As the housing affordability crisis drags on, politicians and pundits are increasingly blaming investors for the rise in prices and dearth of supply. This misdiagnosis, though, threatens to exacerbate the crisis while ignoring the root causes: federal mortgage subsidies, interest rate manipulation, central bank MBS purchases, rising construction costs, and local land-use restrictions.
Home prices are indeed more unaffordable than at any other time in our nation’s recorded economic history, even without taking skyrocketing interest rates into consideration. The rapid expansion of today’s historic housing bubble happened to coincide with a surge in investor activity.
According to John Burns Research & Consulting, the percentage of home sales to landlords with 1,000+ properties jumped from under 1 percent in the years leading up to the pandemic to nearly 2.5 percent by mid-2022. Quarterly investor home purchases surged from roughly 150,000 to more than 250,000 during this time. However, attributing the runup in prices to investor activity is a gross misdiagnosis of the underlying causation.
What actually sparked the most expensive and second most frenzied housing market in history? The answer: Ultra-low interest rates (bottoming out at 2.65 percent in January 2021) artificially engineered by the Federal Reserve combined with its gusher of capital to the real estate sector. The Fed nearly doubled its portfolio of mortgage-backed securities (MBSs). The central bank essentially printed $1.3 trillion in new dollars, directly injecting this into the real estate market.
This massive increase in MBS holdings is the equivalent to $300,000 mortgages on 4.3 million homes—a stunning number equal to the entire existing home sales market in some years. The rate reductions and MBS purchases certainly jolted the pandemic housing market. Existing home sales soared from barely 4 million annually in May 2020 to 6.5 million by October 2020—the most active market since the prior housing bubble 14 years prior.
The rise in investor purchases was an effect of these Federal Reserve policies rather than a leading cause of the price surge. To be sure, investors joined individual families in the frenzied buying spree of near-zero interest rates. (By the way, small “mom and pop” investors — those with fewer than 10 properties — account for more than 4 in 5 investor home purchases).
The uptick in investment activity was a predictable result of these easy money policies. But it was not a leading cause of the housing price surge. Even at the peak of this frenzy, institutional investors accounted for less than 3 percent of the overall purchase market. Freddie Mac reports that even as the large corporate buyer share of the purchase market increased, the overall investor share of the purchase market budged only slightly from 26.7 percent to 27.6 percent.
In the wake of the interest rate hikes, institutional investors significantly curtailed acquisitions. An analysis by John Burns Research and Consulting showed a stunning 90 percent fewer homes during the first two months of 2023 compared to 2022. The single-family purchase market share for large landlords has since cratered to 0.4 percent —the longer-run average — after rocketing to 2.5 percent during the heart of the cheap money frenzy. CoreLogic also reports that large investors dramatically curtailed their share of purchases last year.
For investors owning more than 1,000 properties, their share plunged from 17 percent in the summer of 2022 to roughly half that amount a year later. Redfin reports a record 49 percent decline for investor housing purchases in Q1 of 2023 on the heels of a 46 percent decline the prior quarter. This slump continued throughout the entirety of last year. As of Q1 2024, investor purchases are below levels experienced seven years ago. As it turns out, rising interest rates impact the ability of investors to deploy capital profitably, just as this environment makes it difficult for families to acquire a home.
In addition, focusing solely on investor purchases doesn’t tell the real story. Some investors sell homes while others are buying. For several years, investors have been net sellers — resulting in their ownership share of single-family homes declining even as their share of current year purchases increased. The investor-owned share of the single-family housing market shrank by 1.4 percent over the past decade.
Going back even further, data from the past 50 years show no indication of investor-owned housing adversely impacting homeownership. Rental housing units today account for a smaller share of the market than half a century ago. During this span, the number of owner-occupied increased 95 percent, eclipsing the 82 percent increase of rental housing units. The Urban Institute estimates the number of homes owned by institutions at about 574,000 — fewer than 1 on 200 of the 145 million housing units in the U.S. In other words, entities other than “institutional investors” own 99.6 percent of the housing.
Alarmist reporters and legislators continue to assign blame to institutional investors while conveniently ignoring these facts. The bottom line is that institutional SFR ownership is not measurably impacting local home price dynamics to the upside. Government mortgage subsidies and the Federal Reserve’s multi-trillion-dollar injection into the mortgage market remain the primary culprits. But addressing this is far more difficult to tackle politically due to vested interests than simply misplacing the blame on investors.
Now is the time for Congress to address the crux of the problem: wind down taxpayer-guaranteed and subsidized mortgages, and eliminate the power of the Federal Reserve to purchase mortgage-backed securities. Attempts by state legislators to restrict the capacity of investors to purchase homes ultimately risks forcing many families to choose between apartment living or record-high mortgage costs.
Blaming real estate investors for the resulting misery may score political points. But demagoguery does nothing to alleviate it.
