You’ve no doubt heard the conversation sweeping the nation about whether institutional buyers are bad for housing affordability. Some states are even considering legislation, like California’s Assembly Bill 2584, that would block institutional buyers from acquiring homes over a certain number. This is in response to the belief that entry-level homebuyers are being priced out of the market.
But we must consider broader concerns. Blocking these institutional buyers could prevent them from benefiting housing affordability. Let’s revisit what legislatures should consider before making final decisions.
Home Buying on the Micro Level
A similar situation has played out across the country for many first-time homebuyers. After making an offer on an affordable, starter home generally averaging $242,000, they find out they’ve been outbid by a cash homebuyer. It’s a narrative that pulls on the heartstrings.
And it has led to a broader distrust of institutional property owners. These include landlords and property management companies backed by hedge funds or real estate investment trusts. Some express concern that these institutional buyers drive up real estate prices and intensify competition for entry-level homebuyers.
It’s also proposed that these buyers could change the composition of neighborhoods. Doing so could have broad, long-lasting impacts on a housing landscape and community. Legislatures and voters are certainly considering these possibilities as everyone grapples with housing affordability.
There’s no denying that on the micro level, this dynamic affects individual homebuyers. But when considering macro-level trends, could institutional homebuyers actually encourage housing affordability?
Understanding housing affordability and proposing solutions demands an understanding of trends and their catalysts.
Considering Macro-Level Housing Trends
There’s no denying there is a housing affordability and availability crisis. One of the most obvious answers to this challenge is to build new, affordable homes. It’s proposed that institutional buyers can create demand for more new construction starts.
Home construction is down and has been for a long time. Builders never got back to pre-2008 Great Recession construction frequencies. Before the crash, more than 2 million new housing units were completed annually. Data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development show that development in recent years hovers just below 1.5 million units per year. This stagnant progress in building has led to a significantly decreased inventory. Concurrent to this, population growth has picked up after the COVID-19 pandemic.
This only serves to emphasize one of the pressures on current housing. Whether it’s rented or owned, Americans need adequate housing and new builds are a way to provide it. As the population grows, builders can keep up with demand to add more units to insufficient housing stock. But to take the risk, they need the proper inspiration.
How Institutional Homebuyers Can Influence Affordable Housing
So how can institutional homebuyers provide some of this inspiration? As institutional buyers commit to purchases on new construction or turnkey properties, builders find a reliable market for increasing their building plans. Alongside individual buyers, institutional homebuyers offer another option for builders to sell to.
Confidence in the financial reliability of institutional homebuyers and their potential to commit to broad housing projects lets builders feel like they have an exit strategy. There is less risk in taking on new projects or getting backing. In turn, these builders can expand projects to buy more land and begin more housing starts. They can employ more contractors and staff, creating jobs right alongside expanding housing.
In short, institutional homebuyers provide a reliable inflow of cash into new construction. The more homes built, the less competition per property, which can influence a reduction in home costs on the macro level. Growth in new construction can benefit both institutional buyers and individual buyers by influencing supply-and-demand pricing shifts.
Building and Financing Partnerships Improve Housing Affordability
With more confidence-driven lending in the new construction space, we may soon see improvements in housing affordability trends. It’s important for builders, real estate investors, and contractors to build strong contacts within the traditional banking and private lending fields. Doing so can maximize investment opportunities. Working with a financial entity like Dominion Financial that not only has the lending products needed to finance large scale real estate investments but also holds the role of real estate investor in its own right can give your team the support it needs. With the right backing, investors can make strides into shaping a housing market that works for institutional and individual buyers.
What do you think? Do you buy the argument that institutional involvement in single-family housing makes the ecosystem stronger? Or should Wall Street stay off Main Street for the good of the country?
