Institutional buyers are partly to blame. But it’s more complicated than that.
First of all, the American Dream is much younger than the nation itself. The term emerged 92 years ago,
at the nadir of the Great Depression, when the historian James Truslow Adams defined the American
Dream as “that dream of a land in which life should be better and richer and fuller for everyone.”
As for how it’s been applied since, well, that’s another story.
Between the 1930s and the 2008 Global Financial Crisis, the American Dream became inextricably linked
to single-family home ownership. Today, as inflation declines from a 40-year-high and interest rates
remain at their steepest levels in decades, such ownership is now increasingly out of reach for millions
of first-time buyers.
“Buying a house is exceptionally difficult,” said Andra Ghent, professor of finance at the University of
Utah. “Is the American Dream morphing? I do think that it’s especially difficult to become a homeowner
right now, both because of high home prices and high interest rates.”
The U.S. homeownership rate stands at 66 percent, down 2 percentage points from the second quarter
of 2022, when it reached a 15-year peak. The average price of a home rose from $319,000 in January
2019 to $487,000 by October 2023, according to the U.S. Census. Inventory remains frozen: Last month,
existing home sales fell to their lowest level since October 2010.
“We have to start planning for one-third of adult households to remain renters,” said Vanessa Perry,
vice dean of the George Washington University School of Business. “If we continue to have problems of
shortage of supply for units to buy, if that continues to be the case, then we’ll see people shift away
from homeownership, in addition to not growing that market.”
Perhaps most distressingly, the average fixed rate on a 30-year mortgage sits at 7.22 percent, a level last
seen in May 2001, and nearly a full 5 points higher than the all-time, COVID-era low of 2.8 percent in
July 2021, not even 30 months ago.
First-time buyers are particularly feeling the pain: They comprise 31 percent of the current market,
down from 38 percent in 1981; but the average age of repeat buyers now stands at 58, up significantly
from 36 in 1981, according to the National Association of Realtors.
“When you layer on student loan debt burdens, along with the high prices, you start to get a picture that
isn’t very great for the first-time homebuyer market, and it doesn’t suggest that the market will
expand,” added Perry.
But rather than simply blame the housing crisis on macroeconomic forces — which are both varied and
doubtlessly largely responsible — several housing experts are now pointing the finger at a new
ownership phenomenon born out of the distress of the 2008 Global Financial Crisis: Institutional
investors, namely private equity firms and publicly traded companies, buying up single-family residences
and turning them into long-term rentals.
There are roughly 82 million single-family homes in the U.S. Over the past year, private institutions have
committed $60 billion toward purchasing single-family homes and turning them into rentals.
Institutional ownership accounted for 700,000 (or 5 percent) of the 14 million single-family rental homes
nationally in 2022, according to MetLife Investment Management.
Institutional owners are expected to control 7.6 million single-family rental homes by 2030 — what
would be more than 40 percent of the single-family rental market — according to MetLife.
“We’re morphing into a new sharecropper society, or a neo-feudal society, after a proud 200-year
history of being a yeoman republic, and I don’t think people have thought through what the
consequences are,” said Robert C. Hockett, professor of corporate law and financial regulation at Cornell
Law School.
This year, investor activity has been only slightly more muted amid high prices and soaring mortgage
rates. Investor purchases of single-families — currently 16 percent of all such sales — are slightly down
in 2023, according to Daryl Fairweather, chief economist at Redfin, who cited the site’s internal data.
“When it comes to the share of homes purchased by investors, it’s about even with where it was pre-
pandemic, but below where it was during the pandemic,” said Fairweather. “If interest rates were to
come down, I think investors would get back into the market.”
However, this pattern isn’t accepted by all housing experts. Sam Chandan, director of the NYU Stern
School of Real Estate Finance, testified before Congress last year that institutional investors account for
only 2.5 percent of all home sales nationally, citing data from Freddie Mac.
“It’s an incorrect assessment, in my view, that the institutional investors are driving prices nationally,”
Chandan told CO. “It is simply not supported by the data.”
Regardless of an agreed-upon ratio, there’s no denying that corporations have taken a larger slice of the
home purchasing pie and, therefore, have changed the bargaining terms. Institutional investors often
make all-cash purchases, pushing out first-time buyers who usually seek a 30-year mortgage and flexible
financing. Moreover, if an average family can’t purchase a home in a tight market, they must turn to
renting, which feeds a cycle of higher prices and greater profits for the private firms that have scooped
up the paltry housing supply.
“There are other sorts of investments, but they are certainly not as widely adopted and accepted as
homeownership,” said Perry. “For the overwhelming majority of U.S. households, homeownership is the
route to wealth creation and intergenerational wealth transfer. Period.”
Some experts are increasingly disturbed by the outsize role these large corporations and private equity
firms now play in the housing market, and fear there’s no going back once their corporate foot is in the
door of the American Dream.
“This is one of the biggest changes in American history, literally, but it’s not getting any attention at all
because Americans aren’t aware of what things used to be like,” said Hockett. “People aren’t noticing
the historical significance of this.”
Homesteaders and homeowners
Even if it’s not written in our founding documents, homeownership has always held a pre-eminent place
in the original vision of the nation, mainly because of how radical the idea of property rights was in the
late 18th century.
One of the Founders’ great ambitions, among many, was the idea that individuals could come to North
America and build a homestead on their own and be more or less sufficient by the sweat of their own
brow. The model developed by the first American colonies, especially in what became the Northeast,
during the 18th century and early to mid-19th century was quite different from what prevailed in
Spanish South America, which replicated the European medieval order of feudalism — a small number
of rich families would own all the land, and peasants would work the fields to pay their rents and earn
their keep.
“The yeoman farmers of Jefferson of Madison said this was a country where you would own your own
land, everyone would have their little piece, and they’d own enough to live off of and be self-sufficient
in a democracy of equals, not a society with oligarchs on top, and peasants and serfs below,” explained
Hockett, who noted that Blacks, women, Native Americans and other minorities were for a long time not
part of this initial vision.
“They were trying to build a country in which every citizen would own his own home and be productive
within those homes,” he added.
Legislation buttressed these early hopes, notably the Northwest Ordinance (1787), which incorporated
territories of six future states and established the precedent of public domain land, and the Homestead
Acts (1862), which gave away 160 million acres of land across the continent to productive
homesteaders, and paved the way for white settlers in the American West.
When the Great Depression hit in the 1930s, the government looked for ways to prop up both a
debilitated housing market and a severely wounded banking sector. President Franklin Roosevelt’s
administration and Congress created the Federal Housing Administration (1934), which provides
insurance for mortgages originated by private lenders, and the Federal National Mortgage Association
(1938), known colloquially as “Fannie Mae,” which expands the secondary mortgage market by
securitizing loans and selling them to investors.
Out of FHA and Fannie Mae, the 30-year mortgage was born. The innovation allowed homeowners to
put down 10 to 20 percent of the home’s overall value and pay the rest off in monthly installments over
a 30-year period.
Things shifted dramatically within a generation: Homeownership rates have never dropped below 63
percent since 1965.
“That system worked perfectly from the 1930s to the mid-1990s,” said Hockett. “But we allowed these
public agencies, Fannie Mae and FHA, to fall increasingly under the sway of private sector institutions,
and those systems of home mortgage finance began to get into trouble once we privatized them and
allowed Wall Street banks to bid up prices.”
Mortgage securitization — packaging different mortgages into a security, slicing them up according to
risk, and selling the bond to investors — is universally viewed as the principal cause of the 2008 Global
Financial Crisis (GFC). While poor underwriting standards and misguided federal legislation helped
inflate the early-2000s housing bubble, a three-decade buildup of mortgage securitization laid the
foundation for a once-in-a-century financial panic that exploded across Wall Street and nearly took the
entire system down with it.
“There’s just so much money to be gained that it makes sense for these systems and
elaborate secondary markets to have been created to support homeownership,” said Perry.
“Government provides incentives for homeownership, and in the private sector there are these
overlapping entities — homebuilders, mortgage brokers, real estate agents, insurers, investors — that
it’s very much a cornerstone of the U.S. economy.”
Changed equation
The GFC irrevocably altered the single-family housing market in the United States. Homeownership rates
plunged from an all-time high of 70 percent in mid-2004 to a historical low of 63 percent in the second
quarter of 2016. Between 2007 and 2017, nearly 8 million homes were foreclosed upon, according to
CoreLogic, a data firm.
Out of that carnage, a new paradigm emerged: with millions of American homes carrying negative
equity, mortgage refinances became almost impossible because market values had plummeted. Rather
than allow mass foreclosures to sweep the nation, institutional investors began purchasing pools of
mortgages from Fannie Mae and Freddie Mac, and allowed people to rent rather than leave, something
Wall Street had never done before and was incentivized to do by easy money Federal Reserve policies.
“It’s the big institutional owners who own homes and rent them out — there was nobody significantly
doing that before the GFC,” said John Burns, a national real estate consultant. “The huge collapse of
home prices and the huge decline in borrowing rates enabled them to amass hundreds of thousands of
homes.”
The Federal Reserve signed off on this unofficial policy, placing billions of dollars of underwater
mortgages out for bid. Officials at Fannie Mae and Freddie Mac also signed off, according to Rep. Ro
Khanna, a California Democrat, who said the government understandably made this secondary loan
assistance for institutions out of a concern that additional foreclosures would further hurt already
depressed property values.
“Today, though, there’s no reason for this,” Khanna told CO. “In many parts of the country, property
values are elevated, people can’t afford single-family homes, and you have private equity firms, Wall
Street firms, buying up homes below the median home price, buying them in working-class
neighborhoods, and they’re sitting on them and having them appreciate in value.”
Cornell Law’s Hockett described the method as akin to Gilded Age speculators like Jay Gould and
“Diamond” Jim Fisk, who’d regularly buy up mines of gold and silver to corner the market and drive
prices higher before selling.
“It’s a classic market manipulation scheme, or scam, but now we see that happen to the most precious
commodity of all for middle-class Americans: homes,” said Hockett.
A handful of corporate landlords have cornered the space since 2008.
Pretium Residential owns 90,000 single-family homes; Invitation Homes owns 80,000; American Homes
4 Rent owns 60,000; and Tricon Residential owns 36,000 homes, according to CNBC. Blackstone (BX)’s
single-family rental subsidiary, Home Partners of America, holds a 26,000-home portfolio, according to
CoStar.
“The public consciousness isn’t fully aware of how important being a homeowning society is to the
American identity. We took it for granted that it was pervasive, in the same way we look at the sky and
it’s always the same color,” said Hockett.
Market forces
However, not everyone in CRE capital markets views the entrance of institutional investors into the
single-family space as an apocalyptic event. First, some experts believe mom-and-pop investors play a
larger role in single-family residences than behemoths like Blackstone.
“People conflate institutional investors with investors in general,” said Richard K. Green, chair of the
University of Southern California’s Lusk Center for Real Estate. “The idea of institutional purchases is a
little overdone. It’s a pretty tiny fraction of the market, and it’s usually smaller investors who tend to be
buying housing for rent.”
Christopher Thornberg, founding partner of Beacon Economics, said that the current supply glut is
“strictly a temporary phenomenon,” and that there’s “nothing long-run” about the recent hike in prices.
“And to be clear, it comes after a decade of the cheapest housing our nation has ever seen,” said
Thornberg. “From 2011 to 2021, housing affordability, once accounted for interest rates, was never
better.”
There’s also an argument that corporate landlords are enhancing the overall inventory of homes in the
market. By affording would-be buyers the opportunity to have the homeowning experience at rental
rates, ones substantially lower than the current 30-year mortgage, institutional investors serve a
segment that demands a more affordable housing option.
The Generation X and millennial generations “see homeownership differently than their parents’ and
grandparents’ generations did,” said Alfonso Munk, chief investment officer at Hines, a private equity
real estate and development firm. “Younger generations are much more mobile, and they don’t think
owning a home is the financial goal of a family. They’d rather place capital elsewhere as they make it.”
Munk emphasized that this amounts to a large-scale cultural shift. To a certain extent, he added, a large
percentage of Americans are already comfortable being part of a rental society.
“Most people lease a car, they don’t own it. You want to rent everything you can, and people don’t want
to own things because it’s a big capital expenditure,” Munk said. “I feel that the rental market will be
here for a while and continue growing.”
But if market forces have hastened this country into leasing the American Dream, what current
macroeconomic pressures ossified such trends for first-time homebuyers?
Edward J. Pinto, senior fellow at the American Enterprise Institute, and a former FHA, Fannie Mae and
Freddie Mac official, placed the blame solely at the feet of the Federal Reserve for juicing the punchbowl
with sub-2 percent interest rates for nearly 11 years — and then bringing them back below 2 percent
from October 2019 until July 2022.
“[The affordability] issue is largely the result of not building enough housing, but it’s been compounded
tremendously by the distortions the Fed created by its zero-interest-rate policy [ZIRP] and quantitative
easing [QE],” said Pinto. “They drove interest rates below 3 percent, needlessly, and that created a
refinancing boom which has locked people into 2 percent and 3 percent rates, so people don’t want to
move, and in the meantime rates have doubled.”
As more Americans choose to remain locked into their cheap 30-year mortgages, actual new supply has
also slowed down. Single-family housing starts in October 2023 hit a seasonally adjusted rate of
970,000, roughly 43 percent less than the 1,714,300 new single-family starts in 2005, which set a new
annual record, according to the U.S. Census and Housing and Urban Development data.
There’s also sociological factors to consider.
By tethering Americans to their homes for over two years, COVID altered the use and function of the
single-family home. Employees who now work from home twice a week realize the importance of their
suburban homes, which have offices or comfortable couches to work from, to say nothing of reliable Wi-
Fi.
“The biggest shift in the pandemic was toward less urban living, more suburban living, because people
don’t have to commute as frequently,” said Utah’s Ghent. “There’s been a big increase in demand for
residential space, and within that demand there was a big increase in the suburbs of central cities.”
USC’s Green believes that a radically altered American Dream goes back to Americans’ attitudes toward
marriage. He said marriage is the No. 1 predictor of whether one becomes an owner or a renter.
Marriage rates have fallen from 76.5 percent in 1970 to 31 percent today, according to the National
Center for Family and Marriage Research.
“I think owning a house was a product of marriage more than a thing in itself,” said Green. “The fixed
costs of owning a house are high, you’re tied down, and, if you haven’t met the right person yet, you
want the option of being easy to move.”
Washington to the rescue?
So what, if anything, can be done to change the fundamentals to favor the average American
homebuyer?
Several senators and representatives in Washington are attempting to forge a legislative compromise.
Rep. Khanna’s “Stop Wall Street Landlords Act” would prohibit Fannie Mae, Freddie Mac and Ginnie
Mae from purchasing and securitizing mortgages purchased by private firms that use debt to buy and
rent them out for profit. The bill has several Democratic co-sponsors in the GOP-controlled House.
“This is a real issue,” Khanna said. “Ordinary people are talking about this, how they can’t buy a home
because Wall Street is buying up their neighborhoods.”
Utah Republican Sen. Mike Lee’s “HOUSES Act” would allow state or local governments to purchase
millions of acres from the federal Bureau of Land Management and open those tracts to residential real
estate development as they see fit. The bill has several GOP co-sponsors.
Professor Ghent is wary of Sen. Lee’s plan, mainly because so much federal land is in undesirable
pockets and away from employment centers. Rather, she points toward state-level housing reforms as
being the best hope to make local governments approve more single-family and multifamily housing
through zoning measures.
“The low-hanging fruit is state-level reform,” she said. “Cities are kind of hopeless. They don’t have
expertise, and they’re so beholden to local interests.”
Regardless of where the solutions come from, it’s clear some elected officials are now awake to an
American Dream that is starting to feel like a nightmare.
“Americans aren’t serfs,” said Khanna. “We didn’t fight a revolution in this country just so we have to
pay rent to Wall Street because they own all the homes.”
The original article can be found here.