The scarcity of affordable housing in cities across the country has been well documented. From the onset of the pandemic, news headlines pointed to rapidly rising home sale prices and the increase in investors and corporate entities purchasing and renting out single-family homes, leaving current and prospective homebuyers and renters on the outside looking in.
In the early 2000s, what was considered a “starter home” in the Atlanta metro area went for $100,000–$135,000. Today, that same home is fetching upwards of $400,000, pricing out many homebuyers who are of modest economic means. The cost of rent has also skyrocketed, with renters paying top-dollar for housing that doesn’t seem commensurate with the quality or amenities of the unit. While the market is cooling, it is not yet clear how much the trend in investor purchasing will change.
Atlanta isn’t alone in its quest to find solutions to address the affordable housing crisis—solutions that would allow a buyer to purchase a true “starter home” at an affordable price point; that do not displace longtime inhabitants; and that do not force people to pay top-dollar rents for subpar living arrangements. It all makes for a challenging situation for everyday people looking for a place to live in cities throughout the Southeast region.
A new report, “Investor Home Purchases and the Rising Threat to Owners and Renters: Tales from 3 Cities” by Reinvestment Fund and the Nowak Metro Finance Lab at Drexel University, examines housing markets in Jacksonville, FL; Philadelphia, PA; and Richmond, VA, and finds that more than 1 in 5 homes sold go from homeowners to investors. Detailed transaction-level data from Philadelphia show that such sales were most common in neighborhoods with low sale prices, high vacancy and elevated mortgage denial rates, and in areas with higher shares of Black or Hispanic residents. These transactions were also more frequent in those communities within Jacksonville and Richmond where the markets were showing signs of market stress.
The report connects research on detailed transaction histories with Reinvestment Fund’s proprietary Market Value Analyses (MVA), a local stakeholder-informed, data-based, field-validated examination of a city or region’s residential real estate market. The report examines how investment in single-family homes for rental housing that has been lucrative for investors often comes at the expense of homebuyers and tenants. By connecting the traits of home sales to a profile of the markets where those transactions occur, you can understand better what communities are being most impacted by private investors in the residential market. Because of the disproportionate penetration of investors into the more stressed parts of a community’s real estate market, the authors conclude that the situation requires a coordinated and targeted policy response at the federal, state and local levels to help homebuyers compete with investors and to protect renters. The report presents multi-pronged solutions for addressing the increase in investor ownership organized by who is affected and how different levels of government can be involved:
- Current homebuyers: Current homebuyers are often priced out of new-home purchases because they cannot afford to compete with investors with ready access to cash who can often drive up home prices. On the federal level, the government could investigate possible changes to Federal Housing Administration (FHA) loans to make them more attractive to home sellers and ensure that bulk sales via government-sponsored enterprises (GSEs) give preference to individual homeowners as opposed to investors. Individual states could offer first-time homebuyer grants and loans, or explore the option of assessing a transfer tax when the buyer is a for-profit corporation. Locally, cities should evaluate their current regulatory environment, including zoning codes that may limit the supply of housing, contributing to the increased cost of homes.
- Tenants: When corporate and institutional owners buy up homes in bulk, tenants are often at the mercy of landlords that may charge high rents while neglecting the properties and/or evicting tenants to increase rent. The report recommends the federal government investigate tenant screening tools, and that states regulate landlord-tenant relations to protect tenants, and pass laws requiring the disclosure of beneficial owners of LLCs. Locally, government could pass rental registries, pass tenant protections such as just cause eviction and a right to counsel, and implement rental home inspections and code enforcement.
- Future Homebuyers: Once an investor purchases a home, it’s hard to say what the long-term impact will be on the neighborhood. Will it be resold at a much higher price point, turned into a rental, or bundled with other properties to sell to other institutional owners? A case could be made for state and local governments to create an acquisition fund to buy rental housing from medium-sized investors for public, quasi-governmental, and nonprofit entities to then resell to homebuyers.
- Current Homeowners: Homeowners with incomplete information are often targeted by investors who can make apparently attractive cash offers that waive inspections or objective appraisals. States can play a role in requiring an outside, independent appraisal that evaluates other homes in the area. Locally, a “do-not-call” list would prevent investors from targeting residents. Maintenance and home improvement programs could assist low-income homeowners with home upkeep rather than them feeling forced to sell.
The solutions presented here are not particular to the communities studied in this report. Many metro areas, including Atlanta, are convening state and local entities to address this housing challenge.
In an upcoming U.S. Department of Housing and Urban Development panel discussion moderated by the Office of Policy Development and Research, panelists will discuss institutional investors in the housing markets. “Institutional Investors in Housing” will be held virtually on December 6, from 2 to 4 p.m. The panel will highlight research on this issue and explore actions that various levels of government, along with nonprofits and other mission-driven entities, can take to drive supply to owner-occupants and mission-driven entities. Bruce Katz, Reinvestment Fund’s coauthor in the recent report and founding Director of the Nowak Metro Finance Lab at Drexel University, will be a panelist.
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Originally published in the Saporta Report, December 11, 2022