Have you or people you know tried to buy a home in the last three years? Was it a nightmare? Been seeing in the news about "Wall Street snatching up homes"? This week, we'll be taking a closer look at an interesting bills trending from around the country related to understanding and limiting investment firms purchasing power of single-family homes.
Also, check out our new blog post on squatting across the country. Is it on the rise?
A look at the Situation
Some Background
Before the Great Recession of 2009, financial institutions and investment firms focused on purchasing multi-family dwellings like apartments and essentially ignored single-family homes. But, when a ton of homes were suddenly being sold at incredibly low prices with low interest rates, these investors jumped at the opportunity to scoop up these homes. Individuals and businesses alike capitalized on these low-risk, high reward properties, as long as they had the funds. The general idea was to acquire the property at low cost, and hold it or rent it. This is when the term "house flipping" came about, when people would purchase an asset with a short holding period and the intent of selling it for a quick profit rather than holding on for long-term appreciation.
Some individuals who had the capital in 2009 got the deal of a lifetime on their family home. Others were able to afford more than one and turn them into these investment properties. On the individual basis, most people were investing in homes they wanted to live in, even if it would maybe become an investment property down the line. The investment firms, however, took a strategic business approach. They bought up older homes (from the 70s and 80s) that were inexpensive, but in growing metro areas. A Google office coming somewhere near you? Maybe a Tesla? These firms focus on buying homes in those areas.
Investment firms have continued to invest in homes because it makes financial sense for them to. When comparing investment firm buying power to an individual's, an individual typically pays between 4-7% on their mortgage, where firms usually have access to far more money for a far lower interest rate (Invitation Homes gets interest rates around 1.4%). These firms get debt cheaper, meaning they can afford to pay a higher sticker price for a home than an individual because their actual cost is much lower. Companies also make off their rental income, allowing them to be more cash rich and make cash offers more often than an individual may be able to, making their offers more attractive to sellers. Over the last decade, the number of investors purchasing single-family homes increased from 10% to 15% each year. But, according to a study by Redfin, from 2020 to 2021 investor purchasing of single-family homes increased over 80%. That year, we saw historically low mortgage rates (averaging at 3.11%) due to the COVID-19 Pandemic.
Current State
According to data reported by the PEW Trust and originally gathered by CoreLogic, as of 2022, investment companies own about one fourth of all single-family homes. Last year, investor purchases accounted for 22% of American homes sold. This is significantly down from the 80% number in 2020-2021, why is this? Mostly, debt has gotten more expensive over the last year, and many people are concerned about a looking major recession.
But, it's not just these "huge investment firms" buying up properties for investment. According to Business Insider, when looking at closings between private equity and independent operations (individuals who have "house flipping" revenues), these "investors" accounted for 44% of the purchases during the third quarter. They also state that the "rate for entry buyers (or first-time homebuyers) has continued to decline throughout the year, falling from 43% of the purchases of flipped homes in the first quarter of 2022 to just 32% in the third quarter." Because of this, these "independent operations" are selling their flipped homes more often to institutional investors, because mortgage rates are too high for entry buyers to afford the monthly payment at the prices being asked. Entry buyers are getting "priced out".
Investors purchasing large percentages of available inventory is not a problem unique to the United States. Last year, in an attempt to cool off the hot housing market, the Canadian government imposed a ban on foreign investors from buying homes in Canada for two years. In Europe, there are similar articles to what we see here about investors driving up prices of homes. In Singapore, they implemented housing policies to protect citizens. Most people living in Singapore live in homes that have a 99-year lease they’ve bought from the government and this public housing is sold, not rented, helping control prices and availability.
Last year, five states saw the highest percentage of investor purchases: Georgia (33%), Arizona (31%), Nevada (30%), California, and Texas (both 29%). These investment firms continue diminishing available inventory of houses that may otherwise be obtainable for younger, middle class households. This can lead to a kind of negative feedback loop where people cannot afford to buy because they are getting priced out, but because rent is incredibly high (and expected to keep going up), people cannot save enough money to get into the market even if rates do fall again.
So, what legislative trends are we seeing across the United States? Let's dive in!
The Bills
There are many different legislation trends from around the country related to single-family homes availability and accessibility to Americans. Ranging from allocating funds to help first time homebuyers to limiting what investors can purchase to completely changing how housing works in places with housing crises, states are looking at many different ways to address this issue.
Stop Wall Street Landlords Act
On the national level, in 2022 the Stop Wall Street Landlords Act was introduced. If passed, this bill would impose a tax on selling transactions to make it more expensive for single-family-rental companies with more than $100 million in assets to buy and sell homes. The bill would also prohibit Fannie Mae, Freddie Mac, and Gennie Mae from purchasing and securitizing mortgages held by large institutional investors who use debt to buy single family homes and rent them out for optimal profit. It is not expected to be taken up with the change up of leadership in the House.
Rep. Rohit Khanna of California, one of the bill's three co-sponsors, had this to say about the bill:
"The financialization of the housing market by Wall Street exacerbates corporate profiteering and anti-competitive practices that makes it harder for Americans to afford housing or access homeownership. Low- and middle-income families in my district and across the country are being pushed out because of profiteering and unfair practices by large corporate landlords."
California's Take
California has been proposing legislation related to this issue since 2012. In 2012, California introduced the California Neighborhood Revitalization Partnership Act, requiring the California Housing Finance Agency (CalHFA) in consultation with the Department of Housing and Community Development (HCD) to finance affordable housing for low- to moderate-income households and to revitalize neighborhoods damaged by the foreclosure crisis.
In 2016, they proposed a bill that would have required the Department of Business Oversight (DBO) to collect data about large-scale buy-to-rent investors and prohibit a homeowner from selling their home to a buy-torent investors for 90 days when the home is not a short sale or a foreclosure. Last year, California passed the "California Dream for All" program. This program aims to assist first-time homebuyers by providing 17% toward the purchase price of their first home, addressing the need for a large down payment. In some cases, this funding could potentially cover the entire down payment. New York proposed a similar bill last year, but it died.
A Couple Texas Bills
Although the housing market has cooled off with the higher interest rates, Texans are still having a hard time affording houses. Two Texas bills look at different aspects to this issue. The first is Texas HB1056, which aims to require financial institutions or investment firms that lease homes to register with the comptroller's office. The comptroller's office would then compile and maintain a searchable registry of that information on its website as an attempt to create more transparency about what these firms are investing in and how much. "Investment firm" is defined as a corporation or trust engaged in the business of investing the pooled capital of investors in financial securities. This bill was filed late December 2022, and if passed, would take effect January 1, 2024.
Texas HB1057 was filed late December 2022 as well, and if passed would take effect September 1, 2023. This bill aims to prohibit investment firms from buying a single-family home until after they have been on the market for 30 days. The bill states "a contract entered into in violation of this section is voidable by the seller at any time before the contract is fully executed."
Massachusetts
Failed 2022 legislation aimed to allow cities and towns to set a transfer fee of up to 2% on real estate transactions. The bill set an exemption threshold at the state median, stated at $503,000. The bill also gives cities and towns the option to raise their exemption threshold should they see the need. The income generated from these transaction fees would go into a designated fund earmarked to create and maintain affordable housing in the municipality in which the funds were collected.
Hawaii: The ALOHA homes program
Failed Hawaii legislation, inspired by Singapore's take on housing, would have created the Affordable, Locally Owned Homes for All (ALOHA) homes program. This program would develop low-cost homes on state-owned and county-owned land in urban redevelopment sites to be sold in leasehold by the Hawaii Housing Finance and Development Corporation (HHFDC) to qualified residents. The state government would build thousands of high-density public housing units on state-owned lands near rail stations. The could only be sold to Hawaii residents and would start at $300,000. The Aloha Homes would be leased for 99-year terms, and 75% of the profit from resales would go to the state for building upkeep and to keep maintenance fees low. Bill sponsor, Stanley Chang, plans to re-introduce the legislation again this year.
Georgia
Remember preemption? Well Georgia, another state in the top five most impacted by investment properties, had an interesting bill proposed last year. The state government proposed a bill that would have prohibited local governments from enacting any restrictions including permits, conditions, fees, or amenity requirements on housing that is used or is intended for use as a long-term rental. The bill stated "local government entities shall not enact or enforce any restrictions on land or dwellings that are or are anticipated to be subject to a long-term residential rental agreement and are located on any property where residential dwellings are allowed." The bill was immediately protested by the local governments, many of which voted on resolutions indicating their disapproval of the legislation.
Conclusion
It is quite interesting to take a look at this legislation, and how much of it has not passed. States are clearly interested in knowing more about the impacts of this on their residents, but when it comes to doing things to limit or change what this could look like, there is not a clear trend being executed. What do you think about this legislation? About investment firms purchasing such a large share of single-family homes? What do you think is next?
Cover Photo by Tierra Mallorca on Unsplash
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