Finger-pointing over the nation’s housing woes has become an annual tradition. Both parties have blamed professional housing providers for the ongoing affordability crisis. In Congress, Rep. Adam Smith (D-Wash.) and Sen. Jeff Merkley (D-Ore.) have introduced legislation to impose tax penalties for institutional investors buying single-family homes or even to force them to sell any single-family homes they have purchased. Several states have followed suit.
This rush to ban certain entities from owning homes flows from a misunderstanding of their effect on the housing market and their small presence in the single-family housing market. Evidence shows institutional investors in housing rarely displace individuals from the housing market or increase prices, but local government restrictions certainly do reduce housing supply and drive up prices.
Professional housing providers first significantly appeared in the aftermath of the 2008 housing and financial crisis. Before 2011, no investors owned more than 1,000 units. After the housing crash, investors purchased foreclosed homes, anticipating a rebound. This helped to balance the mass exit of individual homebuyers and prop up housing prices that were in freefall, which meant significantly fewer abandoned homes and dilapidated neighborhoods.
Today, institutional investors only own about 2% of single-family housing in the United States, which is far from a crisis. They did not displace individuals or families—census data show that the homeownership rate in the US increased by over 2% since 2015, even as investor ownership grew.
Professionally managed housing provided a much-needed increase in the supply of single-family rental housing. The Government Accountability Office found that, over time, institutional investors are increasingly paying for the construction of new rental houses rather than buying existing homes. The Urban Institute has pointed out that institutional investors tend to purchase homes in need of repair and “can repair these properties more quickly and efficiently than an owner-occupant generally can.” Fixer-uppers cost less, and with economies of scale, institutional investors can repair a large number of homes at lower cost.
And banning investors has failed. Rotterdam in the Netherlands banned them in 2021, which promptly triggered a 4% increase in rents, displaced lower-income families, and led to homes being purchased more often by richer and older buyers. Hardly a victory for affordability or equity.
Blaming institutional investors distracts focus from addressing real housing problems. The market is not acting as the critics of institutional investors say. If investors are driving up prices, the natural market response would be to increase supply so that homebuilders could sell to both investors and families. If supply keeps up with demand, prices won’t fluctuate much. But while prices did increase, housing supply hasn’t kept up. Persistent regulatory barriers, including zoning restrictions, minimum lot sizes, limits on multifamily housing, and long and costly permitting processes have made it difficult, if not impossible, to meet the rise in demand in a cost-effective way. According to a recent paper in the National Bureau of Economic Research, barriers to building have led to fewer homes being built. In fact, the paper finds that “If the U.S. housing stock had expanded at the same rate from 2000-2020 as it did from 1980-2000, there would be 15 million more housing units.”
Investors see that and are likely to continue to invest in single-family homes. When Jeff Bezos launched a new company to invest in buying rental properties, he pointed out that after years of housing supply not keeping up with demand, it was a sure investment. Rather than being a cause of persistent high prices in the housing market, investors are aware of the major shortage. Should barriers be reduced, not only would prices fall, but it might also spark a reduction in the presence of institutional investors. This is why states as politically diverse as California, Texas, Vermont, and Montana have passed laws in the last few years that require local governments to allow more housing to be built and reduce restrictions, costs, and delays on new housing.
It really works. Austin, Texas, pursued one of the most aggressive efforts to change policies to allow more housing to be built, more density in parts of the city, and a wider range of housing types. The result is that average rents dropped by 22%, about $400/month.
It is not the infusion of capital from investors that disrupts housing markets; it is local government policies that do not let supply keep up with demand, creating a shortage that attracts investors. The increased involvement of investors in the housing market should be a wake-up call to policymakers. Housing supply should be able to fulfill the needs of both the single-family rental and the for-ownership sectors of the broader housing market.
