In this part two of a multi-part series. I’m exploring at how investors and other factors drove driving up home prices and what we should do to keep it from happening again. See part 3, here.

So, detractors are saying that investors are causing this market crisis. The private equity firms will tell you that they have nothing to do with it. If anything, they are helpful to fixing up older properties.

I neither think that private equity firms are the sole problem, nor are they as benign as they like to believe.

There are some undeniable facts.

First, while private equity firms “only” account for about 400,000 SFRs out of tens of millions of homes, it is clear that they have be buying up larger chucks of the market in recent years –just as the other factors we’ve discussed have been driving prices as well.

I’m confident that a talented economist could show that private equity firms and individual investors are fueling speculators and contributing in an out-sized way to high prices.

Second, private equity firms or individual buyers (renters, flippers or STR owners) are all targeting those neighborhoods where home prices are lowest. They buy the cheap property, fix it up and make a profit from the improvements.

An economist would say they are finding previously unseen value. But, like many things in the study of economics, this analysis is blind to the downsides to neighborhoods. And, I’m not just talking about the (very important) social damage of moving people out of affordable homes.

By increasing the value of the home and selling it (cost + improvement + profit margin), they are forcing the new owners or new renters to pay a higher price. Those new owners or renters are padding the profits of people who probably already have money and reducing the chance of the new owners or renters to build their own inter-generational wealth. This is especially true of people trapped as renters.

The private equity boosters are painting a rosy picture of the value that they’ve added to the market, without considering the affects on people who are, in all likelihood, significantly less privileged than themselves.

And now, as interest rates go up, more first time home buyers may exit the market, leaving more buyers who can purchase with cash.

So, what should or could be done? Here are my suggestions:

1. Call me a radical, but neighborhoods are not the stock market. Fannie Mae and Freddie Mac, plus state pension funds should not be investing in the housing market in this manner. We don’t need equity money to infuse cash in to homes. Americans are saving more money than they have in years, and there is plenty out there for individuals to invest in SFRs to meet the demand.

2. STR companies should implement “one owner, one home” rules or similar policies in more major markets around the country. According to this article, AirBnB has implemented such policies. But those not only need to be applied in other market. In addition local governments need more control over STRs, especially in Arizona.

3. There should be similar restrictions on how many homes other investors can purchase. Neighborhoods were never designed to be a commodities market. They should first and foremost be there for families to live peacefully and with long-term stability.

4. Raise awareness about the affect of SFR investments on BIPIC communities. The National Association of Realtors is not really fulfilling its pledge to equal opportunity unless it is going the extra mile and helping minority families to build inter-generational wealth. As long as black and brown families are disproportionately forced in to rental arrangements, we are not addressing inter-generational wealth building.

5. Fix immigration policy so builders can hire more workers. Yeah, I know. I might as well be asking for unicorns to deliver my groceries. But it’s true, so it’s on the list.

6. We need some reforms to protect condo developers and owners from defect litigation.

7. NIMBY neighbors, who are often the same privileged people who benefit from exclusivity in the housing market, need to stop being the same people who prevent others from accessing the same wealth, security and quality of life that they’ve enjoyed. (Here’s an interesting defense of what some folks incorrectly term as “gentrification.”)

8. We need to reform the euclidean building codes that favor inefficient SFRs that contribute to climate change, sprawl and unhealthy communities.

Like I said. No simple explanation for the problem and no simple answer. But, like other things, it takes all of us getting more involved in our communities and thinking of the greater good as much as we think of ourselves.

In this part two of a multi-part series. I’m exploring at how investors and other factors drove driving up home prices and what we should do to keep it from happening again. See the last article here.

Many of the counter arguments to the idea that investors are to blame for high home prices point to supply shortages, cheap money, work-from-home and zoning laws that make it difficult to build multi-family infill projects.

As mentioned in the last blog entry, boosters of investment buyers (private equity firms in particular) will tell you that they make up a dramatically small portion of the market.

“Institutionally owned SFRs represent less than a half of a percent of this market. If we were to narrow our focus solely to the rental market of single family homes, of which there are 16 million, institutionally backed firms only own 2.5% of the market. While investors purchase 20% of all homes nationally today, only 1–2% of homes are bought by larger investment firms. Most rentals are owned by small investors.“

And they would probably say, despite the anecdotal evidence of Realtor Ken in Phoenix, that most investors do infuse a lot of cash in to renovation all across the market.

To be fair, I don’t have and can’t point to any data to demonstrate that there is a trend of sub-par renovations out there. The converse may be the same for the other side.

They would tell you that cheap money encouraged many people over the last decade to buy new, bigger and second investment homes. Covid encouraged people to work from home and buy bigger homes that make working from home easier.

Layered on top of that, city codes and zoning ordinances that have favored SFRs over the last century make building multi-family (either owner-occupied or rental) even more difficult.

There is a great case to be made that, as a country, we decided almost a century ago that we would favor SFRs, despite the higher energy, road, water and land costs that go along with them, and we’ve hamstrung our ability to build more dense housing.

The NIMBY crowd is as strong as ever. You know what I mean if you’ve seen downtown neighborhoods’ social media blow up recently whenever a developer suggests a new project.

Further, developers I’ve met over the years will tell you that they can’t develop condo communities because the are unable to get liability insurance. Condos are the most likely to end up in construction defect lawsuits as soon as the warranty period ends.

That’s a whole other debate about litigation rights.

In the end, the equity-firms-are-not-the-bad-guys crowd might say, “blame the supplier, not the buyer.”

“So,” they would say, “don’t blame the less than 2% of buyers that are equity buyers for prices that were moving up dramatically, regardless.” They would argue that we are not in a bubble and that, given the long-term demand for homes, we are nowhere near it.

These arguments are pretty solid, in my mind. But, as I’ll cover in my next post, policy makers and realtors need to address them as part of a whole.

In this part two of a multi-part series. I’m exploring at how investors and other factors drove driving up home prices and what we should do to keep it from happening again. See Part 1 here.

Let’s start with some perspective. There are about 86 million single family residences (SFRs) in the USA. About 16 million of those are rentals. (About 44 million households, total, are renters. That includes SFRs and apartments.

Really only about 400,000 of those are owned by private equity firms, according to this article, which seems to want to down-play the role of private equity firms.

The Marker Media article above is eye-opening in that it describes how state and university pension plans invested heavily in these equity firms. They are chasing profits to prop up often under-funded retirement funds, drained after years of growing numbers of state retirees and shrinking state budget contributions to those same plans.

But the author’s defense of equity buyers misses the point. The number of sales to equity firms has been increasing, according to the New York Times from the end of 2021. That trend has not slowed.

Equity firms are gobbling up single family residences are to private equity firms (anywhere from 1 in 6 to 1 in 4 sales, depending on who’s reporting). And, by the way, those same equity firms have been coming after apartment buildings, as well, for the last decade.

So, what’s the problem with that? Lots, actually. Don’t investors help infuse money in to fixing up properties?

Well, your run-of-the-mill pro-market economist would say so. But the reality –at least what I’ve seen in person– is entirely different. The investments in the properties tend to be more superficial, “lipstick on a pig” renovations. That’s true for both rentals via equity investment and the quick flips; aging A/Cs remain in place, construction errors are painted over and structural challenges ignored.

The reality is that investors are looking for steady profit every month and a hefty profit when it sells. Those desired profits tend to be higher when an equity firm is involved, as opposed to a smaller rental company that has a buy-and-hold strategy.

That dynamic disadvantages renters. “Well, I think that what we’re seeing is that these companies are acting in ways that are problematic for tenants in order to meet their investment goals.”

I’ve shared previously a great On the Media episode on eviction.

As opposed to nearly faceless equity firms, local landlords have more flexibility to work with tenants who miss a rent payment.

Further, equity investors are more likely to rely on management firms or on-line payment systems, which are less forgiving or willing to work out payment plans. So, renters are more likely to get a late payment or eviction history, which makes it harder for them to find a new place to live.

In this article, a former longtime housing director testified in congress that, “Unlike mom and pop landlords, large out-of-state investors typically don’t have much empathy for their tenants,” she said. “Residents can be a day late in paying rent and face an eviction notice.”

But, it does not stop there.

As you might guess, there is a clear harm to low income neighborhoods and communities of color.

See this map of Phoenix, where homes in lower income areas are scooped up by investors in greater numbers by investors, leaving fewer affordable for new home buyers. Anecdotally, we’ve seen people being pushed out of neighborhoods that have been affordable for decades.

According to the Motley Fool investor website, SFR investors prefer lower-priced homes, which give them greater profit opportunity. The part of the picture they don’t share is that this strategy is specifically what deprives low-priced neighborhoods of low-priced homes.

So, investor share of the SFR market is increasing; whether that be equity firms or individual investors; short-term rentals, flips or flip-to-rent. Investors come in, pull a profit out of the home –either through a flip or a higher rent–, and the new home owner or new renter pays the bill. The neighborhood is deprived of affordable homes and the dominos fall from there.

In the next installment: The case for investors in neighborhoods.