Consequences
In the Kansas City region, there is little systematic research of the impact of investor ownership. MARC’s recent examination of investor ownership was the first attempt to quantify and document this trend in the region. It is useful to look at the experience of other regions and research focused on this issue nationwide to better understand what homebuyers, homeowners and tenants may face here.
In 2022, a U.S. congressional subcommittee held hearings on the impacts of private equity investment in the single-family housing market. Equity investors argued their share of the national housing market was relatively small and that they were meeting housing needs for families. Yet real estate professionals and researchers testified these investment strategies locked out homebuyers, increased housing prices, raised rents for tenants, generated higher rates of evictions, and resulted in lower rates of upkeep and overall housing quality.
In 2022, investors accounted for 28% of all single-family housing purchases nationally. This was up from 21% in 2021 and 16-17% prior to the pandemic. Current estimates project equity investors will hold 40% to 50% of the single-family rental market by 2030, according to the Private Equity Stakeholder Project. The volume of properties held by large firms, their increasing activities in the single-family home purchases and the growing body of evidence on impacts for communities and residents mean the actions of these high-volume landlords have an outsized impact on affordability and opportunity for tenants and communities.
The Atlanta region was an early site of institution investment in single-family houses. Homeownership in that region dropped 6% since the foreclosure crisis. Researchers from Georgia Institute of Technology found that investor purchases accounted for 1.4% of that decline. The percentage share was even greater in Black neighborhoods, where investor purchases accounted for the 4.2% decline in homeownership. The work estimates the loss of equity for Black families in Atlanta at $4 billion over a 10-year period (An 2023).
In Texas, institutional investors are also increasingly active. The former chairman of the Texas Association of REALTORS®, Shad Bogany, testified that investors were targeting minority communities and their cash offers were locking first-time homebuyers out of the market. In 2022, investors accounted for 40% of purchases in Houston and 52% of purchases in Dallas, Bogany told the committee. Research supports Bogany’s testimony, finding that investor purchases often target communities of color even when controlling for other market factors (Raymond et al 2018, Seymour and Akers 2019, Fields and Raymond 2021).
Other research documented the types of rental practices these companies pursue to increase profits. This research drew on the companies’ own filings with the Securities and Exchange Commission and their corporate earnings calls with their investors. This research identified five key components of the rental model used by institutional investors.
- Large rent increases of up to 30% or more.
- The use of fees that add between $650 and $1,000 per year to a tenant’s lease.
- Limited or inadequate maintenance to keep costs low and profits high.
- Quick eviction filings to maintain cash flow. Equity investors obtain low-cost debt requiring steady repayment to maintain a favorable rating and access to low-cost financing.
- The use of convoluted ownership structures masks ownership and makes it difficult for tenants to identify whom to work with when problems arise.
The single-family rental market transformed in the years after the financial crisis with the emergence of institutional investors. Prior to 2011, no landlord in the U.S. owned more than 1,000 single-family homes. As of June 2022, hedge funds and institutional investors owned over 547,000 single-homes across the country (Kaysen 2023). Research demonstrates this investment model affects home prices, homebuyers, tenants, eviction courts and cities trying to keep up with changing property conditions. Local governments are unable to regulate interstate commerce, but there are local, state and federal approaches that could assist in the maturation of this market, and mediate or eliminate many of the less desirable outcomes for homeowners, homebuyers and tenants.
Approaches
At the local level, governments have utilized data to identify consistent or chronic issues with institutional investors. In Cincinnati and Detroit, city governments sued owners utilizing nuisance abatement laws, demanding possession of hundreds of properties unless significant repairs were made or millions of dollars in fines were paid. This approach has resulted in varying success. In Cincinnati, one company agreed to pay over $500,000 in fines and to a series of repairs on an expedited timeline. In Detroit, the city utilized the initial lawsuits to enter negotiations with landlords regarding repairs and maintenance. The full impact of large investors is only understood through combining data that is often kept by separate departments or government branches such as ownership data, code violations, evictions, water and sewer bills and others. It is a complex undertaking but a powerful tool that allows for data-driven decision making and intervention on behalf of residents.
There are also movements for state-level changes, particularly in Georgia which experienced significant institutional investment in single-family houses since the financial crisis. A series of bills focused on expanding tenants’ rights passed the Georgia House of Representatives last spring but failed in the Senate. Proponents intend to bring the Tenant Protection Act up again. The bill included setting up a statewide landlord registry, a process that would provide tenants the ability to “cure” overdue rent before an eviction is filed, and an explicit requirement for landlords to ensure a home is habitable before renting it out. These proposals are drawn from research on the experience of tenants and the operations of high-volume institutional landlords. They are protections developed in response to current business practices.
At the federal level, a bill was introduced earlier this month that would require private equity firms and investment trust to sell-off their single-family holdings over the next decade and would prevent these firms from bulk buying in the single-family housing market moving forward (Kaysen 2023). The Brookings Institution recommends the federal government provide greater technical assistance to local communities seeking to increase affordable housing in more places and at more price points, and utilizing the Consumer Financial Protection Bureau to monitor the action of large firms with significant rental portfolios.
In the Kansas City region, there is a need for more data standardization and integration to assist in the development of data-driven policies based on the experiences of residents and the needs of the community. There is a need to increase the supply of affordable housing given the existing gap of 64,000 units. As evidenced by research on institutional investors in other regions, these activities both limit the supply of housing, make homebuying more expensive, and increase rents. To build affordable housing across the region, policies and strategies will need to be attentive to developing greater supply in many places with a range in prices as well as ensuring the well-being of renter households regardless of who owns the property.
