The Data is Clear
by Nate Zielinski
A recently proposed ban by the current administration to prohibit institutional investors from buying too many homes has made shockwaves across the real estate investment industry for the past few weeks.
The sense of confusion within the industry stems from the fact that while there is a widely agreed upon substantial shortage of homes, with some pundits labeling it a crisis, institutional investors are not the problem and can even be a part of the solution.
In a recent conversation with RCN Capital CEO Jeff Tesch, the sentiment is that large institutional investors provide value to the industry while keeping their footprint to a minimum.
“The number of homes controlled by this segment of large institutional corporations is under 2% of the entire country’s single family housing stock,” said Tesch.
It begs the question of what the current administration is trying to accomplish with this new potential mandate. It appears to be a placating tactic to the larger public that the government is on their side and wants to limit the influence larger corporations have on the housing market. If corporations or institutional investors were supported in the right way, they could build supply for the housing market that the country is currently in need of.
“Many of these homes owned by institutional investors were built by them from the ground up to provide housing in areas where the housing needs were not being met,” added Tesch.
Myth vs. Fact
Additionally, Rental Housing Economist Jay Parsons put it bluntly: “There are many flaws in the argument that institutional investors are hindering homeownership in the U.S., but here’s maybe the most important one: The entire argument is based on a myth. In fact, multiple sources show us that the number of single-family rental homes actually has trended down over the last decade.”
Instead of focusing on the root of the problem, this mandate points the finger at an easy target while the issue at hand gets progressively worse.
According to Census data, there was an eight year stretch from 2015 to 2023 in which the U.S. had twice as many new homeowners enter the market than new for-sale homes. The demand exceeded supply so drastically that a lot of rental home operators closed up shop and converted to owner occupied. This is evidence that investors have actually been squeezed out of the market over time and primary home buyers and homeowners have increased their presence.
Within that stretch of eight years from 2015-2023, there was a spike in home prices in 2016. Parsons continues to cite the Census data and elaborates that a majority of homeowners entered the market because “mom and pop” investor shops were selling off homes in their portfolio for profit.
While there was an increase in activity in the market from institutional investors it was merely a fragment of the market share that is still dominated by smaller investor shops, and they were not imposing their will on primary home buyers and pricing them out.
Moreover, since 2016, that same U.S. Census data illustrates that the U.S. lost 1.5 million single-family rental homes — a staggering number that supports the point that institutional investors were not using their capital to dominate the market share but rather homeowners were seeing a period where they could flourish and enter into homes for the first time. Parsons continues to explain that a crisis does exist, but it is merely a result of demand outpacing new construction.
Tesch believes similarly regarding the potential solution that institutional investors can provide. “I would argue that some of these corporations have done a good job adding to the housing stock and not detracting from it, yet we’re still 2-3 million houses short from where we need to be in terms of demand,” said Tesch.
It is clear that this ban is misdirected and there is an opportunity for collaboration with some of these larger institutional investors that could pay dividends for the housing market as a whole.
The White House vs. Congress
The sentiment that institutional investors are not the root of the issue is shared by lawmakers in Congress.
“Trump officials pressured congressional Republicans in recent weeks to include the president’s proposed ban as an amendment in either of the major housing bills currently winding through the House and the Senate. But lawmakers in both chambers have resisted, partly due to wide skepticism of the idea among both House and Senate Republicans,” writes Craig Karmin, an editor at The Wall Street Journal.
It is a clear indicator that while the current administration wants this bill passed, a majority of the real decision makers in the government are not seeing the correlation between institutional investors and the current state of the U.S. housing economy.
“Restricting the number of homes that public and private corporations can build and own is not solving the housing crisis,” Tesch said.
With multiple credible sources as well as the actual decision makers left scratching their heads regarding this administration’s proposed ban, there is a hope that this potential institutional investor ban doesn’t get passed. It is another reminder that breaking through the mainstream news and popular opinion is key to truly understanding the issues the country faces.
Rather than splintering segments of the real estate investment industry, there could be numerous benefits to bringing these industry experts together and utilizing the capital that institutional investors can provide to work towards actionable solutions.
The American people need a fix, that much is clear. Seemingly on the brink of a recession for the past 2-3 years, now is the time for action and clear strategies that can bring an end to some of the stress the country has been experiencing.
Objectively speaking, institutional investors may not have all the answers or be able to provide the solution, but they are certainly not causing the issue and holding them accountable through this potential legislation is a non-issue in a period when time is of the essence.
