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The Real Causes of the Housing Affordability Crisis: It's Not Just the Investors

August 08,2024 | Posted By Jason Risley in Buying

Understanding the Housing Affordability Crisis

As the housing affordability crisis continues, some people are blaming investors for the rise in home prices and the lack of available houses. However, this blame is misplaced and overlooks the real reasons: government help for homebuyers, changes in interest rates, central bank purchases of mortgage-backed securities, rising construction costs, and local building rules.

The Real Reasons Behind Rising Home Prices

Home prices are more unaffordable now than at any other time in our history, even before considering the rise in interest rates. The rapid growth of today’s housing bubble coincided with a surge in investor activity.

The proportion of home sales to landlords with 1,000 or more properties rose from below 1% pre-pandemic to almost 2.5% by mid-2022. During the same period, quarterly investor home purchases increased from approximately 150,000 to over 250,000. However, attributing the increase in home prices solely to investor activity is a misconception.

The Role of Investors in the Housing Market

What actually triggered the most expensive and second most frenzied housing market in history? The answer is ultra-low interest rates, which hit a low of 2.65% in January 2021, set by the Federal Reserve, and lots of money pumped into the real estate market. The Fed nearly doubled its portfolio of mortgage-backed securities (MBS), essentially printing $1.3 trillion and injecting it directly into the real estate market.

This huge increase is like having $300,000 mortgages on 4.3 million homes, equal to the entire home sales market in some years. These rate cuts and MBS purchases drove the housing market boom. Home sales jumped from 4 million annually in May 2020 to 6.5 million by October 2020, the busiest market since the previous bubble 14 years earlier.

The Impact of Federal Reserve Policies

Investors buying more homes was due to these Federal Reserve policies, not the cause of price increases. Investors joined families in buying homes at near-zero interest rates. Small "mom and pop" investors, those with fewer than 10 properties, made up more than 4 out of 5 investor purchases.

The rise in investment was expected from easy money policies but did not cause the price surge. Even at the peak, big investors were less than 3% of the purchase market. Freddie Mac shows that while corporate buyers increased, overall investor share only went from 26.7% to 27.6%.

Misplaced Blame: Investors vs. Government Policies

Following interest rate hikes, large investors significantly reduced their purchases. There was a 90% decline in the first two months of 2023 compared to 2022. The market share of large landlords decreased to 0.4% after reaching a peak of 2.5% during the period of low interest rates. Additionally, CoreLogic reports a substantial drop in large investor purchases last year.

For those with over 1,000 properties, their share fell from 17% in summer 2022 to about half a year later. Redfin reports a record 49% drop in investor purchases in Q1 2023, following a 46% drop the previous quarter. This decline continued throughout the year. By Q1 2024, investor purchases were below levels seen seven years ago. Higher interest rates make it hard for investors and families to buy homes.

The True Effects of Investor Activity on Home Prices

Focusing on investor purchases misses the real story. Some investors sell homes while others buy them. For years, investors have sold more than they bought, reducing their share of single-family homes even as their share of new purchases rose. Investor-owned homes decreased by 1.4% over the past decade.

Historical Data: Investor Ownership and Homeownership Rates

Over 50 years, data shows no sign that investor-owned housing harms homeownership. Today, rental homes are a smaller part of the market than 50 years ago. Owner-occupied homes grew by 95%, more than the 82% rise in rental units. The Urban Institute says institutions own about 574,000 homes, less than 1 in 200 of 145 million U.S. housing units. This means non-institutional owners have 99.6% of the housing.

Some reporters and analysts keep blaming big investors, ignoring these facts. The truth is institutional home ownership doesn't significantly affect local home prices. Government mortgage help and the Federal Reserve's massive money injection are the main causes. Fixing these issues is hard due to political challenges, so blame wrongly goes to investors.

The Need for Real Solutions to the Housing Crisis

To solve the problem, reduce government-backed mortgages and limit the Federal Reserve's power to buy mortgage-backed securities. Trying to stop investors from buying homes might force many families to rent or face very high mortgage costs.

Conclusion: Addressing the Root Causes, Not the Symptoms

Blaming real estate investors might seem easy, but it doesn't fix the real problem.

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