Owning a primary residence is the single greatest source of wealth for middle-class Americans, and it has been for a long time.
An entire body of public policy—from tax breaks on mortgage payments to local zoning that favors single-family homes over apartment buildings—has been built around encouraging homeownership. That’s why the recent entrance of well-capitalized investors into the single-family home market is so concerning to so many.
Young couples are now competing with more than 200 firms, from tech startups to money managers to rental platforms, to purchase houses priced at record highs. If you want as many regular people as possible to be able to afford a home and build up their wealth the way previous generations have, having investors able to spend tens of thousands of dollars above the asking price and pay in all-cash, all across the market, certainly isn’t an encouraging development. But just how big of a problem is the entry of permanent capital into the housing market? Here’s what we know.
The share of homes investors are buying isn’t massive.
According to Slate, corporate investors bought 15 percent of US homes for sale in the first quarter of 2021. That’s a significant but not overwhelming figure on its own, but what matters is that it’s not as if that 15 percent is spread evenly throughout the country. The reality is that that certain people in certain areas are getting squeezed by the new competition.
They are targeting a particularly important class of properties for middle-class families.
The best investment opportunities are relatively inexpensive single-family homes built since the 1970s in growing metropolitan areas, the very houses that younger working and middle-class buyers have traditionally been able to afford in the cities like Atlanta, Phoenix, Houston, and Las Vegas that they most want to live in, often because those cities have the best job opportunities with costs of living that are dramatically lower than cities like New York and San Francisco. This is what big investment firms are targeting, and it’s bad for middle-class families.
Having billions of dollars isn’t the only advantage corporate home buyers have.
One of the companies leading the charge into the residential market, Invitation Homes, can get a billion-dollar loan from the federal government at an interest rate of around 1.4 percent. Average mortgage interest rates are typically 2 to 4 percent. That means that the massive company can agree to a purchase price that’s $5,000 to $20,000 more, according to Slate‘s math, while paying the exact same actual cost as the individual homeowner would. And their offers are typically all cash, an additional advantage they have over regular folks.
The net effect on working- and middle-class Americans is bad.
The companies that buy these homes typically turn them into rentals which, in a country with weak protections for renters, means more people in more precarious living situations without proper maintenance and at risk of rent increases and evictions.
Having to outbid these huge companies also means that fewer people can take advantage of the various government subsidies that exist for first-time homebuyers. Much of the racial wealth gap in this country is owed to the purposeful denial of these subsidies to nonwhite borrowers, and it’s easy to see how a similar chasm between the wealthy people bankrolling these firms and aspiring homebuyers who can no longer afford them (a group nonwhite Americans are more likely to be in, thanks to the aforementioned racial wealth gap) could grow.
Additionally, investing in homes that are reliable, profitable investments means that the wealthy aren’t putting their money into other, often riskier endeavors that have more diffuse benefits—starting a business that employs people, putting money into research and development that produces useful innovations, and other investments that might indirectly benefit the working class instead of extracting money from them as their landlords.
But ultimately, it squeezes people out of one of the most traditional ways to gain wealth — buying a house. When the housing market works better for businesses, who can then deny that home-ownership to others by offering the properties only as rentals, for example, then families can’t succeed and thrive.