President Trump recently declared that “people should live in homes, not corporations,” echoing a widespread frustration with rising housing costs and the belief that Wall Street landlords are crowding out families. The sentiment is understandable. But it is largely aimed at the wrong target—and risks distracting policymakers from the federal policies that are quietly making homeownership harder for first-time buyers.
The House Financial Services Committee just considered legislation on February 10 to codify the president’s executive order on large institutional ownership of single-family rentals, while the Senate may soon consider a proposal requiring large institutional investors to divest their existing holdings over five years. If Congress wants to get this right, it must ask the right questions: Who is being served by the single-family rental market, and why is federal housing policy subsidizing investor purchases that crowd out first-time buyers?
Single-family rentals are not some fringe corner of the housing market. Roughly 14 million Americans live in one- to four-unit rental homes. These households include families who cannot—or choose not to—buy, including roughly 9 million low-income wage earners who call single-family rentals home.
There’s a reason. About three-quarters of single-family homes have three or more bedrooms, compared with just 8 percent—around 1.5 million units—of apartments in buildings with ten or more units. That makes single-family rentals an especially important option for working households with children or roommates. On a per-bedroom basis, they are often more affordable than one- and two-bedroom apartments, while offering space and stability that apartments often can’t.
Forcing large investors to divest their single-family rentals would have real consequences for the households living in them. Finding suitable replacement housing would be difficult and expensive—moving costs alone can exceed several thousand dollars—before accounting for disruptions to family life, jobs, and children’s schooling. Renting homes isn’t the problem. Washington’s thumb on the scale is.
Institutional investors own roughly 1% of the single-family housing stock. Small investors own about 11% and are far more often the ones bidding against first-time buyers for entry-level homes
Yet federal policy favors small investors. Through Fannie Mae and Freddie Mac, the government subsidizes mortgage credit for small investors buying single-family rentals. Our recent research finds that this government-backed financing gives small investors an advantage over FHA-backed first-time buyers.
Small investors using GSE financing can borrow at interest rates roughly 90 to 100 basis points lower than comparable private-market investor loans. On a $250,000 home, that advantage translates into about $170 per month—more than enough to consistently outbid a first-time buyer without paying a dollar more upfront.
This is not a hypothetical concern. For every four FHA-insured home purchases, roughly one investor is buying a single-family rental with government-backed financing. As a result, tens of thousands of FHA-borrower-type “starter homes” are diverted each year from potential owner-occupants to investors. The federal government is effectively subsidizing competition against the very households its homeownership programs are meant to support.
The consequences ripple outward. When first-time buyers lose bidding wars, they remain renters longer. Rental demand intensifies, pushing rents higher. Families with children—who disproportionately prefer single-family homes—face higher housing costs and less stability.
If policymakers truly want “people” to live in homes, the fix should start with removing this distortion. Fannie Mae and Freddie Mac should stop providing preferential financing for investor purchases of single-family homes. Private capital is fully capable of financing rental housing, and investor demand does not require taxpayer-backed subsidies. Ending this practice would do double duty: Leveling the playing field for first-time buyers while beginning to shrink the government-sponsored enterprises back toward their proper, limited role.
Demand-side reform, however, is only part of the solution. Decades of restrictive land-use rules have choked off the supply of modest, family-sized homes. Two supply-side reforms could unlock frozen capital without massive federal spending.
First, Congress should update the capital-gains exclusion for primary residences, which is still stuck at 1997 levels. The current rule discourages empty-nesters from selling by imposing a steep tax penalty when they move. Expanding the exclusion would make downsizing easier, freeing up an estimated 170,000 larger homes for growing families—and could also coax vacant homes onto the market that are being held while heirs wait for a step-up in basis at death.
Second, Congress should incentivize states with a bounty program for legalizing smaller lots. Land is capital, and zoning rules freeze it in place. Smaller lots cut land costs per home, lower prices for first-time buyers, and could yield roughly 200,000 additional starter homes a year on the same land. Washington should pay for outcomes—and for the homes working families actually want.
Instead of railing at Wall Street, Washington should let markets work—stop subsidizing investor bids through the GSEs and make it easier to build the homes working families need.
