Vanessa Brown Calder
In a recent Senate Antitrust Subcommittee hearing on Competition and Consumer Rights in the Housing Market, participants argued that institutional investors negatively affect housing affordability. One legislator and witness claimed that investors “represent a sizable portion of [housing] sales” owning “a significant share of single‐family homes” and the result is declining affordability.
The concern is that institutional investors buy up the housing stock, outbidding non‐investors who have access to fewer resources. However, this concern is misplaced.
The US housing market is one of the largest markets in the world, so, unsurprisingly, investors have some presence in it. But investor purchases occupy a small share of the market. The National Rental Home Council (NRHC) estimates that large investors made 0.74 percent of single‐family home purchases in 2021, so someone other than a large investor purchased 99.26 percent of single‐family homes. Recent Brookings Institution research estimates that large institutional investors own around 3 percent of the single‐family rental stock.
Moreover, despite increased media attention, investors are not a new, post‐pandemic phenomenon. Vice President Laurie Goodman at the Urban Institute describes how investors sprung up after the 2008 financial crisis and put a floor under the distressed housing market. From this perspective, they filled a void and served a valuable purpose in the rocky days and years following the crisis.
As Goodman notes in subsequent work, large institutional investors typically buy homes in need of repair, and for various reasons investors can make these repairs more efficiently than owner‐occupiers. Investors compete with other professional house flippers to provide this service and upgrade the housing stock.
In addition to upgrading the housing stock, research indicates that investor participation produces other benefits. A recent paper on The Impact of Institutional Investors on Homeownership and Neighborhood Access finds that investors “reduced supply of owner‐occupancy homes” but also “increased the supply of homes available for renter occupancy by 69%,” and this “allowed the financially constrained to move into neighborhoods that previously had few rental units.”
In other words, investors bought housing units from the owner‐occupied market and rented them out, which increased opportunity for renters who could otherwise not afford to live in predominantly owner‐occupied neighborhoods. At a minimum, the effects of investors on the market are varied.
Perhaps most importantly, the cited negative effects of institutional investors in the current environment are a symptom of the broader issue of inelastic supply. In a world with abundant housing, regular folks would not need to go head‐to‐head with investors in bidding wars because there would be plenty of housing to go around. In fact, reporting indicates that investors focus purchases on markets with strong job growth and limited housing supply. Therefore, the solution is to radically overhaul the local regulatory landscape in which housing purchases exist.
Institutional investors may be convenient boogeymen, but the reality is that they serve a market purpose. Moreover, housing problems run much deeper than critics care to admit. Even if—through some unlikely and ill‐advised action—policymakers were able to eliminate institutional investors’ market participation, housing markets across the country would still be subject to a plethora of federal, state, and local policies that produce high‐cost housing. Owners and renters would still struggle to cope, in some cases more than before. This would be especially unfortunate for renters looking for homes in neighborhoods that otherwise do not provide rental options and owner‐occupiers that can no longer sell to the highest bidder.