Blaming the Bogeyman

Scapegoating Investors Won’t Solve the Housing Shortage

It’s a new day in Austin, and that means a new candidate has declared their ambitions to become the next mayor of the Texas capital. In an Austin Monitor profile of Doug Greco, the third candidate to enter the race, one thing he said stuck out:

Despite Austin’s wealth and unprecedented growth, working people continue to be pushed out of the city and out of the middle class.

As mayor I will address this by supporting unions, living wage jobs, public schools, and effective workforce development. This agenda includes ending homelessness, building affordable housing, investing in rental assistance, and ensuring any land-use code changes benefit working people and not private equity firms. [Emphasis added.]

The article continues: “[Greco] pointed out that in 2021, more than 40 percent of home purchases in Austin were made by investors, as opposed to people who wanted a place to live.”

The role of investors in the housing market has received a lot of attention lately, especially with the introduction of a Senate bill called the “End Hedge Fund Control of American Homes Act.” (Hedges funds are like private equity firms in that everyone in Washington either hates them or used to work for one.) 

While it’s still early days—Austin’s sitting mayor, Kirk Watson, has yet to announce his reelection campaign—we can already see how the race is shaping up to be a referendum on the city’s approach to addressing its housing affordability problem. It’s an agenda that Watson has largely supported, and that City of Yes covers frequently. And it’s an agenda that opponents have often criticized as benefiting investors and developers, not regular Austinites. 

So, it’s worth digging into the concerns of Candidate Greco and US senators to look beneath the frightening headline numbers. Do institutional investors really control American homes?

Mr. Greco is correct that investors played a large role in the Austin housing market in 2021. The specific figure Greco cites is from a study of institutional investors by the National Association of Realtors (NAR), which estimates that investors purchased 41% of homes in Travis County, where Austin is situated (for context, NAR puts the national figure at 13%). Although other data suggests investors purchased between 10% and 28% of homes in 2021, it’s of course the bigger, scarier number that people remember. But it hides a lot of nuance.

To start, NAR defines “institutional buyers” as “companies, corporations, or limited liability companies (LLCs).” That includes private equity behemoths like Blackstone but also small-time mom-and-pop investors investing through LLCs. Basically, anybody could be an investor under this definition, and especially in 2021, it certainly felt like everyone was piling into the housing market. 

So, we might ask, what were the conditions that led to this? Helpfully, NAR tells us exactly why this happened:

The home sales and rental markets continue to suffer from a huge undersupply of both for-sale and for-own units. [...] Low interest rates during 2020-2021…have led investors to seek higher returns elsewhere, and real estate is one such asset. In March 2022, inflation surged to 8.5%, creating further incentive for investors to seek assets that offer a hedge against inflation, such as residential rentals where rents are adjusted annually. These conditions have made the real estate market attractive to institutional investors seeking to purchase properties to turn into rentals. 

In short, a huge undersupply of housing, goosed by low interest rates, incentivized a lot of people including investors to buy homes in 2021. 

NAR’s last point is also important: when an investor buys a house, the house doesn’t disappear. Even if the investor paid all cash and doesn’t have a mortgage, homeownership entails a lot of expenses, including insurance and property taxes as well as ongoing maintenance (take my word for it: fixing a broken furnace on a recent brisk 17° morning ain’t cheap). Investors need to obtain market rents or sell at a higher price in order to make a return on their investment, so keeping an investment house off the market is not exactly a great investment strategy.

Of course, the real complaint is that institutional investors are outcompeting individual buyers, further pushing homeownership out of reach for would-be buyers by reducing the inventory of homes for sale. As NAR points out, the main advantage of institutional investors is that they offer all cash and better options to home sellers. For instance, 42% of homes bought by investors needed repairs but were sold “as-is,” relieving the sellers of costly fixes. Meanwhile, 30% of sellers wanted to lease back their homes from the investors they sold to, while others enjoyed “an array of affiliated services like title services, mortgage financing, home inspection, appraisal, and home insurance” provided by the institutional buyers. 

Institutional investors provided home sellers with desirable services and options that individual buyers could not. And—crucially—they did not overpay: NAR reports that “their offer price [was] about the same as non-institutional buyers.” In other words, “the main impact of institutional investors is on market competition,” though importantly they outcompeted not on price but on availability of financing and services. 

Another way to frame this is that home sellers frequently but not always preferred to sell to investors rather than to individuals, because the investors offered them a more seamless path to closing. And why shouldn’t home sellers seek the best terms for themselves? Or should we blame them, too?

There are of course people who object to competition in housing markets on philosophical grounds—but those foundations are so shaky that no housing could be built on them. After all, the housing market is far from a free-for-all: supply has been constrained virtually everywhere by local land use laws, and it is those constraints that create conditions of scarcity in which those with deeper pockets usually win.

To quote somebody famous: don’t hate the player, hate the game.

The good news is that we can change the rules of the game. City of Yes has documented how Austin’s outdated land use policies have created a housing affordability crisis that has fueled the displacement of lower-income folks and threatened the city’s “weird” self-image. Yet as Austin has undertaken a slew of reforms to address the problem in the past year, some detractors would prefer to keep blaming the players rather than the rules of the game that have created an unequal playing field.

I get it: fixing a cumbersome, arbitrary land development code with roots in 1920s-era segregation is hard work; pointing fingers at private equity firms and hedge funds, who everybody hates anyway, is a lot easier. 

But blaming a widely hated bogeyman doesn’t actually solve the housing problem. Nor does pointing to frightening numbers without context or nuance. So here’s some further nuance: according to Parcl Labs, despite their outsized buying activity in certain markets, institutional investors own only about 1% of existing single-family homes nationwide. 

Some bogeyman.

A final point: investors have to live with market fluctuations. Home prices in Austin are down nearly 14% from their 2022 peak, rents are falling, and more than 120,000 apartments are coming to market in the next year or two. This is all great stuff for housing affordability, but not exactly good news for investors. Strangely, those blaming investors for the housing shortage are not celebrating them for lowering prices and rents. Hmph.

All scapegoating does is fundamentally misdiagnose the root of the problem, allowing those who have the power to address it to avoid the responsibility of undertaking reform and the blame for failing to do so. We need to build more housing, not to blame housing market participants—neither sellers, individual buyers, nor institutional investors.

Hopefully, Austin will elect a mayor who wants to build instead of blame.