For everyone who loves a good Christmas movie, it's almost certain that they've seen It's a Wonderful Life, and most likely more than once. For those of you who haven't seen this classic, the film portrays the struggles of a small-time building and loan banker, George Bailey, against the town's richest and most unscrupulous businessman, Mr. Potter. One scene in the movie shows George welcoming a family into a new home that the Bailey Building and Loan has financed. When someone asks the father of the family if he is renting this new home, the man replies "Rent? I own the house! No more do we live like pigs in Potter's Field (Mr. Potter's rental complex)!
Image Credit: Community Impact
Home ownership has long been an integral part of the American dream. Especially during the last half of the 20th Century, this dream was realized by between half to two-thirds of the population. For the majority of Americans during that time, owning a home was not only something they aspired to, but also something that was within their grasp.
Over the last decade, however, there has been a shift in who owns single-family dwellings. The Great Recession of 2007-2009 brought with it a huge number of foreclosed homes, at a time when many people did not have the cash to purchase a home for themselves. Enter the corporate investors, companies that saw an opportunity to snatch up multiple houses at bargain basement prices. Instead of reselling these homes to single owners, though, these companies decided to turn many of them into long-term rentals.
Now there is nothing inherently wrong with rentals. Some people choose to rent and avoid the entanglement and upkeep of ownership. The situation that is cause for concern is the one in which multiple communities in the US are now finding themselves. Over the past ten years, the number of homes that are purchased by investors has increased by 10-15% each year. This number accelerated to over 80% between 2020-2021, with the single-family home rental market increasing 40% during that same time period.
The companies leading this charge come in a number of different forms, including private equity firms, hedge funds, real estate investment firms, and insurance companies. Names that might be familiar are Blackstone, Goldman Sachs, Mynd Management, J.P. Morgan Asset Management, Pretium, and American Homes 4 Rent. These corporations have invested heavily in certain Sun Belt communities, and the effect they have had on those housing markets has been substantial. In fact, if these companies keep purchasing homes at their current rate, they will control 40% of the single home market by 2030, according to MetLife Investment Management.
There are several problems for the average American when corporate investors literally move into (and take over) the neighborhood. Companies with formidable assets are able to not only outbid a single buyer but can do so by offering cash to the seller. This situation is one reason why we have seen prices increase so dramatically over the past few years in certain areas.
When this type of bidding raises the overall prices in an area, fewer people are able to afford a home and are forced to rent. Essentially, they become trapped in modern versions of Potter's Field where they can then be subjected to substantial annual rental increases, making it impossible to save for a home of their own. Even worse, they may be put in a situation where they have to choose between paying for rent or other necessities. They are, in effect, on a hamster wheel from which they can't escape. According to Jordan Ash, director of labor-jobs and housing at the Private Equity Stakeholder Project, corporate investors have been "very explicit about how people are shut out of the homebuying market and are going to be perpetual renters."
I myself have experienced this very situation. As a single mom of two boys with only my modest salary as income, I was unable to purchase a home and had to find a new rental in 2018. Average rental prices had gone up 35% from the last time I looked for a place, just four years earlier. Providentially, I was given the opportunity to move into a small but lovely home offered by a local builder/landlord. At a time when I needed help, this kind man and his leasing agent looked at my situation and discounted my price to make it affordable. The contract that I had with him, which was standard for all his renters, also specified that rent would go up only $25/month every year I renewed, both affordable and reassuring.
It would be wonderful if all landlords were as good to their tenants as this one was to me. Unfortunately, many of them have taken advantage of the last several years and raised their prices beyond what average household incomes can afford. Between January 2020 and January 2023, rents for a two-bed detached home increased 24% nationwide, and in some areas such as Tampa, Phoenix, and Atlanta, rates increased between 35-44%. These are clearly unaffordable increases that either push tenants out of their homes or cause them to do without other necessities, as well as prevent them from saving for their own home and building equity.
The housing market is yet another segment of the marketplace where safeguards need to be restored to provide mutuality. Jenny Schuetz, a housing policy expert at the Brookings Institute, has studied the situation and has several recommendations, including creating landlord registries to identify which investors have patterns of quick evictions, excessive fees, or neglecting property maintenance. Some communities are currently looking at limiting the number of homes these companies can purchase as a safeguard for local homeowners.
On the self-regulating side, landlords smart enough to care about the long-term effects of their actions understand that treating their renters well benefits both themselves and their tenants. A landlord that does not have to constantly search for new tenants saves on expenses such as cleaning, painting, repairs, and marketing costs. Keeping rents affordable provides for steady income and positive cash flow, as well as promoting goodwill among tenants and positive word of mouth in the community.
As Schuetz has also noted, the situation we are currently in ultimately results from a lack of affordable housing. Incentives need to be provided to encourage builders to construct houses that are earmarked for and within the reach of single family ownership. There are many benefits for the states and communities that enable a path forward for home ownership as well. Home owners tend to be more stable, are able to save more money, are more likely to participate in local elections, and are more invested in their neighborhoods.
A contemporary housing model needs to be built (literally!) that addresses both establishing affordable rental homes and promoting single-family home ownership. Addressing these issues are necessary for the long-term health and stability of families and communities, and thus for our nation. Once again, economic mutuality is, in the long run, the path forward for improving all sides of the situation.
What about you? Share your story, question, comment, idea, disagreement -- yes, we welcome disagreement for the sake of mutual benefit! -- with us at blog@PartnershipEconomics.com. We will give a thoughtful response.
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