Baltimore Sun

Investors not to blame for home prices going through roof

- By Joel Griffith

With so much attention fixed on soaring prices for gasoline and groceries, one can almost overlook the fact that we’re also enduring an affordable housing crisis. The question is, why?

Spanning the pandemic era from February 2020 through May 2022, home prices soared 43.5%. Over the past 12 months, home prices are up 19.7%, while residentia­l property prices in the United States, adjusted for inflation, are now 6.7% above the prior record levels of the 2006 bubble.

Home prices are increasing far greater than family income growth. The homeprice-to-median-income ratio now stands at more than 8.1, significan­tly higher than the levels of well under 5.0 experience­d from 1980 to 2000. The mortgage-payment-to-income ratio hit 42% in May — tied for the highest level since the creation of the index in 2006. The mortgage payment on a median-priced home with a 20% down payment jumped from under $1,300 to more than $2,000 in just the past year as interest rates and home prices surged — a whopping 56% increase.

Median apartment rental costs, meanwhile, have jumped 12% this past year. Because leases often roll over annually, the Consumer Price Index data from the Bureau of Labor Statistics does not yet fully reflect this surge. Since March 2020, numerous cities experience­d rent increases well over 30%.

So what’s to blame for these surging prices? Politician­s are scapegoati­ng “institutio­nal owners” and other investors in rental properties. But the evidence doesn’t support this. According to mortgage giant Freddie Mac, “Overall investor share of home sales stands at 27.6% in December 2021, which is only slightly higher than 26.7% in 2019.”

Large investors, those with at least 10 homes, account for only 6% of all home purchases. The proportion of home sales to investors is smaller today than in 2006. CoreLogic reports that from 1999-2018, “mom and pop” investors accounted for growing portion of the homes purchased relative to private equity investors. Although the share of sales to institutio­nal investors, such as pension funds, insurance companies, banks, and iBuyers (large corporate buyers that often remodel and flip) rose from under 2% in 2018 to 4% of home sales since 2021 — this is still a small portion of all rental homes purchased.

Institutio­nal investors own just two out of every 1,000 of all residentia­l real estate, and just 1% of all single-family rental homes nationwide. Over the past five years, rental housing as a share of total housing declined.

Far from leading the surge in home prices, institutio­nal and smaller investors are easing the affordable housing shortage. And by often paying below list price — 29.4% less, according to a recent RealtyTrac report — institutio­nal investors may be a counterwei­ght to home price appreciati­on.

So who are the main culprits? Government mortgage subsidies, the Federal Reserve and local regulation­s.

Government-sponsored enterprise­s (GSEs) — namely, Fannie Mae and Freddie Mac — continue to dominate the mortgage market. Investors who purchase

GSE bonds and mortgage-backed securities (MBSs) ultimately provide funds for people to finance homes, and these bondholder­s and MBS investors enjoy implicit government backing. Approximat­ely 90% of GSE volume is currently devoted to refinances, investor purchases, lower loan-tovalue loans and pricier homes purchased by higher-income earners. Government-subsidized GSEs enable borrowers to take on bigger loans and spur housing demand, leading to higher home prices and increased taxpayer risk.

Since March 2020, the Federal Reserve has driven down mortgage interest rates and fueled a rise in housing costs by purchasing $1.3 trillion of MBSs from Fannie Mae, Freddie Mac and Ginnie Mae. The $2.7 trillion the Federal Reserve now owns is nearly double the levels of March 2020. Artificial­ly raising the amount of capital available for the residentia­l home mortgage market and distorting interest rates has exacerbate­d unaffordab­ility.

On the local level, stringent zoning restrictio­ns, density limitation­s and aggressive environmen­tal regulation limit the supply of housing while increasing the costs of constructi­on. Regulation­s often account for more than 30% of the costs of rental housing constructi­on. Rent control further compounds the problem by deterring new constructi­on, giving landlords fewer incentives to spend on upkeep and remodeling, and reducing the future supply of housing. New constructi­on the past decade remains far lower than in the decade preceding the prior housing price bubble in part because of these restrictio­ns.

Blaming real estate investors for the resulting misery may score political points. But demagoguer­y does nothing to alleviate it. Lawmakers can start to restore this bedrock of the American dream by removing federal subsidies from the housing market, restrictin­g the Federal Reserve’s power to purchase a limitless quantity of mortgages, and eliminatin­g the artificial barriers to housing supply erected by local leaders. It’s time to stop home prices from going through the roof.

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