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Investment Firms: Not Just Buying Houses, But the Ones That Matter

Few things have caused as much buzz in the housing market as the surge in corporate investors snapping up properties. Headlines have been filled with stories of bidding wars, with investment firms like BlackRock making...

Few things have caused as much buzz in the housing market as the surge in corporate investors snapping up properties. Headlines have been filled with stories of bidding wars, with investment firms like BlackRock making waves in the residential real estate sector. But just how significant is their role? Are they really buying all the houses?

The truth lies somewhere in between. While mega-investors may not be dominating the market, they possess a profound and growing structural advantage. Take Invitation Homes, for example. This $21 billion publicly traded company, spun off from Blackstone, operates in 16 cities, with its largest concentration in Atlanta. Though the number of homes it owns may seem small compared to the total sales in the city, Invitation Homes previously bought up to 90% of the homes available for sale in certain Atlanta ZIP codes.

What sets Invitation Homes apart is its ability to borrow money at incredibly low interest rates. While average homeowners pay interest rates between 2% and 4%, Invitation Homes secures billion-dollar loans at rates around 1.4%. This advantage allows them to add a significant premium to the purchase price of each home. Plus, they often make all-cash offers, giving them an edge in a fiercely competitive market.

But it's not just any home that they're after. Invitation Homes strategically targets properties with the greatest potential for wealth-building. Their portfolio, valued at $16 billion, generates around $1.9 billion in rent per year. With a price-to-rent ratio that's twice as good as the average buyer, Invitation Homes is focused on acquiring the precise houses that could be transformational for the middle class.

It's important to note that investors aren't buying every single-family house they can find. Their focus is on relatively inexpensive homes in growing metro areas, typically built since the 1970s. Bigger, more expensive houses attract a different clientele, such as wealthy boomers and finance/tech professionals. Additionally, investors tend to avoid cities with stable or shrinking populations.

However, their presence undoubtedly impacts the availability of affordable homes for working and middle-class households in thriving cities like Atlanta, Charlotte, and Phoenix. By scientifically and systematically scanning the market, these firms make cash offers on attractively priced properties well in advance of the actual demand. It's a proactive approach that gives them a significant advantage.

But what about the impact on the rental market? Wouldn't converting houses to rentals flood the market and lower rents? Unfortunately, that's not the case. According to Invitation Homes, they operate in markets with strong demand drivers, high barriers to entry, and high rent growth potential. Renting may be a viable option for some, but the rental experience in the United States lacks the strong tenant protections found in other countries.

While it's clear that the current system of encouraging homeownership has its flaws, it has historically provided financial benefits for many lucky homeowners. The government's implicit and explicit subsidies for homeownership have been the largest handout to the American middle class. However, these benefits were often denied to Black Americans, contributing to the racial wealth gap we see today.

To level the playing field between investors and regular homebuyers, policymakers can take steps to address the challenges faced by the latter. Reevaluating loan processes, especially for Federal Housing Administration (FHA) and rehab loans, could provide individuals with a fairer chance against the Wall Street behemoths.

Ultimately, if we don't want the vast majority of America's land and housing to end up in the portfolios of the wealthy few, we need to consider taxing the rich. Investment firms are ultimately owned by individuals, universities, churches, and other entities benefiting from favorable tax treatments. As inequality grows in the United States, the financial elite increasingly diverts resources from job-creating endeavors to directly extracting wealth from the working class. Becoming landlords is just one way they accomplish this.

Site of the next bidding war Image: Site of the next bidding war (Tierra Mallorca/Unsplash)