Affordability and housing equity are hot topics in the mortgage industry. The narrative is familiar: scarce inventory has accelerated appreciation, pricing many homebuyers out of the market. The subsequent dearth of affordable housing has had an outsized impact on Latino, and especially Black households, who already have substantially lower homeownership rates than white households.
But conspicuously missing from the mortgage industry's discussions about affordability, housing equity and the future health of our industry is the growing, disruptive influence of single-family home investors, particularly institutional investors. While it would be convenient to pin all the nation's housing woes on institutional investors, it would be disingenuous to do so — we have nearly two decades of underbuilding and centuries of systems that put people of color at a disadvantage to thank for that.
However, the sharp rise in investor activity and the effects it has on supply, affordability and the housing security of vulnerable communities should be very concerning to mortgage lenders, whose ongoing longevity rides on a strong, owner-occupied housing economy.
The growing footprint of SFR investors
Single-family housing investors are not a new phenomenon, but their recent growth and influence on the housing market are. During the pandemic, investors aggressively accelerated single-family home purchases, scooping them up at an unprecedented rate. Redfin reports that in the last three months of 2021, real estate investors purchased roughly 80,000 homes collectively worth $50 billion. In Q1 2022, Core Logic found that investors averaged 27.5% of all single-family purchases, an increase from a 19% share the year before and a 15.3% share in 2016.
While it is true that mom and pop shops (owning fewer than 10 properties) make up the majority of investors, large (owning more than 100 properties) and mega investors (owning more than 1,000 properties) have driven the recent uptick in investor activity, doubling their share of purchases from September 2020 to September 2021.
Reducing affordability and exacerbating inequity
The activity of large and institutional investors should be of special concern because research has shown that, unlike small and medium investors, they are especially disruptive to local housing markets. Institutional investors do not purchase properties uniformly across the country, counties and cities. Rather, they prefer to leverage economies of scale, concentrating on high-growth MSAs where they can carve out large swaths of below-median and median-priced acquisitions with laser-like precision, which are held in a portfolio and operated as rental homes.
The property characteristics largely favored by institutional investors frequently overlap with housing stock for entry-level homeowners. But institutional investors have capital and tools that make it very difficult for individuals to compete. For instance, private equity firm Pretium Partners uses software that scans property listings every 15 minutes, alerting an acquisition team that can make an all-cash offer within hours of a home hitting the market.
The "equity mining" of communities drives up purchase and rent prices, and it pushes creditworthy, would-be homebuyers out of the market, depriving them of the opportunity to build wealth through homeownership with each month they continue to rent.
Moreover, institutional investors have been shown to exacerbate racial housing inequity because they create buy boxes that frequently correspond with majority-Black communities. A NAR study reports that institutional buyers are attracted to areas with a high density of minority households, especially Black households, finding that areas with higher than average institutional investor activity had twice as many Black households than areas with lower investor activity.
For example, in Atlanta, where investor activity has been the highest in the nation, Black suburbs have been most heavily impacted. In Clayton County, where Black families account for 72% of households, investors hold 44% of houses. In South Fulton's majority-Black 30349 ZIP code, 61% of purchases in 2021 were made by investors.
In Memphis, private equity firm Cerberus became the majority-Black city's largest owner of single-family rental homes after it acquired 1,800 properties between 2015 and 2018. During the same period, evictions soared in Black neighborhoods, with Cerberus-owned property management company FirstKey Homes evicting households at twice the rate of other single-family landlords in these areas according to a Washington Post analysis. Notably, in 2020 the MBA and the Tennessee Housing Development Agency partnered to increase Black homeownership in Memphis via the 501(c)3 nonprofit CONVERGENCE Memphis.
A shrinking market for mortgage lenders
Mortgage lenders should take heed of institutional investors' contribution to long-term inventory shortages. Not only are they detrimental to a healthy housing economy, they are also slowly eating lenders' lunch. When institutional investors purchase single-family houses, those houses are unlikely to return to individual homebuyers — and be financeable by mortgage lenders during the lifetime of an IMB. That is because, with the dearth of inventory, these properties are a strong source of regular revenue that will only continue to appreciate as rents rise and consumers vie for a shrinking pool of homes.
When institutional investors sell properties, they are typically purchased by other capital-backed institutions. Whereas a single-family home presents multiple financing opportunities for lenders over the lifetime of an organization, investor ownership of a single-family home likely takes these business opportunities off the table.
A path forward
While there is no panacea for the myriad homeownership affordability and equity challenges of today, mortgage lenders have tools at their disposal to improve access to homeownership within their communities. Where rising home prices have made it difficult for families to front hefty down payments, down payment assistance programs, which average a benefit of approximately $17,000, can bridge the gap. Homebuyer assistance programs are widely available, with at least one program available in each U.S. county and 10 or more programs available in 2,000 U.S. counties.
Also, special purpose credit programs (SPCPs) have recently been called out by the FHFA and CFPB as a promising way for lenders to help close the racial homeownership gap within their communities. SPCPs are programs that enable lenders to extend favorable financing terms to protected classes who have experienced disparate homeownership outcomes.
Beyond these solutions, mortgage lenders should think creatively to proactively address big picture forces that are creating market challenges and stymying affordable homeownership. Individual homebuyers support our industry and it is in our best interest to support them. Whether that involves efforts to stimulate building, curb investor encroachment or something else, collectively, we have the resources and one of the most powerful lobbies on the Hill at our disposal to enact change.
