The American housing market has experienced a staggering 28 percent increase in median prices over the past two years. With the combination of pandemic-driven demand and long-term demographic shifts, buyers find themselves caught in frenzied bidding wars. But what role do corporate investors play in this housing market frenzy?
According to the Wall Street Journal, investment firms accounted for 15 percent of homes purchased in the first quarter of this year. Reports of an investment firm successfully outbidding others to acquire an entire neighborhood in Conroe, Texas, have sparked concerns about Wall Street's growing influence over residential real estate. However, experts reassure us that while these firms are significant players, they have yet to dominate the housing market like regular American families.
The truth lies somewhere in between. Although mega-investors aren't currently able to sway the market in most areas, their structural advantage continues to grow. Let's take a closer look at Invitation Homes, a publicly traded company worth $21 billion that emerged from Blackstone, the world's largest private equity firm, in 2017. With a strong presence in 16 cities, their largest concentration is in Atlanta, where they own a staggering 12,556 houses.
What sets Invitation Homes apart? While regular homeowners face mortgage interest rates between 2 and 4 percent, Invitation Homes secures billion-dollar loans at interest rates as low as 1.4 percent. This allows them to add an extra $5,000 to $20,000 to the purchase price of each home without increasing their actual cost. Their ability to offer all-cash deals gives them a significant advantage in a highly competitive market.
When evaluating Invitation Homes' business strategy, we must consider the value of the properties they buy relative to the rents they charge. Their portfolio, valued at $16 billion after renovations, yields approximately $1.9 billion in annual rent. It takes only around eight years of rental payments to recoup the cost of a typical house purchased by Invitation Homes. This suggests that they are strategically targeting homes with the greatest potential to build wealth for the middle class.
Contrary to popular belief, investors aren't snatching up every single-family house available. Their market share in the United States stands at a modest 15 percent. Instead, they focus on relatively affordable single-family homes built since the 1970s, primarily in growing metropolitan areas. They steer clear of larger, more expensive properties favored by wealthy boomers and the finance and tech elite. Additionally, they disregard cities with stable or shrinking populations.
However, investors are depleting the inventory of affordable houses that younger, working, and middle-class households could have otherwise obtained. This impacts cities such as Atlanta (22 percent of home purchases), Charlotte (22 percent), and Phoenix (20 percent), where these workers can find good-paying jobs. Importantly, investors scour the market systematically, making cash offers on attractively priced properties. They anticipate future demand by tracking major employers' expansion plans and monitoring public school enrollment data, giving them a significant head start.
Contrary to expectations, converting houses to rentals doesn't flood the market and drive down rents. As Invitation Homes reassures its investors, they operate in markets with strong demand drivers and high rent growth potential. Renting may suit some individuals, especially those who frequently relocate. However, renting often falls short of expectations in the United States, where tenant protections are lacking. The business strategies of leading landlords like Invitation Homes and American Homes 4 Rent seem focused on maximizing profits rather than providing exceptional rental experiences. Reports highlight issues such as delayed repairs, black mold, sewage problems, and the financial burden of moving.
While the current system of promoting homeownership has its flaws and places undue risk on the middle class, it has proven financially beneficial for many fortunate enough to own a home. The government's considerable subsidies to first-time homebuyers have been the most substantial support the American middle class has ever received. Unfortunately, these benefits were historically denied to Black Americans, contributing to the racial wealth gap we see today.
To level the playing field between investors and the rest of us, policymakers should consider taking steps to address hurdles faced by buyers who rely on Federal Housing Administration (FHA) loans or need rehab loans for fixer-uppers. FHA paperwork often causes delays, leading home sellers to prefer buyers without FHA loans, even when their bids are competitive. Simplifying and streamlining FHA and rehab loan processes could create a fairer market for individuals.
Ultimately, if we want to prevent all of America's land and housing from ending up in the portfolios of the wealthiest 1 percent, the solution is simple: tax the rich. These companies buying houses are ultimately owned by individuals, universities, or churches, all of whom benefit from tax advantages. As the wealthy struggle to find profitable places to invest their surplus cash, they turn to buying 2,000 square-foot houses in Phoenix suburbs through these investment funds.
This trend reflects a broader pattern of increasing inequality in the United States. The financial elite shifts its focus away from investments that could create jobs, such as research and development or new factories, and instead directly extracts wealth from the working class. Becoming landlords is one way they achieve this.
In conclusion, while investment firms may not currently dominate the housing market, their underlying advantages continue to grow. By strategically targeting specific properties and employing financial advantages, they impact housing availability for working and middle-class households. Policymakers should strive to level the playing field and address the concerns of potential homebuyers reliant on FHA and rehab loans. And if we truly want to ensure a fairer distribution of wealth and prevent further concentration of property ownership, taxing the rich is a necessary step to take.
