Hedge Funds Aren’t Causing the Housing Crisis

It goes without saying that a story is compelling without being true. Of particular suspicion are stories of scapegoating groups or companies that are impossible or at least very difficult to defend. For example, banks, oil companies, criminals, etc.

A scapegoat takes responsibility for complex issues. The trick is to cast villains in such a way that the facts around them become irrelevant.Who cares if criminals actually ravaged American cities? Trying to emphasize test theory like this makes you look like a criminal and puts you on the same page as people who have done horrible things. It’s dangerous because it’s a distraction.

The latest version of the residential villain targets private equity firms and hedge funds, generally known as ‘institutional investors’. They are said to outperform regular homebuyers and are therefore said to be responsible for skyrocketing rents and home prices in 2020 and 2021. J. Vance argued at the start of his senatorial campaign in 2021, noting that first-time homebuyers, disproportionately Black Americans, were unable to become homeowners as a result.

I don’t want to be hyperbolic, but the idea that these firms are ultimately responsible for our housing-affordability crisis is absolutely ridiculous, and no one who knows anything about housing markets believes it. Yet this story has gained so much traction that it has spawned hearings and bills on Capitol Hill. One recent effort by Senator Jeff Merkley of Oregon seeks to levy high taxes on any company owning more than 100 single-family homes, in order to push it to sell those homes to owner-occupants or smaller investors.

I asked Merkley what drew his attention to hedge-fund activity in the housing market, and he told me that he had “started to hear from people in the neighborhood saying. ‘Here’s the problem: We’re competing when we’re looking for a home; we’re competing against all-cash offers from businesses.’ It brought me back to thinking about whether we should have American families having to compete against billionaires to have a place to rent or to buy.”

In order to have the type of pricing power that would allow any entity to push up rents and home prices, it would need to own significant shares if not an outright majority of homes in a particular market. This obviously does not happen at the national level.

According to one report, only 3% of homes sold in 2021 were purchased by institutional investors. At the state level, this story also seems unlikely. In Georgia, a state with relatively high investor activity, about 8.5% of home sales in 2021 came from the largest investor, according to CoreLogic data. In Markley’s home state, just 2% of sales went to “mega investors,” who own more than 1,001 properties. But 8 percent or 2 percent of home sales does not mean 8 percent or 2 percent of total home inventory. After all, most homes are not for sale. Year after year, the majority of houses remain in the same hands. Also, purchase does not imply permanent ownership.

Investors in both states have very likely sold some of these homes. If you’re trying to track down the cause of this phenomenon, you’ll need to find an explanation common to all of these locations, rather than an explanation specific to this or that market. Nevada, Arizona, Utah, Montana, and Idaho saw the most increases in home prices through August, but only the first two of these states received relatively high rates of investment from mega-investors. (According to 2021 data, Arizona holds the largest share, with about 8.9% of homes on the market going to mega-investors).

Furthermore, some proponents of the scapegoat narrative argue that even if institutional investors are not dominant at the state level, they can distort local real estate. If you’re looking for a three-bedroom home outside Atlanta, you won’t be as satisfied with a home outside Savannah. But just because something is theoretically possible doesn’t mean it will happen in practice. And these theories, frankly, give investors mastermind qualities they don’t deserve. For example, Zillow’s threats to buy properties leveled off when the company pulled out of the market after selling many homes at a loss.

In the absence of solid data to back up the institutional scapegoat story, there is no doubt that there are many misleading statistics out there. According to a report from the House Financial Services Committee, “In the third quarter of 2021 alone, institutional investors purchased 42.8% of the Atlanta metropolitan area’s condominiums for sale and 38.8% of the Phoenix-Glendale condominiums.”-Scotts Dale area.”

These are incredibly large numbers, literally unbelievable. The citation given in the documentation was incorrect, but I was able to find a relevant report.

The report only shows the percentage of purchases made by investors, not institutional investors Why is this important? Investors include individuals or businesses with less than 10 properties, mid-market investors with 10 to 99 homes, iBuyers who buy properties and resell them immediately, and even vacation homes through LLCs. It also includes people who In this regard, New He America’s report on investor activity in North Carolina over the past year suggests that smaller players are indeed driving investor growth in this market.

Originally published at https://businessdor.com on January 26, 2023.