A recent Wall Street Journal report that institutional investors were buying single-family homes as rental properties spurred outrage from populists across the political spectrum, from conservative author and Ohio Senate candidate J. D. Vance to socialist magazine editor Nathan J. Robinson. One common phrase appeared in many of these condemnations: that institutional investors were depriving the working and middle classes of a chance to “build wealth” through homeownership.
This conventional wisdom that homeownership ought to be a chance to build wealth deserves scrutiny, along with related notions, such as that renting a dwelling means throwing money away. The prevalence of such ideas itself illustrates a disordered investment marketplace. In a free market, asset prices adjust so that no asset remains a clearly better investment than another for long. If buying a house consistently offers better returns than, say, renting a dwelling instead and putting the money saved into the stock market, this can be due only to market distortions.
Owning a home has long been a worthy investment in the sense that house prices were generally stable and less volatile than stocks. And the idea that homeownership makes for better citizens—the justification for homeownership subsidies, such as federal subsidized mortgages—has some empirical support. Several studies have found that homeowners are more likely than renters to vote, join civic organizations, or be good citizens in other ways (though nations such as Switzerland and Germany that don’t lack for civic order and bourgeois virtue have far lower homeownership rates than the United States). Economist William Fischel’s work on what he calls the “homevoter hypothesis” explains many facets of American local governance, such as how state funding of schools tends to produce worse education than local funding. Homeowners must take an interest in local governance, Fischel argues, to protect their property values.
But making one’s town more desirable is just one way to protect property values. The easier way is to pass negative-sum policies that inflate housing prices by restricting housing supply, letting homeowners “build wealth” by taking it from poorer renters and future generations of homebuyers rather than by creating anything of value. Such policies, which account for the vast majority of the wealth accumulated by homeowners, are of recent vintage. As Jake Anbinder, a historian of American housing policy, points out, housing became a lucrative instead of merely stable investment only in the 1970s and 1980s, after the baby boomers had bought into the housing market. This turning point coincided with a massive surge in policies such as historic-district designations and ostensibly environmentalist “slow growth” land-use planning.
Anti-growth housing policies worked out well for the baby boomers who got in on the ground floor but have forced subsequent generations to confront massively inflated housing prices. One ironic result: homeowners today must take out massive mortgages to afford price-inflated houses, placing themselves in a precarious position that makes them even more risk-averse to downturns in their housing value.
Institutional investors are a useful scapegoat for housing unaffordability, but they bear only a small portion of the blame. Single-family rental companies own less than 1 percent of the country’s total supply of single-family houses; the states where they own the largest part of the total, such as Georgia, Florida, and Arizona, are not notable for high housing prices. Investor purchases of housing sales, meantime, have actually declined as a percentage of the whole market since the last decade.
If homeownership represents many Americans’ best attempt to build wealth, that is largely because laws bar most Americans from other, safer high-yield investments—ostensibly for their own good. For example, the Securities and Exchange Commission’s accredited investor rules essentially bar all but the wealthiest individuals from investing in unregistered securities, including early-stage startups that can provide massive returns on investment. In theory, these rules protect individuals from risky speculations. But even the riskiest securities can be diversified or bought in small enough increments that a complete collapse in their price would not ruin investors’ livelihoods. Houses are far more dangerous investments: they’re unavoidably massive, illiquid, and typically highly leveraged. And unlike investments in housing, investments in startups contribute to making the nation more prosperous.
The real blame for housing unaffordability lies not with institutional investors but rather with heavy government interventions in the housing market—above all, supply restrictions whose most numerous beneficiaries and supporters are regular homeowners. Any justifications for such policies pale compared with their massive economic costs. The best way to get institutional investors out of the housing market is to support expansions in housing supply and make homeownership a way to store, not build, wealth—as it was for most of American history.
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