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Tax Policy Is Helping Wall Street Gobble Up Single-Family Homes

Wall Street investors have concentrated their purchases of entry-level and single-family homes in communities of color.

Pedestrians walk past "Prime Retail Space" for rent, in New York City, on September 7, 2022.

Janine Jackson interviewed CSG Advisors’ Gene Slater about the affordable housing crisis for the November 11, 2022, episode of “CounterSpin.” This is a lightly edited transcript.

Janine Jackson: Home ownership is a key ingredient in what is still called the “American Dream.” Beyond the meaningful symbolism of having one’s own patch, home ownership is instrumental in wealth creation — the difference between living paycheck to paycheck and being able to think about the future.

It’s societally important, historically important, who is encouraged and enabled and facilitated in their ability to buy a home, and who is shut out.

This is why many people are looking with worry at the phenomenon of institutional investors — Wall Street — gobbling up a larger and larger percentage of homes. And particularly entry-level homes, the very ones first-home buyers would be looking at as affordable.

Gene Slater has worked on issues of affordable housing for many years. He’s chairman and founder of CSG Advisors. He joins us now by phone from the Bay Area. Welcome to CounterSpin, Gene Slater.

Gene Slater: Thank you so much.

First of all, this is something new, right? Institutional investors haven’t traditionally looked at single-family homes as, like, pork bellies to add to the portfolio.

So why are we seeing this now?

You’re right; traditionally there have been many, tens of millions of ma-and-pa small landlords. But the idea of Wall Street, with virtually unlimited access to cash, buying up single-family homes is a recent phenomenon.

It started, in some way, in 2010, after the financial crisis, in part encouraged by Fannie Mae and Freddie Mac, who financed some of these entities to buy up homes.

And then it remained, and it sort of fell back and was at a modest level. And over the last couple of years, and toward the end of the pandemic, it’s really mushroomed significantly.

And I think that’s for two reasons. One, from the Wall Street point of view — and I’m talking about REITs, particularly general partnerships — they had raised tremendous amounts of capital before the pandemic to invest in real estate, and suddenly, in the pandemic, one wasn’t going to invest in shopping centers or retail or in office buildings.

So a lot of that got focused on either just buying normal rental properties, standard apartment buildings, but also got focused on buying single-family homes, because they saw single-family homes going up, becoming less affordable, and they could buy. And their focus was in buying in less expensive neighborhoods and less expensive, more affordable parts of the country.

And so they saw this as an opportunity to make long-term gains and to push up rents. And they did algorithms showing, we could add rent charges for this… Unlike ma-and-pa landlords, they could basically create standardized ways of doing this.

So they’ve seen this as a big opportunity. And the more inflation has heated up, the more they’re now pitching this to their investors as, “This is a perfect hedge against inflation.”

So I think that’s what’s been driving this.

It just sounds like a bad thing. In your very useful September piece for Housing Wire, co-written with Barry Zigas, you also point out, and you’ve just kind of hinted towards it, that these institutional purchases are highly concentrated in areas with minority families, with people of color.

And so with this country’s history of redlining and discriminatory government subsidies — we spoke with Richard Rothstein about this years ago — this has also huge racial ramifications as well, yeah?

Yeah. In fact, part of the way I approached this problem is, I had just written a book last year, Freedom to Discriminate, on how the realtors conspired to segregate housing and divide the country. And as I’ve been talking about that in different places, this issue has come up in those discussions, in places I didn’t expect. Talking about this in Greensboro, North Carolina, and basically turned a community meeting about gentrification in East Greensboro into one of out-of-town investors buying homes.

So it’s happening there. It’s happening virtually everywhere. It’s not only in minority areas; it’s not necessarily deliberately targeted, but it’s targeted, buying homes on average 26% below the statewide average.

So that means a focus on startup homes, on modest homes, many of which have been in minority areas. So it’s having an outsized impact.

There’s an excellent Federal Reserve of Minneapolis study, mapping where these corporate landlords are buying, and you can see tremendous overlap with areas where minorities live or would normally buy.

You also note — and you just tilted towards this, but it might need spelling out — with fewer families able to buy homes, those people stay renting, and so landlords can then push up rents as well. It’s kind of a self-feeding cycle.

Yeah. Those people remain renters, and they’re at the top end of the rental market, so it allows landlords to push up rents in general. And these corporate landlords are pace-setting, and very explicitly. They’re deciding, “Well, the median income of our tenants is this; we can push to a higher percentage of disposable income.” That’s what’s happening.

And the impact is of reducing the number of homes that families can buy. This is what’s really key. There’s a record low level of how many homes are available for purchase, because people are staying in their homes longer, because they’re affected by being able to find another place.

And with that record low inventory — this happened especially during the pandemic — there’s a pressure to push up prices. If you remove a lot of the starter homes, the modest-cost homes, families can’t even bid on them, because they’ve been swooped up in all-cash, no-inspection offers that no family can compete with. They’re bidding against each other for a smaller and smaller share of homes.

That’s pushing up prices, and that’s pushing up rents.

And then also, ownership means power, so it matters, in terms of policy, that this market is now one where Wall Street is invested, and is going to be trying to call the shots. Who owns the homes in a neighborhood has an effect on policy in that neighborhood. And it’s just another element that this is affecting, right?

Yes, absolutely. And it also has an effect on neighborhood stability, especially single-family neighborhoods that have been largely ownership, or significantly ownership, to remove the opportunities for ownership makes those into less stable neighborhoods.

It’s a long-term effect on home ownership in the country, and it’s really asking, “Who do we want to own America? Who do we want to own our neighborhoods?”

There has been some critical and thoughtful media coverage. I can’t list it all. I saw Alana Semuels in the Atlantic back in 2019. There’s been people illuminating this phenomenon and just saying, “Let’s pay attention to this.”

But then I see this piece in the New York Times that’s just so Timesian: “Is Wall Street Really to Blame for the Affordable Housing Crisis?” You know: “Who’s to blame? An increasingly popular answer among Democrats, and even some Republicans, is Wall Street.” So now it’s not about discrimination. It’s not even about policy. It’s just kind of partisan political football.

And then it becomes a caricature of an argument, rather than engagement with that argument: “Is private equity the true villain or a scapegoat?” The piece says, “Not everyone is convinced that Wall Street’s entry into the single-family rental market is uniformly bad.”

And then I’m going to close on this: “But unalloyed evil or not, institutional investors simply don’t have the market power to be driving the affordable housing crisis.”

I just find that so belittling and just kind of silly, the idea that there’s a problem and people are pointing fingers, and you want to point fingers at the powerful people, but that makes you emotional, so leave it to us cooler heads.

I just wonder how you react to coverage like that, that says, “Wall Street’s not to blame. They might be a scapegoat.”

So I think this was an entirely false and wasteful use of time in the New York Times.

The issue isn’t who’s to blame for anything. There are so many factors that affect home prices: The Federal Reserve having kept interest rates low, zoning regulations for large-lot single-family homes. There’s no limit to the number of causes with which one could try and explain this.

The question is, what is the situation now? What’s making it worse? Are federal taxpayers subsidizing that?

So let me describe, first, the conversation we had with a leading economist who had worked for these hedge funds, who’s sort of the key spokesperson on this issue.

And her immediate response was, “Well, you’re saying that hedge funds are solely to blame for what’s happened to housing prices, and that’s obviously false.”

We say, we’re not saying that, nobody’s saying that, or at least nobody needs to say that at all.

Rather, we’re now in a situation where what was unaffordability of home ownership focused on a few metropolitan areas, in terms of the median family income and median family price — five years ago, that was like six or seven metropolitan areas in the country. That problem has now spread to like 90% of the metropolitan areas. We’re seeing a huge change in the difficulty of buying homes in the country. Home prices nationally have gone up by 40%. With interest rates going up, they add 45% to the monthly payment, to the cost of buying the same home.

You add those two together, and we’re now in a situation, an overall affordability crisis, that affects virtually everyone who doesn’t own a home, even the children of those who do.

And to put this in context, during the pandemic, household wealth, home equity, increased by $6 trillion in this country. A typical family in San Jose, their household wealth went up by $250,000. In Montana, by $50,000, wherever.

Where does that money come from? How do you suddenly wind up owning so much more? The answer is, that’s an obligation of all the people who don’t buy homes as to what it would cost them in monthly payments to buy homes, or to pay more rent.

So this is now a widespread problem. So that’s our situation, and part of what’s driven that is, the sales inventory of single-family homes is very low and at historic low levels. People are staying in homes longer. It’s hard to buy another home.

OK, so in that context, here you have one factor that’s particularly affecting starter homes in a concentrated way, in precisely the neighborhoods where families traditionally try to buy their first home.

There has been a dramatic reduction in first-time home buyers in general over the last year, and in families that are 25-to-34 years old. So it’s pushing the age at which people can afford to buy much longer. That’s the context.

And sure, these corporate landlords, they only own a small share in total of all the millions of homes in the country. That doesn’t matter. What matters is the impact on the inventory available for sale in a given market at a given time. That’s what drives prices. It doesn’t matter if they only own 3% of all single-family homes — institutional investors in Texas in 2021 bought 28% of the single-family homes for sale. That’s a broad definition of investment.

And they’re buying, on average, as I said, 26% below the median sale price. Their concentration is precisely where people could otherwise buy homes.

So the isn’t “who’s to blame?”question. The question is: “Is this a problem, this situation American families are facing?” And when you step back and you realize that American taxpayers are subsidizing these purchases, that’s really the key.

The question isn’t who’s to blame. The question is, “Should we as taxpayers, all of us, be paying more so hedge funds and Wall Street investors can buy up the single family homes that families would normally be able to buy?”

Is that what we want our tax dollars to be being used for? Because that’s what’s happening.

Democrat representatives Ro Khanna, Katie Porter and Mark Takano have now introduced the Stop Wall Street Landlords Act. What should we know about that, and are there other ways forward that you’re thinking about?

The approach that Barry and I outlined, and that we’ve been talking on the Hill about and with the White House, is a very narrow, limited, focused approach to try and gain as broad support as we can, because we’re up against, obviously, some of the strongest forces in the country, who these buyers are.

And there are other laws being proposed, the one you mentioned and others that go much further, that have 100% transfer taxes….

I think all approaches can be good. The question is, what can be done that’s realistic, that can’t be challenged from the Supreme Court?

So what we focused on is a simple, narrow change to the tax law, so that if you’re a homeowner, you have a limit on the amount of interest you can deduct on your home, $750,000 of debt.

What we’ve proposed is to say, put a similar limit on these major funds. And say, if you own more than 100 single-family homes, you don’t get an interest deduction. That’ll reduce the rate of return, and here’s the key, we’re making this revenue-neutral by saying, investors now own such homes, and they bought them? Fine. You can recoup the deduction you’ll lose when you sell that home to a first-time home buyer in the next four years.

So it has a double power. It’s reducing the incentive to buy these homes, and it’s using that same tax subsidy to encourage investors to make those homes available to the first-time buyers. That’s really the key.

So it’s changing the nature of what American taxpayers are subsidizing, and that ought to be the question: Should we be subsidizing undermining home ownership in this country, especially at this time, or should we be supporting it?

All right then. I’m going to end on that hopeful note. We’ve been speaking with Gene Slater. You can find his and Barry Zigas’ piece, “Stop Subsidizing Wall Street Buying Up Homes,” on HousingWire.com.

Gene Slater, thank you so much for joining us this week on CounterSpin.

Sure. Thank you very much.