The White House Ban On Corporate Ownership

The Real Estate Espresso Podcast

The White House Ban On Corporate Ownership

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The White House Ban On Corporate Ownership

Welcome to The Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about one of the recent announcements out of the White House. The Republican Party is known for being conservative: fiscally conservative, socially conservative, maybe even religiously conservative and so on.

Well, the latest salvo from the White House is to ban large institutional investors from gobbling up single family homes. Now, conservative values are based on free market economics.

The solution to the cost of housing is not to artificially reduce demand. Imagine for a moment, government stepped in to reduce the cost of a burger at McDonald’s by barring people above a certain income level from buying a Big Mac. The assumption is that the price of housing, or a Big Mac, for that matter, is based on supply and demand. By crushing demand, houses will somehow become more affordable all of a sudden.

The problem is that the input costs for a Big Mac have gone up, and McDonald’s is not going to sell burgers at a loss. The same is true in new home construction. It’s not that there’s a shortage of homes, there’s a shortage of affordable homes. Builders want to build affordable homes, but it’s their input costs that are preventing that from happening.

At the same time that the White House is barring large investors from buying homes, they have a tariff of over 30% on solid lumber, of 50% on steel. Somehow it’s the greedy homebuilders who are to blame for the high cost of housing.

It is true that in some markets during periods of slow demand, 20–25% of purchases have been led by institutional buyers. And when we look at the market as a whole, institutions currently own about 2% of the housing stock in the U.S. In some markets, that’s higher, maybe in the 3–4% range. But as an overall percentage, we can argue whether that’s concerning or not.

From a pricing standpoint, I personally don’t have a problem with an institutional buyer having demand for single family homes. From a practical standpoint, maybe from a community standpoint, I’m not a huge fan of large corporate ownership in residential communities. It does change the culture in those communities. It makes established neighbourhoods more transient. But this show is about investing and not social issues.

There is, of course, as well, the build-to-rent phenomenon. Detached single family rentals are only a small subset of detached single family homes because most of the homes are owner-occupied rather than rented. If large investors own roughly 2% of the single family rental stock nationwide, and single family rentals themselves are a minority of all detached single family homes, then the large corporate owners end up somewhere between 1–2% of the entire detached single family home universe.

Build-to-rent communities are even a smaller fraction of the single family rental market, about 2% of rental units, or roughly 350,000 homes in the last couple of years. So excluding these doesn’t materially change the national percentage, but it does matter when you start to look at some of the Sunbelt metros where build-to-rent is more concentrated.

Now, build-to-rent communities are conceptually the same as a multifamily apartment complex because they tend to be self-contained, they’re within a gated community. Their amenities are rich, they’re similar to an apartment complex but just with a physical layout of detached homes or townhouses instead of apartments.

It looks like the build-to-rent space is not a target of the White House action, as these communities are in fact purpose-built. It’s the gobbling up of existing homes in mature neighborhoods that appears to be objectionable.

Now, it’s not clear that the White House has the power to implement the ban without the legislative branch of government. But regardless, this is a huge step in central planning, which is the antithesis of free market economics. It’s a very left-wing move for a conservative party.

The whole thing feels like layers of initiatives designed to compensate for the negative side effects of other government initiatives. If governments got out of the way and lowered their bureaucratic obstacles to new construction, that would directly reduce the land-holding cost associated with new construction. These costs can increase the cost of a project by several percentage points, depending on how long the project takes to get entitled.

The argument is that housing prices are high because we have a shortage of homes in the U.S., and I personally disagree with that assertion. The U.S. has about 142 million housing units, and about 14.8 to 15.1 million units are vacant in a typical year. Of those, about 4.5 million units are vacant because they’re used for seasonal, recreational, or occasional purposes, making up about a third of all vacant homes, and they are about 3.5% of the total housing stock.

If we say there’s a shortage of affordable housing, that’s a different metric.

All of the institutional interest in single family rentals started in the wake of 2008. Major institutional buyers didn’t become active in the market until 2011–2012. 2012 was the bottom of the market. I would actually argue that, were it not for the institutional buyers, they alone can be credited with helping bring the nation out of the bottom of the market cycle.

Blackstone Group was a major buyer, for example, in the Phoenix market. I personally have a friend who built a small portfolio of rentals, mostly in the distressed market in the western regions of Phoenix like El Mirage and Surprise. He sold his entire portfolio, at handsome profit by the way, to the Blackstone Group in 2012 after holding it for only a few short years. Blackstone has since divested of those properties.

Now, this is a political hot potato. Many of the people who vote Republican are older and own their own home. What would happen if a property value got crushed because of government intervention? The government is clearly walking a tightrope where, on the one side, they need to be seen as making housing more affordable while not causing property values to fall.

They want to make new housing more affordable while at the same time raising tariffs on materials used to manufacture a home. Sometimes these contradictions are hard to resolve.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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