Why restricting institutional investors won’t fix housing affordability

Last year, several bills were introduced in Florida to restrict large investors from purchasing single-family homes. These misguided bills, mainly supported by Democrats, failed to gain traction. However, President Donald Trump quickly endorsed their cause and recently issued an executive order instructing his agencies to create policies that discourage institutional and corporate buyers of single-family residences. However, this executive order will likely have little positive effect on housing markets.

Many analysts have pointed out that institutional investors own only 1-2% of housing stock and hardly constitute a crisis. It is worth noting that Florida’s large vacation rental market leads to institutional investors owning a greater percentage of properties in coastal cities, but those markets are generally not where working families are trying to buy homes.

Data on housing markets shows that cities with higher levels of institutional investor purchases have experienced lower home prices than those with lower levels. Recent research examining extensive housing market data reaches similar conclusions, finding that institutional investors buying single-family homes raises home prices by 1-2% and reduces rents by nearly the same amount. Remember that when a house is purchased as a rental property, potential homebuyers may no longer be able to purchase it, but a family seeking a rental has a new opportunity. It is ridiculous to think policymakers can know whether a house should be available for purchase or for rent. That is a decision best left to markets.

Institutional investors not only identify where demand for rental properties exceeds supply, thereby creating investment opportunities, but also address several other problems in the housing market. Institutional investors tend to make more purchases when housing markets are struggling; in fact, over a third of their purchases are distressed homes or foreclosure sales, often where properties require substantial repairs and improvements to make them livable.

Consequently, the growth of institutional investors in single-family homes has already passed. These purchases became more popular after the housing crisis and subsequent recession almost a decade ago, and were sustained by the pandemic. Indeed, in the last two years, companies owning 1,000 or more homes purchased virtually no additional homes. These days, most homes are bought by families or by small investors who own 10 homes or fewer.

In response to economic changes, large institutional investors have adjusted their approach. As purchases of existing homes fell to nearly zero, they began investing in new developments of single-family homes intended to be rented rather than sold. These developments provide numerous suburban-family rentals to meet demand from families seeking safe neighborhoods and good schools, but who are not yet ready to purchase a new home.

The primary cause of housing affordability problems is local government restrictions on housing supply. In response to “not in my backyard” (NIMBY) objections, local governments have a strong tendency to reject new housing and prevent supply from keeping up with demand.

To their credit, Florida legislators are working on bills that would reduce local regulatory restrictions on housing supply and bring down housing prices across the state. President Trump could help solve a real housing problem by focusing on mortgage requirements. Currently, in many housing markets, the average mortgage payment on an average home is lower than the average rent, yet residents still rent rather than buy because they cannot qualify for a mortgage. Much of that is driven by federal mortgage-lending rules enacted after the housing crisis that have swung the pendulum too far.

Untangling the mess of mortgage rules and barriers to adequate and affordable housing supply would go a long way toward helping families get into their first homes. Lawmakers should direct their efforts where they can help, instead of fighting battles that offer good sound bites but little effect on affordability.

A version of this column first appeared in the Orlando Sentinel.

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