Every few years a new proposal lands in the housing zeitgeist: What if corporations weren’t allowed to buy single-family homes? Last month, the idea went from online forums and city council meetings to national news headlines. A new housing proposal was introduced that would ban large institutional investors from buying additional single-family properties with the intent of making homes more accessible to everyday buyers.
In theory, the concept sounds nice. Less corporate buying means more inventory for traditional buyers. Maybe prices will come down. Competition will relax.
Except, of course, housing policy is never that simple.
Breaking Down the Proposal
For this proposal to work, one big assumption needs to be true: that large institutional investors are taking houses from everyday buyers.
Sure, that has been reality in certain markets. Over the last decade, institutional investors descended upon the single-family rental market in a big way, buying homes by the thousands. They made their mark in Sun Belt cities. Places with growing populations and new construction where they could scale aggressively.
First-time buyers in those markets who are now competing for their own home may rightly feel like David against Goliath. It’s easy to understand how this narrative gained steam.
But there are many forces at work in any housing market.
Investors Are Mostly…Not Institutional Investors
The fact investors who own just a handful of homes outnumber giant Wall Street investors is often lost in these conversations.
While institutional investors may dominate the headlines, the reality is most U.S. single-family rentals are owned by small investors. Individuals who own one, two, maybe five homes. Maybe they’re local or they’re retirees just looking to supplement income. Maybe they kept their family home after selling to rent instead.
Wall Street-style investors have gotten huge amounts of attention for their activities over the past decade. But in most markets they still represent only a fraction of total investor ownership.
That’s an important distinction. Once you start writing policies to target “corporations” you can easily end up with a policy that targets small investors.
And it’s much more difficult to predict how that legislation will ripple through the market.
What Would Change If Big Buyers Pulled Back?
Let’s say big institutional investors were banned from buying additional single-family homes. What happens?
Competitive pressure would decrease in markets with lots of institutional activity.
Assuming institutions aren’t replacing themselves (we’ll get to new construction later), there would be less competition from large bidders. That could help relax pricing, at least for homes in the more competitive price ranges.
Little would change in markets without institutional investors.
Lots of markets don’t have an institutional problem. Pricing in those markets is being driven by other factors like population growth, interest rates, and inventory.
New home construction would probably decrease.
If billions of dollars in institutional capital suddenly dry up or are redistributed to other markets, we won’t see as many build-to-rent communities popping up. That would limit supply, potentially counteracting any near-term price relief.
Few policies get to the heart of housing supply like this one. But as we’ve seen with other policies that affect housing investment, it’s hard to know exactly what will happen until after the fact.
Institutional Investors Aren’t Geographically Distributed Equally
Another thing to consider is where institutional investors have focused their buying efforts. Institutional ownership is heavily concentrated in certain markets, while remaining negligible in others.
Because of these variations in institutional buying, any national policy will have very different effects from market to market. That means a national policy would likely produce very different outcomes depending on the region. Some areas might see noticeable changes in competition. Others might barely notice a difference.
New housing construction could alter the equation. But without institutional investors, who buys the homes being built? And where will they build them?
Even when the policy coversation is national, housing is inherently local.
What the Proposal Won’t Do
If you’re reading about this proposal in the news, you might not see this detail: These proposals generally only apply to future purchases. Existing portfolios wouldn’t be touched.
The Big Buy wouldn’t suddenly be forced to unload their portfolios. They’ll continue buying if they want to, just at a hopefully diminished scale.
Any impact on inventory would happen over time, not overnight.
And since markets take years to show these types of shifts, you probably won’t see any effect immediately.
Welcome to housing policy: actions in 2024 may not have visible impacts until 2026 or beyond.
The Inevitable Unintended Consequences
All housing policy runs the risk of unintended consequences. If you pass a law that limits corporate buying, what’s to stop smaller investors from stepping in and filling the void? Or being swept up in legislation intended to target the big guys?
And what about the rental side of the equation? Institutional investors aren’t creating rental supply, they’re converting existing owner-occupied homes into rentals. If fewer of those transactions happen, we could see rental supply tighten up, putting upward pressure on rents.
Between supply, pricing, and public policy there’s a constant tug-of-war. Pull too hard on one side and the others react.
What Really Drives Home Prices?
A lot of times these conversations come up in moments of frustration around home prices. Annual price appreciation hits 20%, and everyone wants someone or something to blame.
Instead of trying to point fingers at who “caused” prices to rise, we need policies that focus on creating conditions for homebuyers. That means tackling out-of-control construction costs, reforming our zoning laws, and building more homes.
Absent those fixes, investors of all shapes and sizes will continue to buy up inventory while millions of would-be buyers are left on the sidelines.
Where Does That Leave Homeowners?
Unless you live in one of the previously mentioned hotspots where institutions have been very active, a ban on new corporate purchases likely isn’t going to affect you.
Housing markets and public policy both tend to move slowly. It will take time to even introduce and approve this legislation, and even longer to see the effects play out.
What could change in the meantime is how we view homeownership as a society. We’ve flirted with treating homes as financial instruments for decades, and it’s overdue that we start treating them like infrastructure.
That one piece could have enormous implications on future housing policy, mortgage lending standards, and development incentives.
Households Make Up the Housing Market
When we talk about who’s buying homes, it’s important to remember that one sector of buyers doesn’t act independently of the rest of the market.
Homeownership is a team sport. Here are all the players:
- First-time home buyers
- Upgrade families
- Downsizers
- Small investors
- Local builders
- Regional Operators
- Large institutional funds
It’s incredibly difficult to introduce legislation that targets one group without affecting another.
And yet, that’s the discussion we should be having. Not whether institutions should be banned from buying homes. But how can we balance all these factors in a way that works for both local and national markets.