The median price of an American house has increased by 28 percent over the last two years, as pandemic-driven demand and long-term demographic changes send buyers into crazed bidding wars.
Might the fact that corporate investors snapped up 15 percent of U.S. homes for sale in the first quarter of this year have something to do with it? The Wall Street Journal reported in April that an investment firm won a bidding war to purchase an entire neighborhood worth of single-family homes in Conroe, Texas—part of a cycle of stories drumming up panic over Wall Street’s increasing stake in residential real estate. Then came the backlash, as cool-headed analysts reassured us that big investors like BlackRock remain insignificant players in the housing market compared with regular old American families.
The truth is between the two: We can panic and acknowledge Wall Street’s small role at the same time. Although the number of houses being purchased by mega-investors is currently not enough to move the market in most parts of the country, these firms’ underlying structural advantage is profound and growing.
Let’s focus on Invitation Homes, a $21 billion publicly traded company that was spun off from Blackstone, the world’s largest private equity company, in 2017. Invitation Homes operates in 16 cities, with the biggest concentration in Atlanta, where it owns 12,556 houses. (Though that’s not much compared with the 80,000 homes sold in Atlanta each year, Invitation Homes bought 90 percent of the homes for sale in some ZIP codes in Atlanta in the early 2010s.) While normal people typically pay a mortgage interest rate between 2 percent and 4 percent these days, Invitation Homes can borrow money for far less: It’s getting billion-dollar loans at interest rates around 1.4 percent. In practice, this means that Invitation Homes can afford to tack on an extra $5,000 to $20,000 to the purchase price of every home, while getting the house at the same actual cost as a typical homeowner. While Invitation Homes uses a mixture of debt and cash from renters to buy houses, its offers are almost always all cash, which is a big leg up in a competitive market.
One way to think about Invitation Homes’ business strategy is to consider the value of the properties the firm is buying, relative to the rents they charge. According to a recent SEC disclosure, Invitation Homes’ portfolio of homes is worth of total of $16 billion (after renovations), and the company collects about $1.9 billion in rent per year. That means it takes only about eight years of rental payments to pay back a typical house that Invitation Homes has bought. The usual rule of thumb for evaluating a fair sale price, says Kundan Kishor, professor of economics at University of Wisconsin-Milwaukee, “is that price to rent ratios are around 20 to 1.” When price-to-rent ratios are very high, it makes more sense for consumers to rent than to buy, and when they are low, it makes more sense to buy than to rent. That Invitation Homes is getting deals twice as good as a typical homebuyer shows that it’s not just buying any homes: It’s buying the specific houses with the greatest potential to be wealth-building for the middle class.
It’s not exactly accurate that investors are “buying every single-family house they can find,” as some have suggested. If that were true, their market share in the United States wouldn’t be a piddling 15 percent. They’re really buying up the stock of relatively inexpensive single-family homes built since the 1970s in growing metro areas. They mostly ignore bigger and more expensive houses, especially ones that are move-in ready: Wealthy boomers and the nation’s finance and tech bros nab those properties. And they’re also ignoring cities with stable or shrinking populations, like Providence and Pittsburgh.
But investors are depleting the inventory of the precise houses that might otherwise be obtainable for younger, working- and middle-class households, in the cities where those workers can easily find good-paying jobs, like Atlanta (22 percent of home purchases according to Redfin data), Charlotte (22 percent), and Phoenix (20 percent). More importantly, they’re able to scour those markets scientifically and systematically to make cash offers on the most attractively priced properties. While normal people buy houses when they actually need to move somewhere, (savvy) investors buy houses several years before a bunch of people need to move to an area. Whether they’re tracking where major employers are building new offices or looking at public school enrollment data, being ahead of the market gives big firms a big leg up.
And in case you were assuming that converting houses to rentals would flood the market and bring down rents, don’t get your hopes up: As Invitation Homes tells its investors, “We operate in markets with strong demand drivers, high barriers to entry, and high rent growth potential.”
While renting might make sense for some people, especially people who move a lot, it often sucks, particularly in the United States, where we don’t have especially strong protections for tenants. The business strategy of the country’s biggest landlords, Invitation Homes and American Homes 4 Rent, does not seem to be, “Make renting with us so delightful that if my tenants have to move cities, they’ll specifically seek out another property owned by our company.” Based on reports from Reuters, the New York Times, and the Atlantic, it appears to be closer to “Squeeze our tenants for every penny, avoid making repairs, let black mold and raw sewage accumulate, and count on the fact that moving is a huge, expensive hassle.”
Our current system of encouraging homeownership is by no means perfect, and it places a lot of unnecessary risk onto the “balance sheets” of the middle class, but it’s worked out financially for most of the people who have been lucky enough to own a home. The implicit and explicit subsidies the government has given to Americans buying their first homes have been the biggest handout the American middle class has ever received (a handout notably denied to Black Americans for much of the 20th century, one explanation for the current size of the racial wealth gap).
Laurie Goodman, vice president of housing finance policy at the Urban Institute, points out that policymakers could take steps to level the playing field between investors and the rest of us. She told me that buyers who need to borrow money using Federal Housing Administration loans, or those who need a rehab loan for a fixer-upper, have a particularly tough time competing against Wall Street firms. FHA paperwork often gets delayed, slowing down the purchase process, so home sellers often don’t want to sell to FHA buyers, even if their bids are competitive. That’s a solvable problem. And loans for properties that need renovations, Goodman says, are both cumbersome and expensive. Rethinking the processes for FHA and rehab loans could, “put individuals on a more equal footing,” she explained.
If you don’t want all of America’s land and housing to end up in the portfolios of the 1 percent, there’s ultimately one very simple solution: Tax the rich. After all, the companies buying the houses are ultimately owned by people (or in some cases, universities and churches, which are their own cans of tax-advantaged rich-people worms). At the same time that the working-class is going hungry, rich people are doing so outstandingly well that they are running out of easy places to park their cash, which is why they’re buying 2,000 square-foot houses in the Phoenix suburbs via their ownership stakes in these funds.
This is all part of a long-standing trend: As inequality in the United States increases, the financial elite invests less in the types of things that could create jobs, like R&D or new factories, and more into directly extracting wealth from the working class. One way to do that? Becoming their landlords.