No serious observer of today’s economy doubts that it is harder and harder for everyday folks to buy a home. This is especially true for first-time homebuyers across the country, in exurbs, Sunbelt suburbs, and neighborhoods in cities large and small.
This escalating unaffordability affects the long-term opportunities of virtually everyone who doesn’t own a home, and the children of those who do. Some pressures making it so hard for families to buy homes are familiar: increasing household formation, higher interest rates, restrictive local zoning codes, rising building costs.
But recently a new factor is accelerating the problem — massive purchases of single-family homes by larger investors. In Texas, for example, major institutional investors bought 28% of the single-family homes sold in 2021. Nationally, institutional investors are buying over 13% of homes, and that share is increasing. The share of homes being bought by families has dropped from 83% to 72% in the last three years, while the share by investors owning more than 100 properties has more than doubled.
More important still, institutional investors are overwhelmingly purchasing entry-level homes, averaging 26% below the median state sales price. This greatly reduces the inventory of the homes that first-time buyers would normally seek.
Black Knight’s national analysis shows too that institutional purchases are highly concentrated in areas with minority families, limiting their ability to become homeowners. While institutional purchases are only one of the factors (albeit the new one) driving unaffordability nationally, their impact is especially intense in these neighborhoods.
These investors aren’t paying more for homes than families, but their all-cash, as-is, bulk purchases swoop up much of the inventory out of the hands of aspiring homeowners. Significantly reducing the number of entry-level homes that families are competing to buy inevitably forces them to bid up the share of disposable income they have to pay.
The impacts are felt by renters as well as potential buyers. With fewer families able to become homeowners, they remain in the rental market instead, pushing up the rents that landlords can charge in general. The largest owner of rental homes raised rents 12% last year and sees the potential to keep boosting rents to a higher percentage of tenants’ disposable income. This cycle feeds itself as families — desperate to escape higher rents — stretch even further to buy the limited inventory of homes available to them.
This feedback loop explains why surging institutional purchases can’t be dismissed as simply shifting stock from ownership to rental — and thus having no overall impact on affordability, even if they limit opportunities for homeownership. The impact of these purchases on available inventory is what matters.
Dramatically reducing the relatively small number of units for sale to homebuyers at any one time increases the prices of those that remain. Shifting those homes to rentals has little impact on the nine times greater stock of units available for rent each year. Obstacles to homeownership drive unaffordability for buyers and renters.
This kind of big money first began washing over the single-family home market more than a decade ago. But that spate of money has now become a flood, and is only expanding as major investors eye rental single-family homes as a hedge against inflation.
The White House itself in May 2022 highlighted how “Large investor purchases of single-family homes drive up home prices for lower-cost starter homes, making it harder for aspiring first-time and first-generation home buyers, among others, to access wealth-building opportunities from homeownership.”
This is not just a problem for individual families, including many Black, Hispanic and other families of color. Widespread opportunities for middle-class homeownership has long been foundational to American society, and ownership has been key to the stability of neighborhoods.
It is natural for investors to want to capitalize on an opportunity. But government subsidies are helping institutional investors beat out aspiring families — making the American Dream less attainable, rather than more.
Tax policy today enables these investors to deduct the full cost of interest on an unlimited amount of funds they borrow to acquire single family homes. This lowers their funding costs, encourages leveraging private equity with debt and substantially increases such investors’ after-tax rate of return.
But what if these same tax subsidies were redirected toward encouraging major investors not to buy up tens of thousands of existing single-family homes to rent out long term but to re-sell them to families??
A simple change would limit the amount of deductible interest on debt used to acquire existing single-family homes. Setting a cap at $75 million of such debt — 100 times the limit available to any owner-occupant — or a similar level, would have no impact on mom-and-pop landlords and small aggregators operating at the local level, who have long been active in owning single-family homes.
But it would at once raise the effective costs to major investors who are changing the market.
This same tax change could allow these lost deductions to be carried forward and utilized when homes are sold to owner occupants. Major investors would thus recover these tax benefits, including those who play an important role in buying and fixing up deteriorated homes and selling them to families, and in lease-to-purchase programs. Moreover, there would be no cap on investors building new rental homes, which add to the housing supply.
This tailored tax change would thus shift government’s role from encouraging Wall Street to own and rent vast swathes of single-family homes to instead encouraging home ownership.
Would this change be enough to totally stop this trend? Probably not. But it could slow it down and make it harder for institutional investors to squeeze out families trying to buy homes thanks to a federal tax subsidy. And it would shift the federal government’s role to encouraging homeownership.
Changing the tax treatment of debt used for housing is nothing new. Congress only recently restricted the amount of mortgage debt on which an individual can deduct interest. It has amended the tax code many times over the years to influence investments into different kinds of rental housing, as well.
American families face plenty of hurdles in buying a home. Unaffordability is already at record levels. They don’t need federal tax policies continuing to making things worse by subsidizing the debt costs of Wall Street housing investment funds.
Gene Slater is chairman and founder of CSG Advisors, a leading national advisor on affordable housing; during the financial crisis, he helped design what became Treasury’s program financing 110,000 first-time homebuyers.
Barry Zigas is a Senior Fellow at Consumer Federation of America, former SVP for Community Lending at Fannie Mae and former President of the National Low Income Housing Coalition.
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