By now you’re no doubt familiar with some version of the claim that deep-pocketed investors are responsible for the misery facing millions in the U.S. and Canadian housing markets: record-high home prices and rents, and a short supply of available homes. I’m losing count of the people I know who ask me about it, or repeat assertions like these:
This article was written by Daniel Herriges and originally published by Strong Towns.
“Wall Street is buying up a ton of homes and driving up prices.”
“New housing is mostly bought by investors, not regular people.”
“The reason there aren’t enough homes is all these speculators are hoarding them.”
Yet there is a ton of confusion out there about this phenomenon: what the statistics you’ve seen really mean, how big a deal this is, and what it means for regular Americans who need housing.
The truth is, large-scale investors are a potent and destructive force in the housing market, but in specific ways that don’t quite track with the more sensational headlines out there. Is Wall Street the reason you can’t find a home? It might depend a lot on where you live and what you’re in the market for.
Here’s a demystifier.
Who Are “Investors”? Let’s Get the Language Straight.
Let’s get some terminology straight, for starters.
By definition, a housing investor is anyone who buys a home in order to earn a financial return, whether by renting it out, holding and reselling at a profit, or both.
Institutional investors in real estate refers to corporate entities, investing typically on a larger scale and on behalf of multiple clients or shareholders, who are not themselves directly involved in selecting or managing the properties to be purchased. This includes things like commercial banks, pension funds, and specialized investment funds like REITs (see below).
REIT stands for Real Estate Investment Trust, and is a type of institutional investor: a corporation specifically created to own and operate income-producing real estate. REITs pool money from individual investors. A single REIT might own many millions of dollars worth of property.
Private equity is a catch-all term for privately owned (i.e., not traded on the stock market) companies that invest clients’ money, such as hedge funds. The size of the private equity market tripled from $2 trillion to $6 trillion in the last decade, and some of this growth has gone into real estate ownership.
When you read an article about investors in housing, or see a statistic, pay attention to the definition they’re using. “Investors” does not always mean “Wall Street”; it might also mean Joe, the landlord who owns six small apartment buildings around town, or Maria, who bought a fourplex last year to renovate and flip. Many of these small-time investors will still use a legal corporation (LLC) to avoid holding property in their own name, adding to the confusion. A simple way of thinking about it is that “investors” is a large and very diverse group; “institutional investors” is a much less numerous subset of investors; and REITs and private equity firms are still narrower categories.
The actual boundaries of who ought to qualify as an investor are murky. After all, even owner-occupiers reap investment returns when they sell their home, whether or not that was a primary reason for purchasing it. It’s worth noting that the overwhelming majority of the $6.6 trillion increase in the value of U.S. residential real estate last year went to homeowners. These owners are almost never included in statistics or statements about “investors” in the housing market, however.
What Are the Trends, and How New Are They?
People have been making money on real estate for a long time. And corporate ownership of real estate is not new, especially when it comes to apartment buildings. But certain trends are noteworthy in recent years.
It’s fair to say that Wall Street ownership of single-family homes is a new trend. Its roots are in the wave of foreclosures that followed the 2006–2008 subprime mortgage crisis. This wave, and the subsequent rise in rental demand from displaced former homeowners, created a tantalizing opportunity for large-scale investors, and they seized it.
In 2012 and 2013, investment firms began to buy up single-family homes that were in foreclosure, many of them in bulk directly from banks as well as Fannie Mae and Freddie Mac. Leading the way was Invitation Homes, at the time a subsidiary of Blackstone, a large private equity firm. In 2012, Invitation Homes spent $4 billion to buy 24,000 single-family homes, becoming the largest buyer of homes for rent in the U.S virtually overnight. The scale of this effort drew headlines and scrutiny. Similar firms have followed suit, and Invitation Homes itself, now a publicly traded company, owns roughly 80,000 homes, making it the largest landlord of single-family homes in the United States.
More recently, as housing prices have shot through the roof, similar investors have branched out into new build-to-rent neighborhoods: whole subdivisions built and sold to investment firms which operate them as rental houses from Day 1. According to the National Association of Home Builders, 13,000 such homes were started in the first quarter of 2022. This is still a small number, but it’s up to 5% of the homebuilding market from a long-term average of 2.7%.
Meanwhile, in the apartment market, private equity has been steadily increasing its stake as well, replacing more traditional real estate holding companies. A recent report by ProPublica finds that private equity firms now dominate among the top 35 largest owners of apartment buildings in the U.S. and own roughly a million American apartments. These firms accounted for 85% of the biggest apartment deals financed by Freddie Mac since 2015. Meanwhile, the share of apartments owned by individuals (think “mom-and-pop” landlords) fell below 50% for the first time in 2015, and to 41% by 2018.
A couple other trends that are distinct from the private-equity explosion end up conflated with it in the popular imagination. One is overseas investment. In Canada in particular, foreign investment in real estate is a trend that has drawn significant media attention, and aggressive policy responses culminating this year in a two-year ban on foreign purchases of Canadian homes. This investment is generally by very wealthy individuals, not corporations.
A mostly separate trend in some cities, particularly tourist destinations, is the conversion of homes to short-term rentals such as Airbnbs. So far, it’s mostly individual investors doing this, though there are rumblings that private equity has its sights on the short-term rental market, as well.
What Is Fueling the Trend?
In short, some massive structural advantages for those seeking housing as an investment over those who want a stable, affordable place to live.
Real estate is traditionally a difficult investment because of the ongoing costs, like taxes, insurance, and maintenance. But in recent years and following a decade of zero or near-zero interest rates, weak returns in other, more traditional investment products have made real estate a more attractive prospect. Public policy enhances this trend by offering real estate investors a lot of tax advantages, including the ability to avoid taxation on much of the income if the returns are reinvested in real estate.
Rental housing has been especially lucrative since 2008, as the foreclosure crisis pushed a large number of Americans out of homeownership and into renting. At the same time, high-end urban rentals have boomed for households that, in a previous generation, might have chosen the suburbs. With housing construction historically weak throughout the 2010s, these well-to-do renters are bidding up the rent on existing apartments, increasing the squeeze on lower-income tenants and making owning rental housing a consistently profitable endeavor.
The broader context here involves both the explosive growth of the financial sector since the 1970s, and more recently, federal policies (quantitative easing in the Great Recession, and stimulus programs during the COVID-19 pandemic) that have injected huge amounts of money into the American economy, much of it in the hands of institutional investors—banks, pension funds, and the like. All that money wants a return, and real estate is one place investors are looking for it.
How Prevalent Are Investors, Really?
Widely-cited statistics seem to tell a contradictory story about the clout of big investors in the housing market.
A wave of sensational headlines in 2021 sparked a lot of discussion with the claim that one in five American homes are bought by investors. This sounds massive, but two pieces of nuance were lost in most of the reporting. One is that this isn’t new: one in five actually represents a decline from the 2013 peak, when investors made up 29% of home sales. The other is that “investors” is being used in the broad sense of the term, not the Wall Street sense. A 2015 Federal Reserve study found that large investors made up just 1–2% of all single-family purchases from 2012 to 2014, while other investors made up 18–19%.
Large institutional investors are picking up the pace of their activity, but they actually own a smaller percentage of the nation’s housing stock than you’d think. Americans for Financial Reform estimates that, as of June 2022, private equity firms owned real estate rented by around 1.6 million households. This includes at least 1,071,056 apartment units, 275,468 manufactured home lots, and over 239,018 single-family rental homes. These numbers sound big, but they equate to only 3.6% of all apartments and 1.6% of rental homes. (There are about 86 million single-family homes in the United States, of which about 14 million are rentals.)
However, these overall numbers obscure that this activity is highly concentrated in certain locations. That same Fed study found that in Atlanta, for example, 12% of single-family home sales were to large-scale investors. For a while in the early 2010s, Invitation Homes was buying up to 90% of homes for sale in some Atlanta ZIP codes. So this is a very localized big deal, and we can be justly concerned about the effects on the housing market in the places where it’s happening.
In What Kinds of Places Is This a Major Factor?
Institutional investors target specific neighborhoods, as well as specific cities or regions. Slate’s Elena Botella describes their niche as “buying up the stock of relatively inexpensive single-family homes built since the 1970s in growing metro areas.” And this has profound implications for working-class renters and would-be first-time homeowners in those places.
In places hit hard by the foreclosure crisis, companies could amass large portfolios of homes at fire-sale prices. This includes Sunbelt metros such as Atlanta, Tampa, and Phoenix, but also a set of disproportionately low-income and non-white neighborhoods in many other cities. A recent report, “Who Owns the Twin Cities?” finds that the share of single-family rentals owned by investor landlords grew fastest in “low-income concentration” neighborhoods, from 4.4% in 2005 to 21.2% in 2020.
What characterizes these neighborhoods is not just a legacy of foreclosures, but a low-income population that generates persistently high demand for low-cost rental units. Large non-local investors, according to housing scholar Dr. Ed Goetz in a MinnPost article, “tend to make purchases in the middle or lower end of the market, and often times will then milk those properties for whatever incomes they can get. They’re collecting rents and really not reinvesting in the building, trying [instead] to draw profits from them.” Such investment firms have also targeted manufactured home communities.
Do Investor Buyers Take Housing off the Market?
This is a very pervasive misconception: either that homes are being removed from the housing stock because investors buy them up, or specifically that building new homes does not add to the useful housing stock because investors simply hoard them. The truth is that it is very rare that they are holding these homes empty. Mostly, they are operating them as rentals.
You can think of the housing market as a giant game of Musical Chairs. In this metaphor, an investor-owned home is still a chair in the game. It’s still a home for someone to live in.
However, that doesn’t mean investor purchases don’t change the nature of the market. On the whole, they are leading to a loss of ownership opportunities, especially for starter homes or lower-income would-be homeowners. And these institutions are problematic landlords.
What Are the Problems With Institutional Investors As Landlords?
Institutional investors are answerable to their shareholders, who are looking for short-term profit and can easily take their money elsewhere if they don’t get it. This makes their incentives unlike those of a smaller investor or a more traditional landlord for whom real-estate ownership is a long-term proposition.
In the apartment realm, the largest and most infamous private-equity-backed landlord is Greystar. A damning ProPublica exposé revealed some of the company’s practices geared at maximizing short-term investor returns: skimp on maintenance and services such as trash collection, charge exorbitant and arguably illegal fees, and force out existing households in order to bring in a new tenant at a higher rent.
Compared to other landlords, large investment companies tend to be very aggressive with evictions. In Atlanta, some of the largest private-equity investors filed eviction notices on a third of their apartments in a single year. These companies will also use threats of eviction as a routine tactic to elicit prompt payment of fees from tenants and to silence complaints.
Institutional landlords are removed from on-the-ground life in the neighborhoods where they own. As their tenant, it can be hard to even reach a human being to interact with: payments and maintenance requests may be handled through automated systems. Mom-and-pop landlords are far from perfect and can be abusive, but with them there is some recourse for basic human problems. (“I have a family emergency, I can’t make rent this month; can I work out a payment timeline with you?”)
An Atlantic piece titled “The Real Problem with Corporate Landlords” and the ProPublica piece on Greystar both provide ample detail as to the specific ways in which institutional investors can be abusive of tenants.
Wait, So I’ve Heard a Lot About Institutional Investors and the Housing Affordability Crisis, but I Don’t Understand: Are Investors a Cause of the Crisis, or an Effect of It?
On the one hand, the growth in institutional investment in real estate is a predictable effect of underbuilding housing by millions of units nationwide. This business model is lucrative because there’s a lot of competition for not enough homes. And we know this because the companies doing it say as much in their own required SEC filings. In Invitation Homes’ 10Q filing, the company states, “We operate in markets with strong demand drivers, high barriers to entry, and high rent growth potential, primarily in the Western United States, Florida, and the Southeast United States.” In another SEC filing (Form S-11), a similar REIT, American Homes 4 Rent, includes a section disclosing business risks, in which it states, “The continuing development of apartment buildings and condominium units in many of our target markets increases the supply of housing and exacerbates competition for tenants.”
In other words, “What we’re doing is profitable in places where supply isn’t meeting demand and rents are going up.”
What drives rising costs is the difficulty of finding a home: when there are lots of options (that is, high vacancy due to abundant supply), a prospective tenant or buyer can simply walk away from a bad deal. If rental housing were abundant, the returns on it wouldn’t be nearly as attractive to Wall Street.
So the YIMBYs kind of have this one right: in one important way, you can argue investor activity is an effect, not a cause, of the housing shortage.
But Aren’t Investors a Key Factor Driving Up Housing Costs Themselves?
This is harder to quantify, and varies by location, but likely yes. And to an extent that far exceeds their actual share of ownership of the housing stock. Here’s why.
Understand how the price of a home for sale is determined: like an auction, a home typically goes to the highest bidder. (Yes, some sellers will accept an offer that isn’t the highest for any number of reasons, but we’re talking in generalities here.) And investors can afford to outbid would-be owner-occupiers for a few reasons. They have lower financing costs: they can get low interest rates, or simply pay with cash. Deep pockets mean they can afford to buy and sell quickly, as they aren’t tied down by a mortgage. The home seller then also gets the advantage of not having to wait for final mortgage approval to close the deal.
This means that in many neighborhoods, large investors effectively get dibs. They don’t buy every house, but they are able to consistently make the winning offer on the houses they want.
To understand how this pushes prices up for everyone, think about the way home prices are determined. Buyers and sellers watch the market. Realtors watch the market. Realtors and appraisers alike look at recent comparable sales. And sellers set their asking price accordingly. So investors’ presence in a market can push prices up even for the homes that end up not being purchased by investors. The investor is the marginal buyer, the one who can pay the most, and what they’re willing to pay matters a lot.
This is doubly true because people who actually need shelter are a comparatively captive market: their decisions are less flexible in response to price than those of people who are just looking for an investment return. If you need a home and the cost of housing is going up—in part because investors are helping to bid it up—then short of moving farther away from where you want to be, you more or less have to suck it up. You rearrange some other aspect of your personal finances, and you find a way to pay.
Both Problem and Symptom
In the end, just because corporate investors aren’t everywhere or even most places—for now—doesn’t mean we shouldn’t be concerned about them. This business model is still a threat, not just to affordability for vulnerable tenants in particular, but to the kind of locally-driven economic ecosystem we need to build strong towns.
A REIT answerable to distant investors has no real skin in the game in terms of a community’s stability or prosperity. It is an extractive business model. The good news is it’s not one that we’re powerless to oppose. We should understand the investor phenomenon as a natural consequence of decades of housing policy aimed at making housing an attractive investment, rather than a reliable and flexible source of shelter. It’s those policies that need to change, in favor of a Strong Towns approach to housing: one that would calm sloshing flows of cataclysmic money in favor of allowing constant, incremental, bottom-up investment from within communities themselves.