The Trump administration has issued an executive order limiting the purchase of single-family houses by large institutional investors. What’s the role of such investors in the housing market?
When people discuss institutional investors in the housing market, they typically refer to companies with a large portfolio of single-family homes (SFHs) purchased to rent out to tenants. Right now, the “big three” in this space are Invitation Homes (formerly owned by Blackstone), American Homes 4 Rent, and Progress Residential. Most estimates put the share of big institutional investors’ homeownership at under 5% of all U.S. SFHs. Pinning down the exact number is difficult because many of these companies conduct their purchases through a network of subsidiaries.
One unintended consequence is that a ban might make it easier for mom-and-pop investors to buy starter homes, further limiting inventory of homes for sale and leading to higher prices paid by first-time homebuyers.
Institutional investors target geographic areas with strong rental price growth and young adult population growth. As a result, the buy-to-rent homes they own are concentrated in cities in the South and Southwest like Atlanta, Charlotte, and Phoenix. Outside a small handful of cities, institutional ownership is less than 1% of SFHs.
Concerns about affordability for first-time homebuyers and reports of pronounced concentrations of institutional homeownership in particular neighborhoods have led to bipartisan calls—from Elizabeth Warren and JD Vance, among others—for restrictions on large investors’ purchases. Hence the phrase, “People live in homes, not corporations.” What happens to prices and rents in an area depends on the type of investor. For instance, because REITs tend to buy properties in city centers, house prices go up only modestly without harming individuals’ access to mortgages. When large private investors create rental units at scale, they help lower rental prices.
Would a partial or full ban help make housing more affordable? Would it have other unintended effects?
Given the small share of SFHs owned by institutional investors, any ban is unlikely to lower house prices by large margins. Despite the focus on large investors, mom-and-pop investors account for an increasing share of home purchases in recent years. Mom-and-pop investors are usually defined as individuals (or LLCs) who own between one and nine non-owner-occupied homes. Around one-fifth of SFH purchases made since the pandemic has been by these smaller investors. Small investors benefit from a range of tax breaks for providing rental units, including mortgage interest deductions, 1031 exchanges to defer capital gains taxes, and lower effective property tax rates than owner-occupiers in 23 U.S. states.
One unintended consequence is that a ban might make it easier for mom-and-pop investors to buy starter homes, further limiting inventory of homes for sale and leading to higher prices paid by first-time homebuyers. The proposed ban also comes at a time when large investors have been slowing their home purchases or selling. Many of the cities that were attractive places for work-from-home nomads to move to during the pandemic now have a glut of newly built homes due to overbuilding. These cities are also the same places that institutional investors once found attractive places to buy up homes.
Large investors might also respond by focusing on building new housing while otherwise maintaining their business model. Last week, Invitation Homes acquired Atlanta-based build-to-rent company ResiBuilt, in an apparent effort to hedge against the risk of a ban. The January 20 executive order mentions exceptions to the ban on government program support for large investors in build-to-rent planned communities.
The administration has also discussed allowing people to use their retirement account for a down payment, buying mortgage bonds, and creating “portable mortgages,” among other ideas. Would those help with affordability?
Any form of down payment assistance will subsidize purchases for current buyers at the cost of higher house prices in the near future. An additional concern with allowing prospective homebuyers to withdraw early from their 401(k) without penalty is that borrowers may be left with reduced resources in retirement if the appreciation in their housing wealth is lower than that of the stock market over the same investment horizon, which depends on people’s ability to hold onto their home in the event of a market crash. In contrast to having exposure to a diversified portfolio of equities, owning a home ties your fortunes to those of a local economy.
If Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) were to buy up mortgage bonds, it would push up the price of those bonds and lower mortgage rates. Bond prices and rates move in opposite directions. Thirty-year mortgage rates dropped sharply, by around 10 basis points, after the announcement of the mortgage bond purchases, with rates expected to fall further when the purchases go through.
Mortgage bond purchases would result in a one-time cut to rates given the $450 billion total cap on mortgage bond purchases Fannie and Freddie currently face. The cap could be lifted by ending the government’s conservatorship of the GSEs through an IPO. But encouraging mortgage bond purchases comes at the cost of financial stability. If another housing crisis like 2008 were to occur, this would leave Fannie and Freddie with limited reserves to prop up a distressed mortgage market. Risky buying of mortgage bonds led the GSEs to near-bankruptcy in 2008.
These proposals come at a time when current homeowners are “locked in” to their homes because they have low-interest fixed-rate mortgages that they would need to give up and exchange for a new higher rate mortgage if they were to move. Bill Pulte, director of the Federal Housing Finance Agency (FHFA), has proposed portable mortgages to reduce the mortgage lock-in problem by allowing borrowers to take their old mortgage with them when they buy a new home. Portable mortgages are widespread in Canada, the U.K., and Australia, and Denmark offers a similar type of contract.
Transitioning to a portable mortgage system in the U.S. is complicated by the fact that the risk makeup of existing mortgage-backed securities (MBS) pools would be impacted. Portability could make investors less willing to buy MBS, resulting in reduced access to mortgages for less creditworthy borrowers. Portability could also create a pricing boom—the opposite of what is intended—since owners who are currently locked in would have more purchasing power than those borrowing at prevailing rates.
In short, there is simply no better solution to the affordability problem than to build more housing.
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