When it comes to the economy, we see an ecosystem that works like a well-oiled machine. It has many parts and wheels that each play a vital role in its operation. If one part of the machinery is worn out, the other parts are affected. But you can repair the affected part by applying measures to ensure continued functionality.
Each actor in the economy has a role, and these roles are based on three main objectives. These goals are security, income and growth. They are interested in all three, but need to balance risk and reward in a way that benefits them. Strive to have only one means that you distance yourself from others. One wins while the others suffer. Knowing how to achieve this balance is key. It is essential to understand the role each piece plays and how it can influence the whole machinery, which is why we will look at the role investors play in today’s housing market.
The housing crisis
Fluctuations in the economy can influence housing crises. This is what happened in 2008 and in previous recessions. With the economic crisis of 2008, we came to understand the role played by subprime mortgages which impacted the lives of so many people across the country and around the world.
The causes of the housing crisis are debated. You can see how the climate crisis has created the phenomenon known as climate migration patterns. You can look at the fossil fuel industry and the power it is allowed to have around the world when it comes to supply shortages. You can even look at tech companies, fashion trends, and politics, but for this article, we’ll take a closer look at the real estate market and investors.
The real estate market has different players. There are consumers or households, suppliers or producers, and investors or owners. Consumers can also be investors and vice versa. We will separate the two types of players into households and corporate owners and focus on the latter, also known as institutional investors.
The role they play as housing market investors is to seize opportunities and make a profit. Now, that can mean buying an apartment building when prices are low and renting it out, but it can also mean building multiple properties and renting them out. This can create an unbalanced market for renters or homebuyers.
In addition to the United States accumulating 10 years of housing shortages, about 74% of properties purchased by real estate investors in 2021 were low-cost single-family homes. To top it off, due to local opposition to affordable multifamily housing, the supply of affordable housing is bleak. The relaxation of certain regulatory requirements could reduce construction costs new houses and therefore the cost of housing. We have seen an increase in construction in recent years, but the types of construction are not meeting the demand. From 1990 to 2019, 13.3 million rental units were built. Yet the number of affordable housing units built fell to 3.4 million. This allows some of these landlords to increase their profits at the expense of tenants by raising rents because tenants have nowhere to go.
We all see that rental prices have shot up as the moratorium orders have ended, putting many of these households in a housing situation they were not prepared for. In May 2022, the median monthly rent price in the United States exceeded $2,000 for the first time in history, climbing 15% since May 2021, above the rate of inflation, which is 8.5% . Cities like Nashville, Cincinnati and Seattle have seen rent increases of 30%, and Austin has almost reached 50% rental price increases. Yet rents are rising faster than wages.
By looking at how much households can afford to pay and how much they are required to pay, we begin to see a difference between the two. While tenants are recommended to spend no more than 30% of their income on rent, many end up having to pay around 50% just to cover their housing expenses. This applies to both buying and renting, as many renters struggle to cover their cost of living to set aside anything for a down payment. Moreover, as in 2021, 18% of homes were purchased by real estate investors and this percentage reached 22% in January 2022, buyers are left with fewer options. During the same period, buyers bought 33% in January 2021, and this figure fell to 27% in the same period this year.
When it comes to rental price increases, we can watch landlords increase rental prices. While some do so for understandable reasons, others blame the economy, inflation or wages for not growing. Yet understanding their roles is important if we are to understand rental housing.
Role of real estate investors
Investors need to understand that they are not the only players in the real estate market and make housing a human right in the United States, as has happened in France, Scotland and South Africa. Did you know that 72% of American citizens think so? Unfortunately, it is not the case. The role of real estate investors in the market has the serious side effect of impacting households across the country in more ways than one.
Household vs Investors
As a first-time home buyer, you need, on average, a 20% down payment and typically turn to mortgages to cover the rest, leaving you with 30 years of mortgage payments. As a real estate investor, you can pay in full more easily through other income-earning properties, gain easier access to loans by using properties you already own as collateral and can pay, on average, 10% less than the asking price because capital means you are more trustworthy.
So that leaves you with real estate investors owning more than they use, able to influence prices because the average Joe has no other option, and they are forced to rent indefinitely. Yet even when they lease, they have limited leeway to keep that lease.
When landlords want to raise rents, it’s not just the rent for an apartment that goes up. The overall market goes up, and because landlords control a large portion of the available housing market, they control the price. Real estate investors buy real estate to flip, rent, share, rent-to-own, or as short-term buyers. Yet while 42% of property purchased by property investors in 2021 was rented and their market share is growing, there are fewer properties left on the market for others to buy and live in or rent out as a second home. .
In counties where investors made up a higher market share, the number of available homes fell and prices rose. Nationwide, 28% of counties have a higher share of real estate investor purchases than the national average, with Dallas, TX having 43% while Texas is at 28%. Other states we can note here are Georgia (19%), Oklahoma (18%) and Florida (16%).
Rights of the tenant
Nationwide, approximately 35.6% of housing is occupied by tenants. That’s more than a third of the US population. The National Low Income Housing Coalition reported that “in no…county in the United States can a worker earning…minimum wage afford a modest two-bedroom rental house.” So what can tenants do to keep renting if they can’t afford to buy, but rents keep rising?
When it comes to tenants’ rights and how actions taken by landlords against them may affect them, we can spot other issues. One of the measures implemented to help tenants avoid massive rent increases is rent stabilization which applies to older properties. However, this law only exists in California, Oregon and Washington DC. If rent-stabilized tenants don’t accept a rent increase, landlords can cause additional stress to get them out through renovations or other means.
As mentioned above, more than 23.4 million people are paying more than 50% of their income in rentals without federal housing assistance due to funding limitations. These housing choice vouchers (section 8) are intended to allow a tenant to spend no more than 30% of their income on rent, with the government covering the rest. Only 1 in 4 approved applications get the funding, and those who get it face some form of discrimination against Section 8 recipients. This makes low-income households vulnerable to eviction proceedings because they don’t can’t afford to pay rent.
About half of evictions are settled in Housing Court, where the greatest disadvantage for tenants can be seen. In most places, tenants are not allowed to be represented by an attorney, while an attorney accounted for 89% of landlords in Colorado in 2021, compared to less than 1% of tenants. In 2017, New York City became the first, and so far only, place in the United States to allow tenants access to legal representation. Additionally, eviction claims remain on a person’s file for years, even if they have won in housing court, making it nearly impossible for these tenants to access future housing.
Measures are needed to balance the balance, and in addition to agreeing that housing is a human right, we need to implement policies in favor of tenants. A massive federal investment in rental assistance and more new affordable housing being built are two things we can do. Subsidies are another, and although subsidies are available for many households, those who need them the most are left behind. Prioritizing the protection of individuals over investments will level the playing field, reducing investors’ influence over house prices so that they cannot fully offset the market for profit.
As we indicated at the beginning of the article, the housing market is a complex part of the economy, and it is not easy to understand what we can do to ensure that it works properly. We can design a market where no one party can gain considerable power over the others, leveling the playing field for all so that affordability increases. Revenues need to match inflation and expense growth trends, but we can’t just do that.