As a greater share of single-family homes are being purchased as investments, a debate has emerged about what government-backed mortgage providers can or should do about it.
During the first quarter of 2022, 28% of single homes were bought by someone looking to rent or flip the property rather than use it as a primary residence, according to a recently published report on the state of the U.S. housing market from Harvard University's Joint Center for Housing Studies. That's up 19% from the prior year and up from the 16% average between 2017 and 2019.
Former director of the Federal Housing Finance Agency Mark Calabria said the uptick raises a question about what role Fannie Mae and Freddie Mac should be playing in the home investment market, particularly amid a spiraling
Calabria said a decision by the FHFA last September to
"Suspension of the PSPA limitations have undermined housing affordability, as they have increased investor demand for homes that would have otherwise gone to homeowners," Calabria said. "The fundamental problem facing our housing market is a lack of supply; increasing investor demand inflates prices unnecessarily."
Others say the uptick in demand has more to do with
"The main driver is the dramatic rise in rents, which has made the investment math better and better," Jim Parrott, a nonresident fellow with the Urban Institute and former senior advisor on Obama's National Economic Council, said. "And then it's easier to invest in single family rental than it has ever been, with the development of securitization and investment platforms attracting categories of investors one didn't see 10 years ago."
Government-sponsored entities have historically sought to add more investor loans to their books, Calabria said, operating under the assumption that they are safer than owner-occupied mortgages. A non-paying renter poses less of a risk than a non-paying homeowner, or so the logic goes, because a new tenant can be brought in quickly, especially in a tight rental market.
Calabria said this argument does not pan out in the long run, as individual landlords — especially those with multiple properties in the same market — are more apt to walk away from their investments than owner-occupants.
"These things all go bad at once. The guy who walks away from 10 properties in Vegas because he can't cover them doesn't walk away from one each year. He either keeps them all or he walks away from them all, or most of them. It's just a differently-performing market," Calabria said. "Investment properties look tremendously great for Fannie and Freddie if you only think housing markets go up. I think we're seeing that's not the case."
While the total market share of investors has surged since 2020, GSE exposure to investment properties have increased only modestly. Investment loans made up 7% of Fannie Mae's acquisitions during the second quarter of 2022, according to its quarterly financial report, up from 4% the year prior. Similarly, through the first half of the year, 7% of Freddie Mac's loans were for investment properties, up from 5% at the end of last year.
Last year saw an influx of cash buyers into real estate markets throughout the country, with more than 30 percent of transactions closing on an all-cash basis, according to the
Large investors — defined as those with more than 100 properties — were also more active in the single-family market last year, according to the Harvard report, increasing their market share from 14% in 2020 to 26% in 2021. Private equity firms and large real estate investment trusts were especially active last year, committing billions of dollars to build, acquire and grow single-family rental platforms to capitalize on market dynamics.
"Some large corporate investment groups have been large buyers for cash," former Federal Housing Commissioner David Stevens said. "The theory is that inventory limitations and higher demand brought on by millennials reaching their peak home buying years will result in both ongoing home price appreciation and ever increasing rental returns — so regardless of whether they hold and rent or sell the returns can be significant."
The GSEs briefly supported such activity. From 2016 to 2018, both enterprises ran pilot programs to acquire debt collateralized by large single-family rental portfolios. In 2017, Fannie Mae backed a $1 billion, 10-year fixed rate loan to Invitation Homes, a single-family rental platform owned at the time by the private equity firm Blackstone. Invitation Homes completed a $1.7 billion initial public offering one week after the financing was announced.
Calabria, who took the reins at the FHFA in April 2019, said the agency made the right choice to stop funding loans to private equity firms, which have ample private financing mechanisms available to them. He said the agency should also revisit its policy on supporting individual borrowers holding investment loans for multiple properties.
"I certainly think it's appropriate that Fannie and Freddie are not funding [private equity] loans and I think the question of Fannie and Freddie funding other investors should be examined because, again, that has an adverse impact on homeownership," he said. "It's one of those things where we should probably not encourage it, but not necessarily discourage it either."
The Harvard report noted investors gravitated toward more affordable homes, purchasing 29% of the homes sold in the bottom third by metro area sales price, compared with 23% of homes sold in the top third.
In a statement, the FHFA acknowledged that investors, particularly large corporations, have come to play a more significant role in the U.S. housing market. The agency has attempted to curb this in small ways, such as extending the priority time period offered to individual buyers and non-profits seeking to purchase homes of which the FHFA has taken ownership from 20 days to 30.
"FHFA recognizes large investor purchases of single-family homes drive up prices for lower-cost homes, making it harder for aspiring first-time and first-generation home buyers, among others, to access the wealth-building opportunities from owning a home," an agency spokesman said. "At FHFA's direction, the Enterprises extended the First Look period during which real-estate owned properties are only made available to owner-occupants and non-profit organizations to 30 days. Large investors are only permitted to submit bids after that period."
Commonly accepted causes for the current housing crisis range from
As the Fed continues to increase its benchmark rate in effort to tamp down inflation, Stevens said the insatiable demand that has defined the housing market these past two years will reach a breaking point — eventually.
"With [mortgage] rates in the 6% range and home sales slowing, with the looming risk that the Fed may miss the mark and push the economy into a recession, will investors remain as strong in the market?" Stevens said. "My expectation is that, like all buyers, investors too will slow their appetite for acquisition here. But we are not seeing that yet."
