An insufficiency of share supply was holding down Goldman Sachs shares not long after it went public in 1999. That’s why Goldman’s partners were given a chance to sell more of their shares in a secondary offering.
A lack of “float” in GS shares made it difficult for the biggest institutional investors to own a piece of the company. To buy GS shares they needed the capability to sell them, but with the float so slight, exits would be challenging. The lack of supply was paradoxically holding down investment in GS, and with it, the share price.
The Goldman anecdote is yet another way to urge Congress to put Sens. Elizabeth Warren and Tim Scott’s legislation, the 21st Century ROAD to Housing Act, out to pasture. In a housing supply sense, call it the reverse of what the GS partners did long ago.
That’s because the legislation explicitly aims to reduce institutional investment in housing. This includes legislative decrees that limit institutional investor ownership of houses to seven years. The dangers of such legislation are many.
For one, it’s quite simply costly for any investor to own property of any kind that requires a sale within a fixed timeframe. The latter gives all the power to the buyer. Exchange rendered asymmetric by government decree will naturally render exchange in the housing space much less routine if increasingly big players in the space (institutional investors) can’t easily exit their investments.
Which brings us to sellers, whether institutional investors or smaller builders. Think of what the ROAD to Housing Act does to them: at GS, institutional investors were frequently referred to as “size buyers.” Size buyers naturally make markets more vibrant exactly because they have the means to buy whatever product is available in large amounts.
Except that the legislation promoted by Sens. Warren and Scott, and embraced by President Trump, specifically aims to shrink the role of institutions in the housing space. Translated, the ROAD to Housing Act will, if implemented, reduce housing supply by its very description. If creators of supply can’t be certain of a liquid buyers’ market for housing, it will become quite a bit riskier for them to create the supply to begin with.
To which some will say that demand for housing is so great that institutional investors aren’t needed. It’s a naïve presumption. Think back to 2008. What builders would have given then for size buyers more capable of helping them quickly clear inventory. Instead, bankruptcies piled up.
All of which brings us to the biggest, but least sung truth about housing: it’s not just expensive, it’s that the expenses of owning a house are merely beginning with the purchase. What follows is costly on a daily, monthly, and yearly basis. In other words, the monthly mortgage payment is but a substantial part of a frequently much larger bill, one run up by individual homebuyers who haven’t a faint clue about what they’re spending so much to maintain. Please think about institutional home investors with this top of mind.
Not only are they creating enormous liquidity in the housing market that substantially boosts supply, their build-to-rent model is also making it possible for a growing number of Americans to enjoy all that housing has to offer, albeit minus the myriad and costly headaches that come with home ownership. To own a home is to worry about many things, including cost, while renting means someone else is doing your worrying for you.
Institutional investors are willing to increasingly shoulder the burden of home ownership for us. If we're wise, and we want to become much richer by allowing others to do our housing worrying for us, we'll gladly accept their offer.
