Looking at the economy, we see an ecosystem that works like a well-oiled piece of machinery. It has a lot of parts and wheels that each play a vital role in its operation. If one piece of the machinery is worn down, the other pieces are affected. But you can mend the affected part by applying measures to ensure continuous functionality.
Each player in the economy has a role, and these roles are based on three main objectives. These objectives are safety, income, and growth. They are interested in all three of them but need to balance the risk and the reward in such a way that it benefits them. Striving for only one means you stray away from the others. One wins while the others suffer. Knowing how to achieve this balance is the key. Understanding the role each piece plays and how they can influence the whole machinery is vital, which is why we will look into the role investors play in the current housing market.
The economy’s fluctuations can influence housing crises. It’s what happened in 2008 and previous recessions. With the economic crisis in 2008, we understood the role subprime mortgages played that impacted the lives of so many people across the country and the world.
The causes of the housing crisis are up for debate. You can look at how the climate crisis created the phenomenon known as climate migration patterns. You can look at the fossil fuel industry and the power it’s allowed to have across the globe regarding supply shortages. You can even look at tech companies, fashion trends, and politics, but for this article, we will look closer at the real estate market and investors.
The real estate market has different players. There are consumers or households, suppliers or producers, and investors or landlords. Consumers can also be investors and vice-versa. We’ll separate the two types of players into households and corporate landlords and focus on the latter, also known as institutional investors.
The role they play as investors in the housing market is to scoop up opportunities and make a profit. Now, doing that can mean purchasing an apartment building when prices are low and renting it out, but it can also mean building several properties and renting them out. This can create an unbalanced market for renters or home buyers.
Besides the fact that the US has an accumulation of 10 years of housing shortages, around 74% of the properties bought by real estate investors in 2021 were low-cost single-family homes. To top that off, due to local opposition against affordable multi-family housing, the supply part for affordable housing is bleak. Easing some regulatory requirements could cut construction costs of new homes and, thus, the cost of housing. We saw an increase in construction over the past years, but the types of construction don’t meet the demand. From 1990 to 2019, 13.3 million rental units were built. Still, the amount of affordable housing built fell to 3.4 million. This allows some of these landlords to increase their profit at the expense of the renters by pressing rents higher because the renters have nowhere else to go.
We all see that rent prices have been climbing as moratorium orders went out of effect, placing a lot of those households in a housing situation they weren’t prepared for. In May of 2022, the median monthly rent price in the US went over $2,000 for the first time in history, climbing 15% since May of 2021, higher than the rate of inflation, which is at 8.5%. Cities like Nashville, Cincinnati, and Seattle experienced a rental increase of 30%, and Austin almost reached 50% rental price hikes. Still, rent is growing faster than wages.
Looking into how much households can afford to pay and how much they are required to pay, we start to see a difference between the two. While renters are recommended not to spend over 30% of their income on rent, many wind up having to pay around 50% to cover only their housing expenses. This applies to both buying and renting, as many renters struggle to cover their cost of living to set anything aside for a down payment. Furthermore, because in 2021, 18% of housing was purchased by real estate investors, and that percentage reached 22% in January 2022, buyers are left with fewer options. Over the same period, buyers purchased 33% in January 2021, and that figure dropped to 27% by the same time this year.
Regarding rental price increases, we can look at landlords increasing rental prices. While some do this for understandable reasons, others blame the economy, inflation, or wages for not growing. Still, understanding their roles is important if we want to understand rental housing.
Investors should understand that they aren’t the only player in the real estate market and make housing a human right in the US, as it happened in France, Scotland, and South Africa. Did you know that 72% of US citizens believe that it is? Unfortunately, it isn’t. Real estate investors’ role in the market has the severe side-effect of impacting households across the country in more ways than one.
As a first-time home-buyer, you need, on average, a 20% downpayment and usually turn to mortgages to cover the rest, being left with 30 years of mortgage payments. As a real estate investor, you can pay in full with more ease due to other properties that bring you revenue, get easier access to loans by using properties you already own as collateral, and can pay, on average, 10% less than the asking price because capital means you’re more trustworthy.
So, that leaves you with real estate investors owning more than they use, able to influence prices because the average Joe has no other option, and they are stuck renting for an indefinite period. Still, even when they rent, they have limited lee-way in holding on to that lease.
When landlords want to increase rents, it’s not just one apartment’s rent appreciating. The whole market goes up, and seeing as landlords control a large portion of the available housing market, they control the price. Real estate investors purchase property to flip, rent, share equity, rent-to-own, or as short-term buyers. Still, when 42% of the property purchased by real estate investors in 2021 was rented, and their market share is increasing, fewer properties are left on the market for others to buy and live there or rent as a second home.
In counties where investors made up a higher market share, the number of available homes decreased, and prices climbed. Across the country, 28% of the counties have a higher share of real estate investors’ purchases than the national average, with Dallas, TX having 43% while Texas is at 28%. Other states that we can note here are Georgia (19%), Oklahoma (18%), and Florida (16%).
Around the country, around 35.6% of housing units are occupied by renters. That is more than a third of the US population. The National Low Income Housing Coalition reported that “in no … county in the US can a worker earning the … minimum wage afford a modest two-bedroom rental home.” So what can renters do to continue to rent if they can’t afford to purchase, but rents continue to climb?
When it comes to the rights renters have and how the measures taken by landlords against them can affect them, we can spot other issues. One of the measures implemented to aid renters from incurring massive rent increases is rent stabilization which applies to older properties. Still, this law only exists in California, Oregon, and Washington D.C. If renters in rent-stabilized housing don’t agree to a rent increase, the landlords can cause additional stress to make them leave through renovations or other means.
As mentioned above, more than 23.4 million people pay more than 50% of their income on rentals without federal housing assistance due to funding limitations. These housing choice vouchers (Section 8) are meant to allow a renter to spend no more than 30% of their income on rent, with the government covering the rest. Only 1 in 4 approved applications get the funding, and those that get it, face some form of discrimination against Section 8 recipients. This leaves low-income households vulnerable to eviction proceedings as they can’t afford to pay rent.
Around half of the evictions are settled in housing court, where we can see the most significant disadvantage for renters. In most places, tenants aren’t allowed legal representation, while a lawyer represented 89% of landlords in Colorado in 2021 compared to less than 1% of renters. In 2017, New York City became the first, and so far only, place in the US to allow renters access to legal representation. Furthermore, eviction fillings remain on someone’s record for years even if they won in housing court, making it almost impossible for those renters to access future housing.
Measures are necessary to even the balance, and besides agreeing that housing is a human right, we must implement policies to benefit renters. Massive federal investment in rental assistance and increasing the number of new affordable housing being built are two measures that we can take. Subsidies are another, and while subsidies are available for many households, those that need them the most are left stranded. Prioritizing the protection of individuals over investments will level the playing field, making investors a smaller influence on housing prices so that they can’t completely offset the market for profit.
As we stated at the beginning of the article, the housing market is a complex piece of the economy, and understanding what we can do to ensure it works properly isn’t easy. We can design a market where no one party can grow considerable power over the others, leveling the playing field for all so that affordability increases. Incomes need to match the growth trends in inflation and expenses, but we can’t only look at that.
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