AMAC Exclusive - By Andrew Abbott
In March 2020, experts and academics predicted that the worsening COVID-19 pandemic would lead to a massive “real estate tailspin.” Instead, it kicked off one of America’s hottest real estate markets ever. But while conventional wisdom held that the trend was a result of stimulus checks and historically low interest rates, a new congressional report suggests another cause: some of the world's largest investment firms are buying up single family homes as fast as they can manage, threatening to turn America into a nation of renters.
According to the report, which was released by the U.S. House Committee on Financial Services Subcommittee on Oversight & Investigations on June 28, a significant number of single-family home purchases over the past two years were made by large investment firms, not individual homebuyers. By analyzing a handful of key housing markets, the House Subcommittee found that large companies have been buying up vast numbers of houses at an unusual rate. For example, in the third quarter of 2021 alone, “institutional investors bought 42.8% of homes for sale in the Atlanta metro area and 38.8% of homes in the Phoenix-Glendale-Scottsdale area,” according to the report.
Unsurprisingly, the median sale price for a single-family home in the first quarter of 2022 has shot up nearly 25% from the first quarter of 2020, going from $329,000 to nearly $430,000.
This development is an unwelcome one for prospective homebuyers, as these firms – which include private equity giants like BlackRock and Invitation Homes, a $21-billion spin-off of Blackstone – don’t intend to resell the homes on the open market. Instead, they hope to turn them into single-family rental properties, or “Securitized SFRs.” The companies then hold the properties for rentals and long-term investments. With so many houses being bought, these companies would likely be able to set rental rates for entire housing markets – and are already doing so in some areas, often increasing rental rates by more than 10% each year. At the same time, a restricted supply of homes on the market is causing prices to increase even further, forcing would-be first-time homebuyers out of buying entirely and back into renting.
This business strategy goes back to the financial crisis of 2008. As the congressional report details, following the crash and subsequent collapse of the housing market, corporations backed by large investment firms began snapping up homes that had massively depreciated in value, often taking advantage of the financially distressed situation of homeowners. This effort was aided by the federal government, both through “bulk sales of distressed federally-backed mortgages and foreclosed properties” and “providing Fannie Mae-backed financing.” In other words, the federal government loaned money and sold packages of foreclosed homes to these investment banks, enabling them to become major players in the real estate market – a trend that accelerated more slowly at first, and then rapidly during the pandemic.
The unsettling irony here is that it was these large investment firms and the federal government that caused the housing crisis to begin with. Leading up to 2008, these firms pressured banks to offer sub-prime mortgages to Americans who could not afford them. The mortgages were then bundled and sold as investment products for a significant profit. When buyers defaulted and the market collapsed, it triggered one of the most significant economic crises since the Great Depression. In response, the Bush and Obama administrations bailed out the banks – leaving millions of ordinary Americans to suffer.
In 2001, no single investor owned more than 1,000 homes. While the report does not reveal how many homes these institutions currently own, it does reveal that, from March 2018 to September 2021 alone, five institutional investor-backed companies purchased 76,235 single-family homes. The recent increase was likely due to the historically low mortgage rates offered during the pandemic, which benefitted corporations as much as individuals. In the last two years, many hopeful homebuyers found themselves outbid by these investors, who could afford to offer cash up front and were willing to close immediately. Of the investor-acquired homes the subcommittee analyzed, they found that the new property owners would immediately raise rents on tenants by almost double, despite “a diminished quality of housing over time.”
Homeownership has long been one of the most reliable ways to build generational wealth for families. With these new barriers, many families may now be forced to seek other options. The report offers no clear solutions on how to solve the problem – perhaps unsurprising given that government meddling largely caused it to begin with. But as this crisis continues to worsen, our leaders must find some way to address it, lest the American Dream slip further out of reach for millions.
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