Housing markets in the United States today are rapidly changing. We are bombarded in the news about corporations purchasing homes across sunbelt metros like Atlanta, Charlotte, and Phoenix. Reporting and research highlight the challenges faced by renters in private equity-backed properties, from maintenance requests gone unfulfilled to evictions as a core part of a fee-based business model. During the first two years of the Covid-19 pandemic, homebuyers fought over a limited supply of for-sale housing, often finding out that they were beat by all-cash corporate offers. Now we wonder: will these homes ever come back on the market, and what happens to the tenants who live in these new rental properties?
To shed new light on these intersecting disruptions facing housing markets in America today, the Nowak Metro Finance Lab and Accelerator for America published Averting a Lost Decade: Rethinking an Inclusive Recovery for Disadvantaged Neighborhoods. Now, the Nowak Metro Finance Lab and Reinvestment Fund have teamed up to analyze changing housing markets in three very different cities: Philadelphia, PA; Jacksonville, FL; and Richmond, VA. For decades, Reinvestment Fund has implemented their Market Value Analyses (MVA) in cities across the US to understand the diverse tapestry that is America’s local housing markets. The MVA is a local stakeholder-informed, data-based, field-validated, examination of a city or region’s residential real estate market. Completed principally with administrative data reflective of the housing market (e.g., home sales, building permitting, new construction, vacant properties, subsidized rentals, etc.), the MVA is used by localities across the country to make data-based investment and programmatic decisions.
In our new report co-published with Accelerator for America, Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from 3 Cities, we overlay a new analysis of investor purchases in different MVA submarkets. By doing so, striking patterns of parasitic purchasing comes into view. In the last 30 years, the proportion of the rental market owned by sole proprietors has approximately halved, going from 77% to 41% of all rental units. At the local level, the parts of Jacksonville where investors were most active have seen greater declines in the number of homeowners and the homeownership rate. Investor purchases from owner-occupants are often concentrated in areas with below average but not the lowest homeownership rates, where both prospective buyers and current owners have struggled to access mortgage financing. Investor purchases of single-family homes are particularly prevalent in neighborhoods with low sale prices and high vacancy, elevated mortgage denial rates, and higher shares of residents who are Black or Hispanic. In the most distressed neighborhoods in Philadelphia, Richmond, and Jacksonville, more than 1 in 5 homes sold go from homeowners to investors.
We believe that investor purchases of homes are being driven by a series of market dynamics that include structural imbalances in the supply of and demand for rental housing that make investments in single family housing lucrative relative to other investments. It is also driven by technological advances that facilitate the targeting of particular neighborhoods, even for investors located in other cities. These dynamics have led to investor purchases making up an ever-increasing share of the total home sales in a given city. Investor purchases of single-family homes in 2020-2021 ranged from 19.3% of sales in Richmond, VA to about a quarter of all sales in Philadelphia and Jacksonville/Duval County FL. The share of homes that sold from a homeowner to an investor ranged from 11.5% in Jacksonville to 14.9% in Philadelphia.
These investors take many different forms. The rise of the Limited Liability Company since the 1990 means that landlords are increasingly taking on a corporate form. These LLC landlords need not be big institutional landlords, as it is now standard advice for all landlords, large and small, to incorporate an LLC. Yet many of the new entrants into the housing market are large, institutional landlords, like private equity firms and hedge funds. Corporate landlords and institutional investors pose differing, but overlapping, risks to the housing market. Corporate landlords are universally difficult to track down, as the true beneficiaries of LLCs are often shielded behind non-public incorporation documents. Institutional investors often have business practices that differ sharply from mom-and-pop landlords of the past, some of which substantially harm tenants. We don’t wish to malign all private investors. In many industrial cities, flippers play an important role in revitalizing America’s aging housing stock; landlords are a necessary part of any rental housing market. Yet we are alarmed by the changes we are seeing in cities like Jacksonville, Philadelphia, and Richmond, and we write so that cities, states, and the federal government can act now to address the challenges we see.
A Quartet of Challenges Surrounding Investor Purchases
We see four clear challenges posed by the rise of investor purchases, centered on current homebuyers, future homebuyers, homeowners, and tenants. In our paper, we review the literature and data to demonstrate why these challenges are top-of-mind. Here, we sketch the challenges to highlight our alarm given the changing housing market.
- Regarding current homebuyers, corporate investors have an edge because they offer quick, cash transactions. As some corporate investors explicitly target lower-priced homes that need repairs, many homebuyers may be limited in their ability to compete with institutional buyers who are willing to purchase above the appraised value of a property. At the same time, so-called “IBuyers” have been rising in prominence, with Zillow and others offering homeowners cash for their homes before they even make it to the market.
- Regarding future homebuyers, once in the hands of an institutional owner, it is unclear whether a house will return to the open market again. Investors may instead hold property for a very long time, or choose to bundle their portfolios and sell to other institutional owners. This raises concerns that neighborhoods may fundamentally change from ownership neighborhoods to renter neighborhoods to the detriment of the once owners, and that those neighborhoods may be unable to return to a state of individual ownership.
- For current homeowners, the business model of a house flipper is to buy low and sell high. Pernicious flippers, wholesale buyers, and institutional homebuyers may target low-information homeowners with offers of quick cash without inspections, or even requiring them to list their properties on the open market. This sort of information asymmetry is bad for owners, who may be leaving money on the table. Over time, neighborhood prices may appreciate, but in a neighborhood owned by corporate landlords, little of that appreciation may accrue to a city’s actual residents.
- For tenants, research shows that corporate and institutional landlords have business practices adverse to the tenants’ interests. Many institutional owners have made evictions part of their business practice, using the filing of an eviction as a tool to extract higher fees from tenants. Using advanced computerized models, large owners try to maximize profit from their tenants. Shielded from liability, corporate landlords may not maintain their properties. Reporting from the media clearly shows that many institutional landlords are abdicating their responsibilities to their tenants and their properties.
A Suite of Solutions
In order to address the four challenges outlined above, our paper offers 19 potential solutions that the federal government, state governments, and local governments should investigate and implement to stem the tide of parasitic capital entering housing markets. Among our solutions, we first call on the federal government to create a new Federalist Task Force on the New Housing Market with high level representatives from federal, state and local governments. On the federal level, the Biden Administration should create an inter-agency, inter-governmental task force on the rising threats to homeowners and renters. Building off of the work of the Interagency Task Force on Property Appraisal and Valuation Equity, the focus on the New Housing Market could include representatives across a set of federal agencies — HUD, FHFA, FHA, SEC, among others — as well as the GSEs. A process should be established to include representatives from state and local governments that are leading the response to this market dynamic. The Task Force, once organized, can reach out to other critical stakeholders and experts as appropriate, and report its findings and recommendations within a specified time period.
Before the 1990s, LLCs were rare. They are fast becoming the norm for landlords and investor purchases across housing markets in America. Recognizing the potential use of LLCs for money laundering, the Financial Crimes Enforcement Network (FinCEN) in the US Treasury has begun tracking high-priced real estate transactions that occur with shell companies. But states also have a role to play. States regulate the creation of LLCs, and thus, should pass laws requiring the disclosure of beneficial owners for LLCs. The District of Columbia has laws on the books requiring LLCs with rental property interests to disclose beneficial owners, and other states should follow suit. The murky ownership of corporate rentals makes it difficult for tenants and local governments alike to identify who is responsible for fixing problems in a property, and states have the power to bring transparency to current ownership.
Local governments have always had a role to play in the public safety, health and welfare of their residents. With substantially rising rents in 2021 following two years of housing market pandemonium during the pandemic, cities must take steps to ensure that renters have needed protections. To the extent that they are empowered to do so by their state governments, local governments should also pass broad tenant protections, such as just cause eviction and a right to counsel for eviction. Local governments can also create rental registries, keeping track of what units are for rent, the type of owners who own those rentals, and providing contact information for tenants in those registered rentals; cities should take care to make those registries publicly accessible. Cities can also undertake proactive code enforcement and active and appropriate inspections to ensure that all rental properties are in good repair for the tenants who live there. Additionally, local governments and their partners can help homebuyers be more competitive through down payment assistance programs and obtaining portfolios of single-family homes from investors for re-sale to owner-occupants.
Our Next Steps
Our report is part of our ongoing work at the Nowak Metro Finance Lab and Accelerator for America for an inclusive recovery. Over the next year, we are going to continue to publish data-driven reports on the New Housing Market, and highlighting strategies the federal government, states, and cities can implement to tackle this new paradigm.
In order to move our work forward, we welcome collaboration with organizations that are currently working on-the-ground to implement solutions across the four sets of problems we outlined above. If your organization is working to address the flow of parasitic capital flowing into housing markets, and its impacts on homeowners, homebuyers, and tenants, please reach out.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Ben Preis is a Research Fellow with the Nowak Lab. Ira Goldstein is President of Policy Solutions at Reinvestment Fund. Emily Dowdall is Policy Director of the Policy Solutions group at Reinvestment Fund.