Rent prices are starting to stabilize, according to recent data from Redfin. But even with this positive development, housing costs remain a prime concern, leading politicians across the spectrum to suggest varying proposed solutions. Some seek to address the underlying causes behind rising costs, while others prefer to paint institutional investors as convenient villains.
Unfortunately for consumers, such a focus only distracts from real solutions, as institutional investors aren’t driving the housing crisis.
Housing accessibility and affordability look different today than prior generations. Over the past decade, median rents have risen, especially in dense urban areas. Yet despite these increases, the affordability of renting still outpaces that of home ownership.
As more Americans forego homeownership for financial reasons, lawmakers have been looking around for someone to blame. Increasingly, they’ve landed on institutional investors.
At the state level, New Hampshire serves as a case study for both kinds of approaches to housing costs. This year, New Hampshire lawmakers introduced House Bill 625, which would prohibit corporations from buying single-family homes, although it was later amended to establish a legislative committee, “to study the merits of and procedures and processes for prohibiting or limiting corporations from purchasing single-family homes.”
Additionally, the Federal Trade Commission (FTC) sought public comment on the impact of “mega” single-family rental investors—companies that own over 1,000 rental homes. While landlords and large corporations make appealing scapegoats, often, the easiest target isn’t the right one.
Despite momentum at both the federal and state levels, early evidence suggests that institutional investors are responding to consumer demand and helping stabilize a tough housing market.
There’s no question that institutional investors are reshaping parts of the housing market. Research from the Philadelphia Federal Reserve found they were responsible for much of the decline in homeownership rates. A study from NYU’s Stern School of Business likewise found that institutional investors could drive up home prices and reduce the availability of homes for purchase.
But in the rental market, which includes an increasing number of Americans, the effects are often positive. The Philadelphia Fed found that institutional investors reduced unemployment by boosting construction labor demand and lowering vacancy rates. The NYU researcher similarly found that investors expanded rental housing supply and, crucially, helped reduce rental prices.
While homeowners still make up about two-thirds of U.S. households, renters, who tend to have lower incomes and less budget flexibility, are an increasingly important group to support. For them, institutional investors’ role in keeping rents in check is a welcome relief.
Rather than targeting investors, lawmakers would do better to tackle the true drivers of high housing costs, which affect owners and renters alike.
Research from the Leeds School of Business at the University of Colorado found that residential zoning impacts the housing market. Specifically, minimum lot size requirements raise costs. According to this paper, doubling the lot size requirements would increase home sale prices by 14 percent and increase rents by 9 percent.
Zoning rules, such as these, distort the housing market and cause a mismatch of supply and demand that leads to higher costs across the board. Eliminating such regulations would be more effective than pitting owners and renters against each other.
New Hampshire, in addition to the harmful institutional investor legislation, has also introduced Senate Bill 84, which seeks to set maximum lot sizes. While still a market distortion, the goal of this bill is to counteract more discriminatory mandates such as minimum lots, which tend to discriminate against low-income individuals and renters.
Millennials have been blamed for their low homeownership rates for everything from the 2008 housing crash to spending too much on avocado toast. The truth is more complex, involving a mix of economic and social factors.
What lawmakers shouldn’t do is add to the confusion by blaming the housing investors who are providing needed rental options for a growing population. Instead, they should focus on the real barriers to affordability, like restrictive zoning laws and letting the market respond to consumer signals.
Getting serious about housing costs means addressing supply, not scapegoating those responding to demand.
