Companies that buy and rent single-family homes have drawn increased scrutiny over the past year. At a congressional hearing in July, a Houston real estate agent urged lawmakers to act because institutional investors are “creating a generation of renters” who will miss out on the benefits of homeownership.
Although there is some evidence that institutional investors are pausing their home purchase activities for the moment, it also may be that some of the larger players are waiting to splurge on discounts down the road. Private equity giant Blackstone, for example, is setting aside $50 billion to scoop up real estate bargains in case of a downturn, according to The Wall Street Journal.
I think having institutions in the (single-family rental) space is a positive thing. We need to go out and show the world that it is positive.
— David Howard, executive director, National Rental Home Council
CoreLogic tracks what it calls “mega-investors,” or companies that own 1,000 or more properties across the country. The real estate analytics company found that the share of single-family homes purchased by investors of all sizes grew from 16% in 2020 to 24% in 2021.
Mega-investors were a large part of this growth, says Thomas Malone, a CoreLogic economist. These institutions had been responsible for about 1% of all home purchases for several years but ramped up more recently, Malone said. In 2021, mega-investors comprised 4% of all home purchases.
Malone says there’s several potential reasons why mega-investors bought so many single-family homes last year. One, home prices were skyrocketing, so the housing market looked like a good deal. Rents also increased so returns on investments seemed promising.
“Buying a house and renting it out is sort of a classic hedge against inflation,” Malone says. “You can keep raising the rent if inflation keeps going up, so (these homes) might be seen as sort of like a shelter against inflation.”
That leads to the question of whether these large investors had a hand in the home price appreciation surge of the past couple of years. In his analysis, Malone notes that mega-investors have been most active in states where price increases have been the highest, such as Arizona, Nevada, Georgia, Florida and North Carolina. Each of these states recorded annualized price appreciation of at least 20% in June 2022.
But Malone also says that price appreciation has been high in states where mega-investors are a nonfactor. “South Dakota had a 23% appreciation and had literally no mega-investors,” he says.
The trend of institutional investors purchasing and renting homes is relatively new, emerging at scale only after the financial crisis of 2007-08, says David Howard, executive director of the National Rental Home Council (NRHC). But he says there’s a false narrative that companies buying homes are having an outsized impact on the housing market.
“In a lot of the stories that you’ve read and that I’ve read, it would seem that owners of single-family rental homes, particularly large owners, are buying every home in every neighborhood across the country,” Howard says. “It’s pretty easy to push back on that if you take any kind of look at the data.”
He says that his organization represents most of the large institutional investors and these companies only own about 350,000 of the 23 million single-family rental homes in the U.S. And institutional investors don’t own any properties in nearly half of the country because they mainly focus on the Sun Belt states.
Howard says that most people who rent single-family homes are moving out of urban apartments and tend to buy within a couple of years. He also says that institutional investors can do things at scale that smaller owners cannot.
For instance, he says that institutional investors are stepping up to address the housing inventory problem by building new homes to rent. Two years ago, only 3% of NRHC’s members were building new units, but that share has now grown to 26%.
“I think having institutions in the space is a positive thing,” Howard says. “We need to go out and show the world that it is positive, and that’s what we’re excited about.”
Scott Olson, executive director of the Community Home Lenders of America (CHLA), says he was surprised that there was an uptick last year in corporate home purchase activity. CHLA strongly opposed a $1 billion loan from Fannie Mae to Blackstone’s Invitation Homes division in 2017.
Olson thinks that this was a phenomenon spurred by unique conditions over the past 10 years. “People were really surprised at the scale of this because it sort of takes the one-two-three combination of lower prices, lower rates to pencil out the rentals, and less demand from the homebuying public,” Olson says.
The conditions that made single-family homes attractive to corporations have gone away for the time being, Olson says. And he believes the trend of institutional investors buying homes will likely decline for the foreseeable future.
“I think those are going away unless prices dropped significantly and then the economics could kick back in,” Olson says. “I don’t want to say prices are going to drop significantly. I’m not predicting it.” ●
