The shortage of U.S. single-family homes is a multifaceted issue requiring a comprehensive and collaborative approach.
Stop predatory investing and end hedge fund control of American homes!
Sounds like a righteous cause, doesn't it? Stopping large institutional investors from swooping in and buying up all the single-family home inventory, pushing out homeowners in favor of renters, while would-be homeowners cannot compete with
an all-cash purchase, resulting in the soaring prices of single-family homes.
That's the issue Senate bills S.2224 and S.3673 as well as House bill H.R.6608 try to fix. Unfortunately, they don't address the actual issue and instead blame easy targets, Wall Street, and its accredited investor class. Although the target is the large institutional investors, in the text, these bills can trickle down to the mom-and-pop investors who are just trying to run small family businesses with 50 or more homes.
Let's start with the myth that all the inventory of single-family homes are being gobbled up by institutional investors. According to a Freddie Mac chart published in a December IO, 2023, Housing Wire article by Logan Mohtashami, those who bought more than100 homes in a 12-month period did not even reach a 2.5% market share going back to the year 2000. In fact, through second quarter 2023, only 1,959 homes were purchased by investors that own more than 1,000 homes. That is 0.03% of the market. The highest percentage of market share, at 19.6%, went to investors who own between one and nine properties. The vast majority of those folks are not cash buyers and would have to compete with would-be homeowners to get loans.
SCARCITY OF SIN6LE·FAMILY HOMES
There are several reasons for the high prices. No. I is supply and demand, but it's not because investors are buying up all the inventory. Builders have not been keeping up with new household formations.
Let's take a deeper dive as to why.
Zoning Regulations and Land Use Policies. One significant factor contributing to the scarcity of single-family homes is the web of zoning regulations and land-use policies. Many municipalities have implemented restrictive zoning codes that prioritize high-density developments or commercial spaces, limiting the availability of land for single-family home construction. Stringent regulations often create barriers, making it challenging for developers to secure permits for new single-family housing projects.
The NIMBYism (not in my backyard) Mentality. Prevalent in many communities across the United States, NIMBYism poses a substantial hurdle to the construction of single-family homes. Residents often resist new developments in their neighborhoods, fearing changes in property values, increased traffic, and strain on local resources. This resistance, though well-intentioned, contributes to the scarcity of available land and stifles efforts to address the growing demand for single-family homes.
Rising Construction Costs. The escalating costs of construction materials and labor play a crucial role in hindering the construction of single-family homes. From lumber and steel to skilled labor, the expense of building a home has risen significantly, causing developers to reconsider or scale back their projects. The affordability crisis has made it difficult for many families to enter the housing market, exacerbating the shortage.
Infrastructure Challenges. Insufficient infrastructure, such as roads, utilities, and public services, can impede the construction of new single-family homes. Developing infrastructure to support residential areas is a costly and time-consuming process, deterring developers from investing in regions lacking the necessary amenities. Governments at various levels need to prioritize infrastructure development to encourage and accommodate the construction of single-family homes.
Strong Demand Outpacing Supply. One of the primary drivers of the shortage of existing single-family homes for sale is the robust demand from homebuyers. Favorable economic conditions, historically low interest rates, and a growing population have combined to create a surge in demand for housing from 2017 through 2022. Unfortunately, the supply of existing single-family homes has struggled to keep pace, resulting in a highly competitive market with limited inventory.
Demographic shifts, such as the aging baby boomer population and millennials entering the homebuying market, have further intensified the demand for single-family homes. Baby boomers are often reluctant to sell their homes, contributing to a scarcity of available properties. Meanwhile, millennials, the largest generation in the United States, are actively seeking homeownership, putting additional pressure on the limited supply of existing single-family homes.
Homeowners Opting to Stay Put. Economic uncertainty, coupled with high interest rates, has led many existing homeowners to choose remodeling or renovating their current homes instead of selling. This trend, known as "aging in place," has resulted in fewer existing single-family homes being listed for sale, as homeowners opt to improve their current living spaces rather than navigating the challenging process of selling and buying a new property.
Low Housing Turnover. The historical trend of homeowners moving less frequently than in previous decades has contributed to a lower housing turnover rate. Homeowners are increasingly choosing to stay in their homes for more extended periods, reducing the number of existing single-family homes available for sale. This trend is influenced by various factors already mentioned.
For comparison, 20 years ago the average home turnover was seven years; starting around 2008, it began increasing to a little over I0 years.
THE RISE IN SINGLE·FAMILY HOME RENTALS OVER OWNERSHIP
Let's discuss the elephant in the room: If there was not a demand for rental houses, investors would not buy them, especially now at historically high price to rental ratios. The price-to-rent ratio in the United States measures the nominal house price index divided by the housing rent price index.
This shift in preference reflects evolving attitudes toward housing, shaped by a combination of economic, lifestyle, and demographic factors.
One of the primary drivers behind the surge in single-family home rentals is the desire for financial flexibility. Renting allows individuals to avoid the significant upfront costs associated with purchasing a home, such as a down payment, closing costs, and ongoing maintenance expenses. Renters can allocate their financial resources more freely, adapting to changing circumstances without being tied down by the financial commitments that come with homeownership.
Demographic shifts, particularly among younger generations, play a crucial role in the rising preference for renting single-family homes. Millennials, in particular, value mobility, career flexibility, and the ability to explore different living arrangements. As this generation postpones major life milestones such as marriage and starting a family, the appeal of renting over owning becomes more pronounced, aligning with their dynamic and fast-paced lifestyles.
Economic uncertainties, exacerbated by events like the 2008 financial crisis and the recent global pandemic, have left a lasting impact on individuals' perceptions of financial security. Some people are wary of committing to a mortgage, preferring the flexibility and reduced financial risk that comes with renting. The ability to adapt to economic fluctuations without being tethered to a long-term mortgage commitment is an attractive prospect for those cautious about the housing market's unpredictability.
Renting single-family homes provides individuals with the opportunity to live in desirable neighborhoods without the substantial financial investment required for homeownership. In cities with soaring real estate prices, renting allows residents to enjoy the amenities and lifestyle of sought-after areas without the burden of a mortgage. This increased flexibility aligns with the modern preference for experiences over ownership.
MULTIFACETED APPROACH NEEDED
The shortage of single-family homes in the United States is a multifaceted issue that requires a comprehensive and collaborative approach. Addressing zoning regulations, tackling NIMBYism, and mitigating economic uncertainties are crucial steps in fostering an environment conducive to the construction of single family homes. By overcoming these challenges, policymakers, developers, and communities can work together to ensure there is an adequate supply of housing to meet the needs of new families and promote sustainable growth in the housing market.
What is misguided about these bills is if the government forced institutional investors to sell every investment home they owned, it would only add 700,000 units of inventory-and we are 6 million homes behind new household formations in this country. Forcing sales to homeowners will not address underlying affordable housing or inventory issues for the following reason: The immediate impact of the bills is to forcibly displace less financially secure renting tenants in favor of prospective homeowners.
Even an immediate influx of institutional investment homes on the market will only temporarily impact owned housing supply/demand. It does nothing to close the real gap in the amount of sustained new construction needed.
The way to fix this is not by limiting or controlling who can have what; only by creating a greater supply of single-family homes will this problem be solved.
In 2008, the housing bubble burst because anyone with a pulse could qualify for a loan on a home. That problem has been fixed. It is now time to address the under-supply of new homes, but not by artificially limiting the competition of who can buy homes. Regarding the Senate and House bills currently pending: They are not likely to go any further, based on conversations with staffers of senators serving on the Finance and the Banking, Housing, and Urban Affairs committees.
Rest assured, AAPL is constantly monitoring all potential legislation that affects the private lending industry. We work diligently to pass that information along to you and to speak on your behalf to the stakeholders at the local, state, and federal levels.
By Bill Fairman
Private Lender, The Official Magazine of AAPL
Spring 2024, p. 6-9