Is Wall Street Really to Blame for the Affordable Housing Crisis?
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Well before the coronavirus pandemic, Americans were struggling to keep up with the cost of housing, and inflation has made the problem worse
Well before the coronavirus pandemic, Americans were struggling to keep up with the cost of housing, and inflation has made the problem worse: Between September 2021 and September 2022, rental prices for a primary residence rose by 7.2 percent — a measure that typically climbs by just 3 percent per year — and between July 2021 and July 2022, home prices rose by 15.8 percent.
Who’s to blame? An increasingly popular answer among Democrats, and even some Republicans, is Wall Street. Earlier this year, Senator Elizabeth Warren accused private equity firms of “taking advantage of the housing shortage by purchasing large numbers of houses and raising rents for families.” In June, the House Financial Services Committee held a hearing entitled “Where Have All the Houses Gone? Private Equity, Single Family Rentals and America’s Neighborhoods.”
To what extent can the affordable housing crisis — and incipient hopes for and fears of a “rent revolution” — really be blamed on corporate speculators? Here’s a look at the debate.
The rise of the institutional real estate investor
As Francesca Mari explained in a 2020 New York Times Magazine piece, institutional landlords didn’t exist in the single-family rental market before the Great Recession. But between 2007 and 2011, nearly 4.7 million homes went into foreclosure. By 2016, with the help of government-backed financiers Fannie Mae and Freddie Mac, private equity firms had acquired hundreds of thousands of single-family houses in desirable areas at bargain prices and converted them into rentals, making money on rising home values as tenants paid down the mortgages. The market for single-family rentals got another boost during the pandemic: In the fourth quarter of 2021, real estate investors bought a record 18.4 percent of the homes that were sold in the United States, up from 12.6 percent a year earlier.
Critics of institutional investment in single-family real estate say that it has put homeownership even further out of reach for more Americans.
“A normal buyer can’t compete with an all-cash offer from an institution, especially if it comes in high,” Aaron Graf, the chief executive of the New York City real estate brokerage LG Fairmont, said last year. “Young people are thus being priced out of the starter single-family home.”
Many tenants say the trend has also harmed renters because of the lengths to which private equity companies go to maximize their profits in relatively short periods of time. “Various studies have found that corporate landlords are more likely to raise rents, evict their tenants and poorly maintain their properties than smaller landlords,” The Times’s Sophie Kasakove reported in April. “One by the Department of Housing and Urban Development in 2018 found that large corporate owners in Atlanta were 68 percent more likely than smaller owners to file eviction notices.”
A ProPublica investigation this year detailed how private equity firms have also been buying up apartment buildings in American cities and wielding their influence to shape state and local housing policy. In 2018, for instance, the private equity giant Blackstone spent more than $6.2 million fighting a ballot initiative that would have allowed rent control in California cities.
In 2019, human rights officials at the United Nations decried Blackstone’s practices and criticized six countries, including the United States, for failing to properly regulate investment in residential real estate. “Landlords have become faceless corporations wreaking havoc with tenants’ right to security and contributing to the global housing crisis,” they wrote. “The financialization of housing in its current form runs afoul of international human rights norms and cannot continue.”
Is private equity the true villain or a scapegoat?
Not everyone is convinced that Wall Street’s entry into the single-family rental market is uniformly bad. As Jerusalem Demsas has noted in Vox, institutional investors tend to buy homes in need of significant repairs that a typical prospective homeowner might not be willing to make. And because they have the resources to buy even during downturns, institutional investors can provide a price floor for the housing market if it threatens to collapse.
But unalloyed evil or not, institutional investors simply don’t have the market power to be driving the affordable housing crisis, many analysts say. As of 2021, institutional investors owned just 3 percent of single-family rentals, which themselves account for just a small fraction of the roughly 84 million single-family homes in the United States. “It’s really difficult to make the case that a handful of companies that own 300,000 homes across the country really have the ability to influence things like home prices and rental rates,” said David Howard, the executive director of the National Rental Home Council, which represents the single-family rental home industry.
As the Times reporters Conor Dougherty and Ben Casselman explain, the fundamental reason housing is so expensive in the United States is that there just isn’t enough of it. Last year, according to an estimate from Freddie Mac, the country had a deficit of 3.8 million units, up from a 2.5 million deficit in 2018. “Other analysts come up with different figures, but pretty much everyone agrees that the country hasn’t been building nearly enough homes to keep up with demand, especially for middle and lower-income families,” Dougherty and Casselman write. “The failure to build those units is the single biggest contributor to the affordability crisis that in recent years has spread from a few coastal cities to a much larger swath of the country.”
The sluggish pace of housing construction has many causes, including a lack of public investment, industry fragmentation, restrictive local zoning and land use laws and opposition to reforming those laws from homeowners, who share a key interest with private equity giants: a return on their investment. NIMBYism, the tendency of homeowners to oppose new development, is arguably a natural consequence of the American insistence on homeownership as the ultimate sign of prosperity and chief means of building wealth.
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