From TikTok videos claiming that institutional investors are buying homes en masse at inflated prices and forcing people to rent until they die, to a Medium article claiming that 44% of all single-family home purchases last year were made from private equity firms, Wall Street has emerged as a villain in public discourse. The narrative persists, even as economists and analysts have pointed out that widespread claims are entirely incorrect.
Who is right? It’s hard to blame institutional investors like Blackstone, BlackRock, and Invitation Homes for the national housing crisis; most estimates place ownership at less than 5% of single-family rentals and less than 1% of all single-family homes. But desirable markets like Atlanta, Dallas and Charlotte tell a different story: Wall Street owns more than 4% of single-family homes in Atlanta, for example, and that could be a factor in rising real estate costs.
However, hedge funds, corporations, and asset management firms are often blamed for unaffordable housing by everyday Americans; Home prices and rents rose dramatically during the pandemic-fueled housing boom, mortgage rates more than doubled shortly after, and so many people are living in housing poverty. Politicians have jumped on the bandwagon to blame Wall Street; Democrats in Congress introduced a bill late last year that would ban hedge funds from owning single-family homes in the country.
“You have created a situation where ordinary Americans are bidding not against other families, but against American billionaires for these homes,” said Sen. Jeff Merkley, who introduced the bill along with Rep. Adam Smith. New York Times. “And she’s driving up rents and she’s driving up home prices.”
Wall Street’s share of the multifamily rental market is much higher and goes back much further. But in the aftermath of the Great Financial Crisis, institutional investors entered the single-family rental sector and, because so many homes went into foreclosure, they quickly scaled up, buying up cheap homes in bulk. While benefiting enormously, institutional operators have also prevented the real estate market from bottoming out. Interestingly, their existing real estate portfolios still reflect that entry into the market more than a decade ago.
“They mapped almost one by one the metro areas that experienced the highest rates of foreclosures and the deepest cuts in home prices,” said Ermengarde Jabir, senior economist at Moody’s Analytics. Fortuneciting Phoenix as an example.
The truth about why housing has become so unaffordable is much more nuanced and dates back more than a century.
Wall Street doubles, position matters
In January, Blackstone announced its $3.8 billion acquisition of Tricon Residential, a deal that will give it the third-largest single-family portfolio across the country, after Progress Residential and Invitation Homes, according to Parcl Labs, an investment firm real estate analysis. Collectively, these three institutional buyers would own more than 200,000 single-family homes across the country. But institutional investments are not distributed equally, Parcl Labs co-founder Jason Lewris explained Fortune.
“They’ve entered exactly the same markets, and almost half of the national portfolio is in six U.S. real estate markets,” he said: Tampa, Charlotte, Atlanta, Houston, Dallas and Phoenix. “If you look at the ownership stake within these markets, it’s 20 times or higher,” compared to their domestic holdings.
To make matters worse, they are not evenly distributed within these markets. “In almost every case in these six major markets, they’re concentrated in just a handful of zip codes … now you’re looking at a situation where they own more than one in 10 homes,” Lewris said.
Think of Atlanta, the real estate market with the largest institutional presence, where companies own 4.4% of single-family homes. Investors have a substantial impact on the market, and their presence in Atlanta and other highly concentrated metropolises can pose a burden to the average buyer. “They have special financial vehicles and when they buy in a market, they really buy in a market, so they are a large share of all trades,” Lewris said.
The median home value in Atlanta is $387,216, nearly 13% higher than the median home value nationwide. Meanwhile, the average rent for all one-bedrooms and all property types in the city is 5% higher than the national average. From an analysis of institutional investors, Jabir and his colleagues found that rents for single-family rental properties are higher in metropolitan areas where institutional landlords operate.
Institutional investors also are buying homes where people want to live, said Taylor Shelton, a geographer and assistant professor at Georgia State University. Buying a home in rural Mississippi is a different ball game than the Atlanta metro area, where, as previously mentioned, institutional buyers are largely found. Research by Shelton and his colleagues also suggests that there are a few places where institutional investment is concentrated, with Atlanta being the most prominent. Institutional operators seek to invest in places with certain distinctive characteristics, such as a lack of strong tenant protections and a growing demand for housing.
The Atlanta metro area’s population increased by nearly 67,000 people between April 2022 and the same month last year to more than five million people; the population of the city of Atlanta grew by more than 14,000 people, almost three times more than the previous year, reaching more than 500,000 people. With a growing population comes a greater demand for homes.
“These companies are all trying to capture some corner of the market and really exert significant market power,” Shelton said. “It rarely happens in a purely monopolistic sense, but in a kind of oligopolism.”
Institutional firms have algorithmic buying strategies; they can purchase homes as soon as they come on the market and make an all-cash offer upon request, Shelton explained. “Institutional investors are not responsible for all aspects of the housing crisis equally everywhere,” but they play a role in Atlanta and, for starters, in the Sunbelt, he said.
How did housing get so expensive?
For starters, the country simply doesn’t have enough homes to house its growing population. There are different estimates of the housing shortage, although it is generally understood as a deficit of between one million and more than six million homes. According to Tobias Peter, senior fellow and co-director of the American Enterprise Institute’s housing center, the government has promoted housing demand through lax underwriting and down payment programs in the face of limited supply.
Meanwhile, building houses is more difficult. In the 1920s, Herbert Hoover, as secretary of commerce before his presidency, created a model zoning law that was implemented in individual states and localities. Our housing shortage developed from there and got worse in the years that followed, Peter explained, because they “prevented the market from building more housing.”
Zoning laws, along with a change in American mentality and the environmental movement of the 1970s, complicated development to the point that what little housing does get built is mostly expensive housing that can offset high costs and regulations. A central part is missing, and it’s the result of “a self-inflicted wound,” Peter said. In his opinion, especially for politicians, “Wall Street is always a convenient scapegoat.” The real problem, he said, is the failure of government regulation that has led to a market that isn’t building enough housing. For Wall Street firms, housing is a good investment, especially when there is widespread shortage, Peter said.
“Housing was unaffordable long before these Wall Street firms entered the market,” he said. So if we built more housing, homes would be more affordable and institutional operators would not have the market power they currently have.
Institutional investors aren’t the only problem, and we can’t simply say that institutional investors are the reason Americans can’t afford single-family homes, Moody’s Jabir said; highlighted the disparity between home price appreciation and wage growth over the past 30 years. “The ratio of median house price to median household income in the 1980s was half what it is now,” Jabir said, and “since the Great Financial Crisis, construction has collapsed.”
“It’s a confluence of factors where the institutional ownership component is part of the problem, but it’s certainly not the only problem,” Jabir continued. “Do we go back to where we went wrong on the path to the American dream?”