My Neighborhood is Not Your Stock Market

This is the motto that I’d love to see on a million cars around the United States.

I’ve opined in the past that I think the proliferation of investors (mostly institutional) have had a damaging impact on our neighborhoods, specifically, but have also increased homelessness. I think that trend continues and I think we need to begin to take action.

Here’s how the damage has been done.

Over 10 years ago, investors played an important role in making certain that foreclosed homes could be purchased and put to good use. But they learned from those days that they could treat neighborhoods like commodities, bundling them in to real estate investment trusts (REITs) and selling them to everyone.

So, what’s wrong with that?

First, when investors purchase homes, they have a different money calculus than does a home owner. They are willing to pay more because they will be able to pass that on to a future renter to pay their debt. Or, in some cases, they don’t have debt to pay off. But they do have shareholders that demand huge profits.

This goes for both investors in homes that they turn in to rentals and also short term rentals.

So, the increase of investors drives prices up because they are willing to pay more, and for cash. This drives mortgage-backed home owners out of the market.

And, yes, all of this trend started long before interest rates got as high as they are now.

This trend drives up homelessness.

“But what about the mom-and-pop investors?” After all, you might be one and you don’t want to think that you are part of the problem.

Don’t worry too much. Data indicates that it is the increasing amount of investors that are causing the problem, not mom-and-pop investors. This coverage indicates that an increasing amount of institutional investors (state retirement funds, union funds, etc) are investing in single family residences.

According to my friends at the Cromford Report, the total amount of rental properties remains at about 10% of the total inventory, but that the make-up of the ownership has changed, with an increasing amount of investors and a decreasing amount of mom-and-pop owners.

Note: Cromford analysts tell me that it is very difficult to track exactly how much of the total number of homes in the state are owned by investors. This is because some people don’t report honestly what they intend to do with the house. In some cases, the title company overseeing the transaction reports the affidavit of value to the county automatically as “owner occupied”, and nobody challenges it. Further, there is no comprehensive way (at least in AZ) to report a change in use if there is a change in ownership.

However, the increased proportion of investors to mom-and-pops represents the second way that investors drive up rents and contribute to homelessness. Investors, with automated systems and tens of thousands of properties create a less humane landscape driven by high expectations for profits over people. (This On the Media podcast covered the issue.)

The case is often made, quite accurately I think, that homes owned by companies both raise rents faster and are less tolerant of late payments, as detailed in this reporting. If a renter has a problem making rent, they are in a better situation if they know their landlord than if they are interfacing with a bureaucratic brick wall, which has the power to report them to other landlords as a bad renter (even if they are not).

This has created a situation where state governments are trying to solve a problem that they are helping to create. It is difficult to parse out causation and correlation, but I believe that it is possible that Arizona’s very own retirement system is investing in real estate in a way that helps drive up rents and increases homelessness, which taxpayers must pay for in many ways.

See page 11 of the Arizona State Retirement System’s Real Estate Investment Plan. While not all in Arizona, 35% of retiree money is invested in multi-family investments. Other state retirement systems invest in Arizona’s residential real estate. As the entities that run those apartments raise rates, the retirement fund makes more money, but at the cost of low and moderate-income people. It is unclear from this document whether some of this multi-family money is in REITs and/or single family residences.

Third, as we all probably know, the increased number of short and long-term rentals in neighborhoods are increasing turn-over in neighborhoods, decreasing our connection to our neighbors and undermining communities. We’ve seen people organizing around the damage done by short-term rentals. But I think it is a matter of time before we see people beginning to organize around investors treating our neighborhoods like commodity markets.

Fourth, like any investment trend, the trend ends. Investors who flock to an investment from anywhere else will eventually leave. It’s a fact of investing. Is it possible for investors to begin selling of tens of thousands of homes at once in a panic? What will that do to our home values? Or, could this go the other way so that fewer and fewer people can even own a home? In that case, will an investor class becomes the new landed gentry, with the rest of us renting with no intergenerational wealth?

Am I weaving unfairly scary scenarios here? Maybe. I hope I’m wrong. But we are not talking enough about it. All of this lands on top of an urban planning system in the US that favors sprawl and a current legal landscape that discourages dense condo development.

What can be done?

• I’m not sure we can outlaw institutional investors from buying in residential neighborhoods. But I think we should explore that.
• I am certain that we can at least ask state retirement systems to demonstrate that their investments are NOT contributing to increased rents. If they are, then our state retirement funds should not be contributing the problem. I think union retirement funds should do the same.
• States and counties should demand better tracking of whether properties are owner-occupied or used as rentals.
• If nothing else, we should be talking more about this.