As the United States emerges from the COVID-19 pandemic, it is becoming increasingly clear that the country is entering a period of deep economic uncertainty and adjustment. While the media has extensively covered the acceleration of remote work and the fragility of global supply chains since the beginning of the crisis, only recently has attention focused on the dramatic rise of investor purchases of single-family homes and what that and other forces might mean for homeownership generally and among Black- and Latino-owners in particular.
The New Localism newsletter has focused extensively over the past two years about a related topic: the pandemic’s disproportionate and adverse effect on Black and Brown-owned business, and about the concomitant need to aggregate new forms of capital to restore these business assets while also redressing historic disparities in business investment. Next month, the Nowak Metro Finance Lab and Accelerator for America will release a major paper documenting more broadly the scope and severity of the challenges that disadvantaged communities will face post pandemic, arguing that these communities will face a Lost Decade unless major public, private and civic actions are undertaken.
Now, however, it’s time to underscore the pandemic’s adverse consequences on Black and Brown wealth-building through homeownership, the single most important component of US families’ net worth.[1] This is occurring, in part, because of the economic after-effects of the pandemic’s dire impact on Black and Brown households’ jobs, incomes, and savings and other assets. But, in addition, the pandemic has precipitated other headwinds, namely investor bulk purchases of single-family homes in entire neighborhoods because real estate investors shifted from commercial asset targets (now with high vacancies due to remote work) to relatively low-priced single-family homes. While this bulk purchase trend began before the pandemic, investor purchases grew to 18.4 percent of home sales in Q4 2021, up by nearly 6 percent from the prior year, and the most in two decades, based on Redfin figures.[2] Yet, last year, 30 percent of home sales in majority Black neighborhoods in places like Atlanta, Charlotte, Jacksonville and Las Vegas went to investors. Foreign investment, which “barely registered” before the pandemic, amounted to 1/3 of all institutional investment in single family rental homes as of April 2021.[3]
What do investor bulk purchases of homes mean for neighborhoods? For residents entering homeownership, bulk investor sales mean far less inventory available for purchase, less household ability to compete (with all-too-frequent all-cash sales), and, over time, exponentially less access to home value appreciation and wealth-building. More to the point, bulk purchases siphon whole neighborhood wealth, exporting wealth out of town, out of state, and even out of country. And there is evidence that many absentee investors are taking unfair advantage of residents and communities, by boosting rents, increasing evictions and failing to maintain homes adequately.
We have deep reason for concern. Unless concerted and coordinated action is taken, at scale, the nation runs the risk of exacerbating racial disparities on wealth, which are already pronounced. On the eve of the pandemic, data from the Federal Reserve’s 2019 Survey of Consumer Finances (SCF) showed the typical white family in America had a net worth of nearly $190,000, the typical Black family had a median net worth of approximately $24,000, and the typical Hispanic family had a net worth of approximately $36,000.[4] As the Economist recently summarized: “For every $1 the average white American household earned in 2019, the average black one made only 51 cents. For every $1 in wealth held by a white household, a black one owned just 15 cents.”
If the threat of worsening disparities seems familiar, it is. In the aftermath of the Great Recession, low-income neighborhoods bore the brunt of mortgage foreclosures, real estate vacancies and long-term unemployment, leaving a vacuum filled by parasitic capital and predatory actors. According to the Census and the Annual Community Survey, the homeownership rate for Black families plummeted, falling from 49.4 percent in 2000 to 42 percent in 2019, a 7.4 percentage point decline. The impact of the Great Recession was particularly pronounced in older industrial cities. In Detroit, the Black homeownership rate dropped from 55.5 percent in 2000 to 46.5 percent in 1019. In Cleveland, the Black homeownership rate in 2019 was only 35.5 percent, compared to 43.1 percent in 2000. Today’s rising interest rates will only exacerbate entry to the market.
Fortunately, the Biden Administration has begun to address Black and Brown homeownership, particularly from an underwriting and foreclosed property perspective.
Just last week, the Administration launched a new mortgage tool (See, https://www.hud.gov/sites/dfiles/OCHCO/documents/2022-08hsgml.pdf) to keep foreclosed FHA properties from investor purchasers by creating a 30-day right of first refusal for owner-occupants, nonprofits, or government purchasers.
More importantly, the Biden Administration’s Interagency Task Force on Property Appraisals Valuation and Equity (PAVE), co-chaired by HUD Secretary Marcia Fudge and Domestic Policy Advisor Ambassador Susan Rice, has focused over the past year on solving the “appraisal gap” that has impeded residents from qualifying for mortgages in disinvested neighborhoods in weak market cities. This gap arises because many of the homes in these communities need renovation, yet the combined cost of the home purchase plus renovation typically exceeds the appraisal value of these homes. The appraisal gap prevents mortgage issuance or requires a large cash infusion by the homebuyer. Instead, whole neighborhoods stay low in value, ripe for outside speculation.
The PAVE Action Plan has already resulted in the implementation of several key reforms, including a vigorous new right for homebuyers and homeowners to request a second appraisal, new tracking of appraisal data through data sharing between the GSEs and HUD, FHFA’s permitted use of a desktop (rather than an in-person) appraisal system; and longer-term studies of AVM algorithms, appraiser governance and standard-setting, and more. If implemented rapidly and effectively, these PAVE administrative reforms could increase home values in minority neighborhoods and re-build wealth for new and existing minority homeowners in the very low-growth, high vacancy markets that have been stymied.
But, while notable, these underwriting and FHA portfolio tools are not sufficient to address the specter of bulk investor purchases in Black and Brown communities, or to thwart the continual export of community wealth.
We need to rapidly counter bulk purchase with hefty innovations — in purchasing power, in loan product innovation, in land assembly and community equity generation — that leverage a renewed commitment from federal agencies like HUD, FHFA, Treasury, and the VA and Agriculture Departments to assuage the loss of this community housing stock.
To that end, we’ve identified several tools, products, and development innovations, still in the nascent, pilot phase, that begin to fill the landscape with new ideas and progress toward thwarting investor bulk purchases and increasing Black and Brown homeownership
First, several nonprofit and quasi-governmental organizations are intervening in the housing market to make their own bulk purchases of vacant or low-cost homes before losing housing stock. They’re also renovating homes and offering them to families at market valuation, overcoming any appraisal gaps, using a relatively modest private “subsidy”.
In Akron, the Knight Foundation and key city, corporate and civic partners are working with The Well CDC to intervene at scale in the housing market, by purchasing single family homes from absentee owners and using renovation and stewardship of properties to drive an inclusive regeneration.
In Cincinnati, The Port purchased almost 200 single family homes from an LA based firm that had struggled for years to pay its taxes and maintain its properties.
In Detroit, Rehabbed and Ready, seeded by the Detroit Land Bank and the Rocket Community Fund, renovates vacant homes and sells to homebuyers at the market value, thereby avoiding the appraisal gap through rehab subsidy. Over time, this program raises comps of homes sold in specific neighborhoods.
Not surprisingly, these efforts are relatively small. They suffer from a lack of capital to scale these tools and innovations fast, in time to prevent speculation and removal of homes from the available inventory for local family homebuyers. But they illustrate the potential role that key entities — community development corporations, land banks, public authorities, philanthropies — can play in responding to investor purchases.
Second, while private and nonprofit lending innovations in high-cost markets are developing mortgage products that share the appreciating home equity, aspiring homeowners in some low-cost markets need lenders willing to issue “small dollar” or “micro” mortgages (less than $100,000), as fewer and fewer banks are willing to participate. Lack of mortgage capital for small balance loans is as damaging to low-growth, high vacancy markets as is an appraisal gap, and filling the gap with accessible capital is beginning to turn the tide.
Some midwestern and rural providers are stepping in. Cleveland Housing Network, a recently chartered CDFI, now provides both small balance mortgages and home rehab loans. And, in late 2020, a micro-mortgage marketplace demonstration launched Louisville, KY and Southern Indiana led by Fahe, a CDFI, in partnership with the Housing Council of America, and Urban Institute. Of course, these small demonstrations are racing against time in the effort to keep these homes available to communities, and out of the hands of parasitic capital.
Third, a new concept — Community Equity — offers a larger scale reversal of the parasitic swooping in and exporting of a whole neighborhood’s wealth. In the context of large-scale community redevelopment and investment, a “community equity” approach would set-aside a portion of the community asset (and its long-term appreciating growth) for the benefit of community residents. Rather than exporting wealth, the community equity district redevelopment approach contemporaneously builds whole community wealth, resident wealth, and investment growth.
Several of us wrote about an emerging model of “community equity districts”, a tool to redress the racial wealth divide with homeownership and “community equity shares” that can effectively respond to this moment, aggregate the acquisition of land and existing homes, set-aside and grow community equity for residents, and create an accessible bridge to homeownership for black and brown families.[5] This approach could be an especially relevant model for the very low growth, high vacancy neighborhoods vulnerable to investor bulk purchases today.
This Community Equity District approach recognizes, at its core, that home value appreciation — the primary way that homeownership builds wealth for families — can occur only when the community’s whole value also rises. A focus on wealth-building through homeownership at scale cannot succeed as an isolated effort disconnected from other investments in a neighborhood. Rather, this value depends especially on the effective and transformational braiding of public, private, and philanthropic economic development investment in, or adjacent to, the residential community.
Namely, the approach would include synergistic and contemporaneous actions in each of the following three areas:
- The implementation of a local “district economic redevelopment” initiative, that facilitates planned, whole neighborhood, public-private growth. This entails creating a neighborhood “district,” comprised of a mix of uses that includes a broad suite of whole-neighborhood economic development and innovation, alongside hundreds of units of both newly built and revitalized high-quality owned homes for low- and moderate-income families. This kind of approach effectively comprises a neighborhood-wide land parcel assembly and economic reinvestment strategy necessary to uplift whole neighborhoods, integrate business attraction and growth, and grow community and family assets, including forming businesses and providing pathways to the innovation economy, job-creation and worker upskilling.Especially today, the effective implementation of a transformational community equity district will depend on a city’s coordinated and integrated deployment of federal infrastructure investment — in the roads, transit systems, environmental remediation, renewable energy installations, digital access, and land acquisition and redevelopment — to build anew and reposition the community’s assets. The community equity district effectively anchors and coordinates public funding for economic development around a holistic, place-based whole-district focus.
- The development and implementation of a “community equity” share in the neighborhood district, aligning resident and investor benefits. This new, ultimately liquid, security product — akin to shares of stock in the neighborhood— would enable all community residents, whether owners or renters, to participate in the financial upside and value appreciation of a whole neighborhood. This share would gain value over the life of the district economic redevelopment, uniquely aligning investor and community resident benefit, and ensuring that residents realize the benefits of the economic growth of their own neighborhood. For homeowners, this security value is in addition to the appreciating home equity of their home.The restricted community equity share mechanics are still in development. A likely approach the authors describe is to craft a restricted share that becomes available after a certain point in time. In this way it is an ultimately liquid “pledge” of, for example, tax increment financing, dedication of another tax source, or set-aside of the returns from tax incentivized or subsidized development. We think that the community equity pledge might also be a tool to stave off parasitic investment into Black and Brown neighborhoods.
- Implementation of a scaled lease-purchase model. A scaled, accessible homeownership strategy requires a credible, safe and market-specific approach to growing homeownership. In a post-industrial neighborhood, a scaled lease-purchase model provides the most impactful solution to the homeownership gap by offering a long-enough runway to enable financial qualification and provide time to rebuild resident belief in a neighborhood’s potential for upward revaluation. It also allows the community equity security to appreciate during the leasehold portion, so that the security value might be used toward a down payment.And, a lease-purchase model — at-scale in this Community Equity District — enables the partnering of a mission-driven community development entity or land bank with a sufficiently large capital source to, hopefully, counter outside investors’ bulk purchases. Ultimately, this model could take advantage of lower prices and vacancies fundamentally enabling an alternative bulk purchase purpose by a capable development team levering targeted capital.
How do we scale an alternative to bulk purchases that can lead to Black and Brown homeownership?
The progress we discuss above is noteworthy; over time it could transform underwriting, narrow appraisal gaps, purchase units of vacant inventory at scale, set-aside community equity, and begin to help Black and Brown families build and then transfer wealth to subsequent generations.
But it is clearly not enough. We need scaled capital and capable development and lease-purchase enterprises to effectively counter speculators with their own mission-focused bulk purchases and preserve thousands of homes available to purchase. We need flexible federal funding to effectively acquire and assemble land, build and renovate homes for resident purchases, and consider sufficient credit enhancement for an asset class that sits in between multifamily and single family. We need federal leadership, across the entire government, that recognizes the scope and severity of the challenges that investor bulk purchases now pose and responds accordingly.
To that end, we recommend that the PAVE Task Force quickly expand its work to include an urgent focus on Neighborhood Ownership. The tsunami of parasitic capital ripping through low-income neighborhoods needs to be quantified, labeled and countered with the full force of government and aligned stakeholders, at all levels and across all sectors. A focus on Neighborhood Ownership can provide the evidentiary base needed to assess the scale and impact of investor purchases and provide a detailed roadmap for how all levels of government and all sectors of society can mitigate and respond to this market phenomenon. To the greatest extent practicable, the Task Force should engage firms that have the ability to provide timely data on investor purchases and impacted neighborhoods, including market platforms like Redfin and Zillow as well as CDFIs like The Reinvestment fund. The Task Force should also engage the broad array of practitioners who are both witnessing and combatting this new surge in extractive capital and draw from the lessons and literature from the period following the Great Recession.
The Task Force should provide answers to questions that are more urgent with each passing month:
- How can federal tools be used to counter bulk purchases by outside investors at the same time we cultivate homeownership opportunities for Black and brown homeowners and communities? What capital sources are available, and to whom? How can they be deployed fast enough to make a difference? What additional powers and products do FHA and the GSEs need to affect market dynamics (e.g., FHA and the GSEs have specific credit enhancement products for multifamily units across multiple buildings in a single development, which could encompass a multi-building approach to single family rentals. But we understand that there is no current GSE lease-purchase product, and no FHA authority for a lease-purchase effort with more than 7 units.)
- To what extent can tax advantaged capital, like Opportunity Zones, be used to create public private investment partnerships that support community equity growth and enable single family home purchase solutions? What legislative reforms would be most relevant? Might the newly re-introduced Opportunity Zone Transparency, Extension, and Improvement Act be a vehicle to enable a mission-driven bulk purchase of single-family homes for ultimate conveyance to minority homebuyers? And can the Act’s proposed Community Dynamism fund seed community equity shares, as a group of us wrote about a few years ago,[6] to be repaid by the appreciating assets and return over time?
- What can localities do to respond to the tsunami of parasitic capital? What interventions used in the aftermath of the Great Recession (e.g., strategic disposition of publicly owned assets, amplified use of code enforcement, deterrent effect of tax policy) can be adapted today? How might the work of the National Community Stabilization Trust, and its “first look” REO and other tools, inform solutions today?
- Which enterprises have the capacities to simultaneously assemble land, renovate large parcels of frequently vacant single-family homes, and manage the lease to purchase process for thousands of aspiring homeowners? How can the country build a community of practice that ensures that growth in homeownership is accomplished alongside economic development tools, ideally braided with infrastructure sources, so that values are more likely to rise over time?
The housing market in the United States was broken before the COVID-19 pandemic. The speed and scale of investor purchases happening across the country could exacerbate the affordability crisis and change the fabric of neighborhoods. Now is a time for clarity of focus and seriousness of purpose around a new vision of Community Equity. Our work has only just begun.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Lori Bamberger is the Managing Director of ABK City Advisors, an inclusive economic development firm.
[1] Sixty percent of Black household family net worth is comprised of home equity; compared with 43 percent of white household family net worth. Jung Hyun Choi and Alanna McCargo, “Closing the Gaps: Building Black Wealth through Homeownership,” Urban Institute Housing Policy Center, November/December 2020, p. 2.
[2] Sophie Kasakove, “Why the Road is getting even rockier for first-time homebuyers,” New York Times, April 22, 2022.
[3] Konrad Putzier,” That Suburban Home Buyer Could be a Foreign Government,” Wall Street Journal, April 13, 2021.
[4] Bhutta, Neil, and Andrew C. Chang, Lisa J. Dettling, and Joanne W. Hsu. “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances (SCF).” Federal Reserve. September 2020.
[5] Lori Bamberger, Nadia Sesay, Roberta Achtenberg, and Bruce Katz, “Redressing the Racial Wealth Divide through Homeownership and Community Equity,” Drexel Nowak Metro Finance Lab, November 2021.
https://drexel.edu/nowak-lab/publications/reports/Redressing%20the%20Racial%20Wealth%20Divide%20through%20Homeownership%20and%20Community%20Equity/
[6] Kofi Bonner, Bruce Katz, Roberta Achtenberg, Lori Bamberger, Kate Gasparro, “Growing Wealth in Opportunity Zones: A proposal for Community Equity Trusts,” Drexel Nowak Metro Finance Lab, July 2020, p. 9.
https://drexel.edu/nowak-lab/publications/reports/Growing%20Wealth%20in%20Opportunity%20Zones%20A%20Proposal%20for%20Community%20Equity%20Trusts/