A recent New York Times story on the surge of investors in single-family homes noted that, last year, investors purchased one-fifth of all single-family starter homes on the market, double the number they bought 20 years ago.
According to the 2017 American Community Survey, investors own and rent out about 18.2 million one-unit homes, including detached homes, townhomes, and duplexes, providing housing for about 42 percent of the nation’s 43 million renter households. Investors in single-family homes offer potential benefits if they increase housing options and quality in communities, but they can also exacerbate existing housing market problems.
As we watch investors—both individual and institutional—make inroads into single-family homeownership in US cities, we should keep three concerns in mind.
Are investors taking homeownership opportunities away from individuals and families?
When an investor and a noninvestor show interest in buying a home, the investor is likely to have one big advantage over the noninvestor: they can often make a cash purchase, while noninvestors need mortgage financing, which can be time-consuming and difficult to obtain.
Bigger investors also have technological and managerial advantages that allow them to determine a house’s value so they can act quickly. Smaller investors often use auction websites to find, price, and bid on homes. So when investors compete directly with individuals and families for specific homes, many investors have easier access to capital and more information.
So are investors leveraging these advantages to the detriment of homebuyers? To find out, we need to know whether investors are adding value to the system by improving the housing stock through houses they resell or whether they are just flipping to sell at a profit, at the expense of homebuyers.
Some investors specifically seek homes that need renovations and repairs, potentially increasing the supply of homes that are well located and large enough for families who may not be ready to buy.
Conversely, although some potential owner-occupants have the interest, skill, and financial ability to repair a home, many may be turned off by a home that requires a significant time and capital investment to make repairs.
A policy to consider
Nonprofit organizations could help level the playing field between investors and potential owner-occupants by providing financial, labor, and skill assistance to those who find move-in repairs to be cost or skill prohibitive.
Nonprofit organizations can also act as intermediaries for potential homeowners when sellers have instituted First Look programs for property owned by lenders known as real estate owned (REO). These programs that should be expanded beyond the GSEs government-sponsored enterprises and the Federal Housing Administration.
And as innovations continue in the financial technology space, nonprofits could enhance the ability of individual buyers to find and purchase housing. But the reach and capacity of nonprofits aren’t currently sufficient to level the playing field. Supporting increased nonprofit capacity is a policy governments, philanthropies, and financial services providers should consider.
Are investors creating and maintaining quality affordable rental units?
An influx of investors into communities can be detrimental if investors make shoddy repairs, poorly maintain their properties, refuse to accept vouchers, or unfairly evict or otherwise mistreat their tenants.
On the other hand, investors can broaden access to single-family homes near good schools and safe neighborhoods. Increased decent and safe single-family housing options can also increase labor mobility, both by providing workers rental options in better locations and by not locking potential homeowners into housing that’s far from quality jobs.
It remains to be seen (and studied) what type of investors (institutional investors, owners of one- or two-unit properties, owners of 10-or-more-unit properties) do a good job of repairing, maintaining, and managing their single-family rentals, a task that is more complicated with individual homes than it is with an apartment building.
Large-scale owners of investor homes may benefit from economies of scale. But will these larger owners be quicker to evict tenants and less flexible overall? What will happen to the homes when the investors’ investors need to be repaid? Will owners of fewer investor homes have greater personal connections with the community and be inclined, therefore, to be more responsive and flexible?
A policy to consider
Communities need to know who is buying and who owns single-family rental units, including properties sold at tax auctions, so landlords can be held accountable for maintenance, taxes, and business practices. Investor ownership is often opaque because purchases are made through limited liability companies. Communities also need to provide tenants with code enforcement and eviction protections that support the well-being of the families living in investor-owned single-family houses.
Are investors increasing home prices?
It’s difficult to determine investors’ impact on home prices in an area. If investors are buying homes and improving them, the price of those homes—and perhaps others in the neighborhood—will increase, at least until the market is saturated.
At the same time, if investors are putting vacant homes back on the market, the increased supply may mitigate price increases. But if investor improvements are low quality, their activity might artificially inflate prices.
Economists often say that no one can drive prices above what the market can bear, which is determined by the job market and the gap between housing demand and housing supply. But it isn’t certain that this holds true in all micromarkets, like gentrifying neighborhoods.
A policy to consider
Communities should consider encouraging improvements by current and prospective homeowners, which would make the single-family housing stock less subject to transfer to an investor. Options could include the following:
- limits on increasing assessments (especially for less expensive homes) after rehabilitation
- assistance in planning improvements that meet code but are also affordable
- easy-to-access grants and loan pools with fair repayment terms that are accessible to potential homeowners and nonprofits who serve them for nonextensive rehabilitation and repair
- enhanced support for homebuyer preparation and new homeowner assistance to maximize the likelihood that new buyers will become sustainable homeowners
The recently introduced Neighborhood Homes Investment Act, H.R. 3316, shows how some policymakers are proposing to help existing and potential homeowners acquire or improve homes requiring rehabilitation, thus improving communities and enhancing owner-occupancy of the existing single-family housing stock.
We need to know more about the impact of investors on housing markets, workers, and communities. Strengthening the ability of localities to track investor impacts and taking steps to level the playing field between investors and would-be homebuyers can help alleviate these concerns.