Will this cause prices to go down in the near term from a decrease in demand with a long run increase in prices from a lack of supply, due to builders now having less demand for their services?
Will this cause prices to go down in the near term from a decrease in demand with a long run increase in prices from a lack of supply, due to builders now having less demand for their services?
Institutional investors own very small shares of single family housing stock, so it's unlikely to make a measurable difference. More broadly, more single family homes available for rent instead of purchase lowers rental prices and increases geographical income mobility, there's nothing wrong with having a rental market for single family homes.
Banning institutional investors from buying single family homes will lower the quantity available for rent, increasing rental prices (but I agree that it’s unlikely to be measurable)
Banning from buying will lead to a very slight change in transactions that would normally take a long time to filter to anything measurable anyways.
How is that? If a house is bought by an investor, the person who would otherwise have bought that house for themself to live in now has to enter the rental market. Sure, you have more rental supply, but you're also increasing the number of renters.
And since people on the cusp of buying a home, who have been just barely outbid by an investor, are likely to be higher income than the average renter, then the average income of all renters goes up, and average rents will go up to reflect that.
It seems to me that average rent would actually go down without investors, though that doesn't mean everyone's rents will go down, it's just a composition effect.
Think about a housing market in equilibrium. You have some number of owner occupied homes, as well as investor owned homes being rented. On the margin, owners and renters are indifferent to renting vs owning at prevailing rates. That price to buy vs monthly rent implies an equilibrium expected return on investment.
An external investor, to enter the market, must necessarily accept a lower rate of return than the equilibrium rate - a higher purchase price for the same rents, lower rents for the same purchase price, or in general a higher price for lower rents. The extent to which the new entrant would affect prices vs rents would depend on their respective elasticities.
You can think of the particular marginal case - who is the external investor buying from? If it is a current landlord, they could sell to the institutional investor - but that does not affect the rental side of the market at all. They are simply paying a higher price for the same rents. On the other hand, it could be an owner occupied home that sells to the investor, and that former owner becomes a renter. They would only do that if they were better off - they get a better implied rate of return from renting than what the new institutional investor will accept.
In practice there is a lot of friction in the housing market (high transaction costs), so it adjusts slowly. But the big picture would be as above - institutional investors lower the equilibrium rate of return vis a vis rents in the market, which leads to lower rents in equilibrium.
The average institutional investor is not paying an above market price if they were to buy. It is more common than not to see discounts and/or favorable financing within the secondary market. I also don’t see how they wouldn’t raise rents either, depending on location, occupancy, etc.
Wouldn’t that require there to be no other homes available for purchase other than the one they were looking at? When I bought my house I submitted offers on more than one home. It’s not like the first home someone attempts to buy will be the last.
Without extensive knowledge in real estate markets. I would think a fairly coordinated effort to buy all the single family homes in a given price band and geographic region that’s large enough to prevent moving to an adjacent town would be necessary to have a significant impact on prices in that way. Whereas an investor trying to rent a home and maintain a low vacancy rate would to an extent be forced to lower prices to a reasonable level unless they had a monopoly on the single family rentals in that area.
If the supply is fixed, someone is being displaced regardless, even if it's further down the chain. Eg, you have 10 homes for sale, 10 people looking to buy a home for themself, and then 1 investor steps into the market and takes 1 of the homes. Now you have 9 homes but 10 people still looking to buy. The person that got outbid by the investor can go look to buy another home, sure, but then they are going to have to outbid someone else and displace them. Eventually, someone will have to rent out the home the investor bought if they want their own place.
I think it's safe to imagine a fixed supply, because the core of this issue is that not enough houses are getting built.
Though i guess there are alternatives, like if that last person that got outbid by everyone was living with parents, they might choose to stay in that situation until a new house is up for sale. In this case, they would not be adding to rental demand. For rents to go down, it would have to be some kind of situation where, yeah we add to the rental stock, but at the same time displacement does not cause the number of renters in the market to increase (is how i'm imagining it would work)
Someone being displaced assumes that no one wants to rent a single family home though. I know people that want to rent single family homes, so reducing SFH rentals would displace them potentially. There are some people where it makes no sense to buy, but they want the yard and such. I'm not saying we should be embracing institutional investors, but they wouldn't buy SFHs if there wasn't a demand for renting, and not everyone who rents an SFH would've bought if none were available to rent.
Maybe I'm confused, but it doesn't seem like we're talking about the same thing. The willingness to rent a SFH is exactly why the problem I'm describing happens.
The claim is that more SFH available for rent lowers the rent price, and my challenge is that sure we're increasing the supply of rental homes, but we're also increasing the number of renters, so why would the cost of rent go down?
The whole displacement effect I'm describing is to explain why an investor entering the market causes an increase in the number of people who are seeking out a rental, which would nullify the benefit of increased supply.
My comment was addressing displacement of people who would otherwise buy. The only way increasing rentals displaces people is if there's local ordinances that prevent enough homes being built, which is absolutely a huge problem causing inflation of housing, more than institutional investors. But there are people that can't or shouldn't be buying. Without rentable SFHs, they can't live in a house. People who are relocating potentially in 5 years or less shouldn't buy (especially in the current market). Or people who are having financial issues that can't qualify for a mortgage. Most often people in those situations want SFHs if they have kids, and should be able to rent them if they want.
Right, the difficulty in building new homes is the problem. That's why I'm assuming that supply is fixed (or in reality it should be considered negative relative to the growth in demand)
In a context where the supply is fixed, it makes sense to me that adding the additional demand of an investor would cause prices to go up in all parts of the housing market, because every part of the market is linked in some way.
The preference to rent a SFH doesn't really relate to the effect on prices though. If there are no SFHs to rent, people will (begrudgingly) make do with an apartment (although I'd say there are some very nice purpose built rentals where you can have a yard and are perfect for raising kids).
If you take SFHs off the rental market, but at the same time remove renters from the market by turning those renters into SFH owners, then the rental demand relative to the rental supply doesn't really change, and so I wouldn't expect prices to change either from supply/demand factors.
At this point, the effect on the "average rent paid" would come from other variables, like peoples' incomes or the intrinsic value of the properties still on the rental market.
How does your scenario change when the investor/hedge fund etc buys all 10 homes? Which is closer to the scenario they are seeing and trying to limit with this legislation.
In your scenario, the “investor” is just another purchaser….. with the same impact and leverage as anyone else buying.
BlackStone purchasing 2-3 THOUSAND homes in certain areas will have far different effects, which is what I think OP was investigating….
“Overall: Institutional investors own about 3-4% of the total single-family rental stock nationwide, though this share can be much higher (over 12%) in specific local markets.”
Edit: Blackstone not BlackRock. Edit: adding overall numbers.
The same i would imagine, but with more extreme effects
There are composition effects about the proportion of rented vs owner-occupied single family homes around rental vs purchase prices, yes, but institutional investors specifically are too small to be a meaningful part of that.
Why assume someone who misses out on a home purchase becomes a renter? If I get outbid for a home I buy a different one instead.
It doesn't have to be that same person who switches to the rental market, but the market as a whole is linked. If there is a shortage of supply, one potential home buyer is going to have to go without buying a home, somewhere down the chain
Kinda like a game of musical chairs. Investor buying home = removing one chair. Whoever doesn't have a chair when the music stops is the one that can't buy their own house and has to look for an alternative, like the rental market.
“Overall: Institutional investors own about 3-4% of the total single-family rental stock nationwide, though this share can be much higher (over 12%) in specific local markets.”
Those seem like numbers large enough to measure and move the overall market.
Only if you assume that those homes would've been owner-occupied instead of otherwise rented.
I see…. Thanks for that.
So this specific discussion doesn’t really have enough information. OBVIOUSLY the large institutional buyers are going to rent them out…. But we need to also know what OVERALL % of home sales are made to rent instead of occupy. (Or converse…. What percentage of home buyers are purchasing just to occupy)
Yeah. We know that when a higher proportion of SFH is available for rent instead of owner-occupied rent is cheaper and buying is more expensive then if the proportion moves the other direction the effects are reversed, and it's certainly possible for institutional ownership to influence this proportion (though by how much is probably very hard to empirically answer), but it's not, on its own, sufficient.
Having more SFH available to rent additionally helps with geographic income mobility, ie, it's easier to move into a nicer neighborhood (potentially with a nicer school) by renting than by buying. Implicit racial/income segregation by zoning laws is substantial in the US.
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if you can link the source that would be helpful, but usually those 30% figures are either
Oh boy, I’ll try. Hard to find an article from long ago.
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Can you provide a source for those figures? Usually when people regurgitate numbers like that, it comes from some trivial article with no real methodology.
Without institutional home buyers, there would be less demand and less supply. Fewer economies of store builders. Canada banned foreign buyers based on your reasoning and now buildings can’t get built because there isn’t a deep enough market of buyers to support it. Demand brings supply which lowers prices.
Is there any good articles looking into the fallout from banning foreign buyers? Trying to look into it myself after you mentioned here and maybe I just don't know what to be looking up!
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> We have adequate supply of homes in the US
Can we get a citation for this?
Institutional investors own a tiny percentage of all housing.
https://econofact.org/factbrief/do-private-equity-firms-own-20-of-single-family-homes
No.
I mean.. there's a lot of rental housing? Yes. That is not bad.
AirBnBs make up an even smaller portion of the housing market than institutional investors.
The problem isn't really anyone who wants to buy housing at all.
No. Because that's not the problem. The problem is a lack of housing. The solution is more housing. Any sort of policy that doesn't actually address that is ultimately a fool's errand.
https://www.reddit.com/r/AskEconomics/comments/1lglz27/what_examples_do_we_have_of_housing_deregulation/
Turns out, the problem is a lack of supply, and building more housing actually addresses that.
Not where people want to live, no. We need a lot more apartments/condos/townhouses to house people more efficiently.
Zoning codes are the biggest factor, like outright bans on anything except detached single family homes:
Higher density housing is currently illegal in many of the places people most desire to live:
Adding onto flavorless_beefs 2 restrictive sets, sometimes that 30% number is generated by looking at how many homes were bought by institutional investors in a restrictive time span. They also don't mention who sold the home.
If institutional investor A is looking to get out of some market and reallocate funds to another market, they may look for institutional investor B to buy dozens or hundreds of homes from them in one transaction. Which then leads a given quarters metrics to show investor B bought something like 30% of all SFH sold in that quarter.
Depends on where you live.
"Housing in Tampa Bay is becoming increasingly corporate-owned, a Tampa Bay Times analysis has found. Large companies have amassed around 27,000 homes across three counties. More than 70% of these properties are linked to institutional investors backed by Wall Street and private equity."
The Tampa Metro Area has 1.54M housing units according to the Census. 27,000 is less than 2% of that.
per, the urban institute, large investors (> 1000 SFH properties, nation wide) own ~450K units. the first order effect of forcing these investors to divest would be to lower home prices and increase rent prices, assuming they are forced to sell to homeowners and not to other landlords. since renters are generally poorer than homeowners, this is a somewhat regressive policy.
in a very small handful of neighborhoods, largely in the sunbelt and in Atlanta, in particular, large owners own an appreciable share of the market; in these markets, it's possible for both rents and home prices to come down, however, as I noted before, these markets are relatively rare.
Long-term, this might have some negative impacts on total supply as the order could presumably hit build-to-rent
What makes is possible for rents to come down with prices? First order, more owner occupied implies less rental stock.
Is it market power?
mostly market power, yeah. some papers also find institutional investors increase the amenity value of neighborhoods (eg they lower crime), so reversing that would tend to decrease prices, as well (although some papers find the opposite, which likely reflects that there isn't a "universal" investor thesis). although this isn't a clear consumer win in the way more competition is.
Decreasing prices by raising crime seems like a poor trade.
(I suppose the economist way of saying this is that the overall welfare effects are unclear?)
Assuming supply is not perfectly inelastic, it should be welfare positive to reduce crime, since an elastic supply elasticity means the increased demand isn't fully capitalized into prices.
the only tricky part is that some neighborhoods are likely perfectly inelastic because of zoning, in which case decreases in crime might be close to fully capitalized into prices. otherwise, the welfare effects just depend on how much the marginal vs infra-marginal renter values a decrease in crime.
BUILD MORE HOUSING oh my god it’s not the fucking hard. We spend so many brain calories putting on bandaids that don’t work when the answer is just really easy. Tell NIMBYs to take a hike and just build more. That’s it. It’s literally the only thing that works.
You're not wrong, but in this context specifically the market power probably does justify some intervention. That's why we have antitrust laws.
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