housing shortage will persist. Local developers and builders may find ways to be more efficient with the available workforce, but true progress can only be achieved when there is an influx of skilled construction labor.

Unfortunately, these challenges will persist for years to come, and the actions of hedge funds will only fuel an already raging fire. In the face of these obstacles, small developers and individuals interested in revitalizing neighborhoods should focus on constructing modest rental properties. This approach, often referred to as "missing middle housing," involves building rental apartment buildings or small mixed-use spaces. It is crucial to target distressed existing neighborhoods and avoid the overheated and expensive sections of the market. By working in areas where modest rental projects are financially viable, we can also support local construction trades and provide opportunities for individuals interested in learning a trade. Ultimately, we must find a place we care about and contribute to its growth and development.

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