Big Corporations Are Playing Monopoly With Single-Family Homes — Here’s What That Means
Big Corporations Are Playing Monopoly With Single-Family Homes — Here’s What That Means
If the American dream entails owning a home, we're entering a collective nightmare.
The American dream promises that if you work hard enough, you can build enough financial security to enjoy some of the finer things in life: a decent car, an occasional vacation, and of course, a nice home for your family. But that latter aspiration is no longer within reach for many people — and as with most problems currently plaguing America, big corporations may be to blame. Masked as investment groups, these multi-million dollar businesses have been gobbling up single-family rentals in droves over the last decade. Not only are they constricting the supply of homes, but many of them are hoarding those properties so they can rent them out at astronomical prices.
While this trend is nothing new, it’s reaching record highs as of late: in the last three months of 2021, 18.4% of homes were bought by LLCs. This accounted for roughly 80,000 homes valued at a combined $50 billion. According to research by the National Association of Realtors (NAR), institutional buyers made up 15% of home purchases in 2021. Texas has the highest share of institutional buyers at 28%, followed by Georgia with 19%, Oklahoma and Alabama at 18%, and Mississippi at 17%.
According to real estate broker Will Wheaton, institutional buyers have been purchasing homes in bulk since the financial crisis of 2008. After the housing collapse, foreclosures presented shiny opportunities for global investment firms to purchase millions of homes at quite a bargain. Between 2011 and 2017, private-equity groups and hedge funds spent $36 billion on more than 200,000 homes across the country.
Wheaton says companies are salivating at this strategy for two reasons:
Homes have been appreciating significantly over the years — in fact, home values rose 18% from June 2021 to June 2022.
The ROI on renting is astronomical. In 2021, 42% of single-family purchases made by institutional investors were converted into rentals — and renting out single-family homes is expected to deliver annual returns of 6.8% for those investors in the next three years. “The institutional investor receives security, cash flow, and appreciation,” Wheaton adds. “It’s a no-brainer.” Not to mention, they can then increase rents as they see fit, says Michael Green, real estate expert and owner of Quick Cash Homebuyers.
The NAR’s research revealed some interesting trends within institutional home buying. Firstly, the median purchase price among institutional buyers is around 26% below the state median price. Companies and corporations tend to buy houses in areas with a high concentration of minority groups — especially Black citizens. In fact, there are twice as many Black households in markets with a higher percentage of institutional buyers than there are in markets with a lower share of these investors. For example, in Clayton County, Georgia, where 72% of households are Black, the share of corporate home investors is 44%. (It’s worth noting that today, the gap between Black and white homeownership is larger than it was before the Fair Housing Act passed in 1968.)
Other factors that seem to attract institutional investors to a market area include:
Areas with a high density of renters
Areas with a high density of millennials
To sum it up: Large corporations are buying cheap homes, largely in urban and low-income communities, where they know there’s a high percentage of residents who can’t afford to buy — meaning they’ll have no choice but to pay whatever rent they dictate.
“These companies are snatching up entire streets in middle-class neighborhoods, not only increasing the prices of housing in these areas and their surroundings but also increasing the cost of living in these areas as well,” says Green.
According to NAR’s study, people who are looking to offload properties just can’t resist selling to corporations. Wheaton says this is because LLCs typically make cash offers — and often are willing to take the homes “as is.” So, sellers get paid more quickly, and they don’t have to worry about bank approvals, inspections, and appraisals. Who can compete with that?
In my home city of Boston, about 160 homes sold for at least $100,000 over their list prices in just the first six weeks of this year.
“In the current market, first-time homebuyers might have to make an offer that is tens of thousands of dollars higher than the asking price only to have it rejected,” says David Tully, a realtor with eXp Realty. “To encourage a seller to accept their offer, they might have to put up thousands of dollars in nonrefundable fees. The prediction is that over 2.5 million first-time buyers will be shut down because of this growing trend.”
As long as the financial elite keeps sweetening the deal for sellers, hopeful home buyers will have an increasingly harder time getting offers accepted (and that’s not even taking into account the skyrocketing mortgage rates). As big corporations continue to put an artificial chokehold on the supply of homes — well, we all know the laws of supply and demand. With less inventory, the prices of homes will continue to increase.
“Renters are also feeling the pain because there are so many qualified home buyers that are not moving because they can’t afford to buy, or they keep getting outbid,” says Wheaton. “As a result, rents have skyrocketed.”
It’s been argued that investors could potentially be better landlords than cash-strapped mom-and-pop type operations because they have more resources. But is it realistic to expect that these corporations can effectively monitor and provide maintenance for thousands of buildings? And when your home or apartment is owned by a shadowy corporation backed by mega-wealthy global investors, doesn’t that just increase the power imbalance between you (the tenant) and your landlord?
A 2019 report found that rental homes owned by LLCs are linked to all kinds of negative outcomes, like lower housing quality, and higher rates of evictions and disrepair, especially in low-income Black and brown communities. When CNN Business interviewed a handful of tenants with corporate landlords, many complained of slow repairs, and eviction threats when rent was overdue or withheld because of maintenance issues that had yet to be resolved.
An investigation by The Atlantic revealed that many of these companies have continued to cut corners when it comes to maintenance and repairs by pushing more and more of these responsibilities onto the tenants. American Homes 4 Rent, for example, began charging tenants when maintenance staff was sent out for repairs they expected them to take care of themselves. Colony Starwood, meanwhile, slashed property-management costs by 25% between 2018 and 2019 — and its leases specified that tenants were responsible for replacing central air systems, taking care of routine insect control, landscaping, and repairing broken glass, as well as sewer and sink backups. In other words: renters are taking on all the daunting duties of being a homeowner, without reaping any of the rewards of an investment. A property administrator for colony American Homes told The Atlantic that in the area she managed, there were just six maintenance workers to handle 2,100 homes. She eventually had to report the company to OSHA due to the concerning and even dangerous conditions of the homes and was promptly fired.
At a 2022 U.S. Senate Committee hearing, tenants shared horror stories of living under “hazardous conditions,” with landlords who are constantly increasing the rent while expertly “exploiting legal loopholes.”
Renters will also continue to be harmed by this trend as they have little protection from arbitrary rent hikes, says Green. In fact, there was a 19.3% rent increase nationwide between December 2020 and December 2021. So it should come as no surprise that as of 2022, more than 6 million Americans are behind on paying rent.
“As more of their income goes towards paying rent, they’ll have little left over to save and invest, further curtailing their ability to achieve financial prosperity,” says Green.
And this trend will have long-term, far-reaching implications, according to Green, since homeownership remains one of the most accessible ways to build wealth — mainly via price appreciation. According to a 2019 survey, the median homeowner’s household wealth is 40 times that of a renter’s – $254,900 compared to $6,270. At every single income level, homeowners are wealthier than renters — and except for the very top earners, the majority of that wealth comes from housing. In the lowest income category, a staggering 92% of total homeowner net worth is tied to the value of their residential property. A homeowner who bought a single-family home in 2011 at the median price of $169,000 and then sold it in 2021 for the median price of $363,100 had amassed $225,000 in home equity or housing wealth. It’s also a way to build generational wealth — research has actually shown that children of homeowners are more likely to transition to homeownership earlier in life.
Invitation Homes Inc. (NYSE: INVH) — a real estate investment trust with a portfolio of about 83,000 single-family rental homes as of Q1 of 2022 — continues to dominate this market. Most of its portfolio lies in the Western U.S. and sunbelt states, and the average monthly rent for its properties is $2,124.
Another major player, according to Dwellings Michigan associate broker Boyd Rudy, is the government-sponsored enterprise Fannie Mae. If the company sounds familiar, that's because it also happens to be the leading source of mortgage financing in the U.S. And now they’re one of the largest landlords in the country, too.
“This conflicting role as both lender and landlord has led some to question whether Fannie Mae is working in the best interests of its customers or if they are unfairly putting them at a disadvantage,” says Boyd. “There is no doubt that having such a large presence in both the mortgage and rental markets gives Fannie Mae a unique position of power.”
And there have been instances where it appears that Fannie Mae has used this power to manipulate the market in their favor. For example, in 2017, Boyd notes that the company was accused of artificially boosting rents on properties they owned in order to make it appear as though the overall market was performing better than it actually was.
“This allowed them to then charge higher interest rates on their loans, which ultimately hurt consumers,” he explains.
Blackstone Group, an asset management firm that previously operated under the same umbrella as BlackRock, owned more than 13,000 California homes at one point. Its subsidiary, Invitation Homes, became the largest owner of single-family homes in Sacramento County by 2017. When Blackstone Group cashed out of the rental-home market in 2019, it pocketed a whopping $7 billion in profits. There are now more than 1.2 million vacant homes in California — meanwhile, the state’s homeless population grew by 22,000 during the pandemic. It definitely doesn’t help that so many institution-owned properties are listed with asking prices well above their value.
The real estate agents, brokers, and investors I spoke with unanimously agreed that it’s a massive conflict of interest for corporations to snatch up single-family homes when they’re also the nation’s largest mortgage lenders because it turns their customers into their competition.
“This is because these businesses are able to use their knowledge of the housing market to take advantage of would-be home buyers and renters,” adds Matt Teifke, founder and CEO of Austin-based brokerage Teifke Real Estate.
Worst of all, though, real estate agent and Quadwalls.com founder Chuck Vander Stelt says communities at large are being harmed by this growing trend, too — because communities with a high rate of ownership tend to have lower crime rates, better quality public schools, lower infrastructure costs, and generally higher quality of life.
“Communities develop based on the presence of people,” he explains. “In an area where the majority of the residents are renters, the long-term benefits of a high percentage of homeowners will never come to fruition.”
As more and more of America’s housing becomes tied up in the portfolios of the 1 percent, it’s clear that something needs to change. Moving Astute founder Joshua Haley suggests that the government should introduce regulations that block business entities from purchasing more single-family homes, or at least cap the number that they can buy. Recently, U.S. Representative Adam Smith introduced the Saving Homes from Acquisition by Private Equity (SHAPE) Act, which aims to create a federal real estate transfer tax, set at 100% of the property's sale price, which would be charged to large private equity firms or corporations that purchase single-family homes. Revenue from this tax would then go directly to a fund that provides grants to states to build and preserve affordable housing.
In some states, homeowner associations are adopting bylaws that limit the number of rentals that investors can buy — or require new homeowners to wait a certain amount of time before they can rent out their properties.
Another option, says Haley, is for the government to provide incentives for selling to individual home buyers as opposed to Wall Street. For example, Vander Stelt suggests that state governments could offer tax credits to sellers if they accept offers from Jane Smith or Joe Blow.
“Local and state governments should work closely with home builders to develop neighborhoods with affordable homes,” he adds. “And affordable housing needs to stop being a dirty word in most communities.”
Eyal Pasternak, a licensed real estate agent and investor with Liberty House Buying Group, also stresses that the federal bank needs to lower interest rates so individual buyers are in a position to make better offers and compete with big corporations.
“The Feds need to act fast,” says Tully. “They are enacting legislation to increase restrictions on corporate ownership across the entire nation as well as purchasing land and selling it for less than market value. The only proposed particular policy, however, relates to mortgage rates, and no other constructive policy has been made.”
In the meantime, hopeful home buyers who are struggling to compete with big businesses will have to get creative in making their offers more attractive — for example, by choosing a lender with speedy closing times, offering a lease-back, making a cash offer, or using cash offer programs in which a company makes a cash bid on your behalf and lets you rent it back while you work to obtain financing.
To you and me, a home is more than just an investment: it’s a safe haven; a foundation of your most precious memories. It’s where you share intimate meals with loved ones, celebrate birthdays and other momentous occasions, and enjoy much-needed rest after a grueling work day. For many in the post-pandemic world, it’s even where you work. But for deep-pocketed investors? These buildings are nothing more than an annual return on equity. As the world continues moving in a direction where we will purportedly own nothing, homes are the one thing we can — and must — hold onto.