The housing affordability crisis is an issue being faced throughout the country. This has caused frustration for hardworking Americans, who consistently view housing affordability as a top issue. One solution to this problem is Single-Family Rentals (SFRs). SFRs are what they sound like; stand-alone housing units that are not occupied by the owners. Many families prefer living in a single-family home over an apartment unit. However, there is a lack of single-family options to meet the demand. At the heart of the issue is a problem of supply and demand.
Who’s getting the blame?
As rent and mortgage prices have increased and emotions run high, people are looking for someone to blame. Recent rhetoric from politicians has pointed at private equity and real estate firms as the boogieman behind increasing rents and mortgage costs. Current public discourse suggests that institutional investors are buying every property in sight and forcing a new generation of renters, but the reality of the situation is much different. This isn’t a problem caused by Wall Street, but by a lack of homes.
Feeding into the narrative that institutional investors are buying up neighborhoods, some lawmakers are championing legislation that implements investor crackdowns while ignoring the primary causes. Policy has been touted or filed across the country that restricts the purchasing power of institutional investors by limiting the number of homes they can purchase and placing additional tax or regulatory burdens on purchased homes. Instead of more options and lower rents, renters will bear the costs caused by a lack of supply resulting from these artificial caps.
SFRs and institutional firms
Popular rhetoric has created general confusion about who these investors are, as there are various definitions currently in play. President Trump’s most recent Executive Order to limit institutional investors will define “large-scale investor” under the U.S. The U.S. Department of Housing and Urban Development (HUD) has defined institutional investors as those who own 1,000 or more units, while Freddie Mac has defined them as those own 100 or more. When looking at data of investors who own 100 or more homes, it reflects they only own around 1. Medium-scale investors own between 10 and 99 homes, while small mom and pop investors own 10 or fewer properties. The reality is that small or medium investors own roughly 9 out of 10 SFRs throughout the country, with small investors. Despite this, there are bipartisan efforts by lawmakers throughout the country to make large-scale investors the ones who must limits and increased tax and regulatory burdens.
What SFRs do for families/communities
Single-Family Rentals are an important and suitable option for families not ready to take on the financial commitment of purchasing a home. SFRs provide families, especially young families, and those with kids, access to good neighborhoods that can provide stability and safety. Additionally, they provide families with adequate space, convenient mobility to work, and desired school zoning.
Low-income families, especially, benefit from having access to SFRs as they allow families who cannot yet afford homeownership to live in desirable neighborhoods without dealing with burdensome costs including downpayment, closing costs, taxes, and general housing upkeep. Additionally, evidence suggests low-income communities are most negatively affected by a limited supply of housing options, which additional SFRs could help alleviate. SFRs also serve as an alternative for individuals or families in transition due to life events, giving them the option of housing stability without shouldering the responsibility of a mortgage.
Institutional investors also play an important role in selling homes to potential homeowners. The homes they own are often newly constructed or renovated and tend to be high-quality. Increasingly, investor-owned homes end up being sold to traditional homebuyers as investors shift to more built-to-rent SFRs. As a result, institutional investors are not taking the opportunity of owning homes away from Americans, but offering future homeowners a trustworthy product.
Real Solutions
The demand for housing remains high, especially in areas with steady population growth, and supply is not keeping up. What’s causing this is not institutional investors, but overbearing regulations bottlenecking the housing supply. Instead of attacking a group that increases the supply of homes, policymakers should be breaking down barriers stifling new construction.
Recent legislation in Florida was filed to allow more flexibility regarding lot sizes on which residences could be built. Steps like this will boost the supply of homes, including SFRs, and bring down costs. Currently, developers are not incentivized to build starter homes when housing density is restricted. This causes developers to focus on building larger homes, for which the cost is prohibitive to most renters or first-time homebuyers. The elimination of lot size restrictions in other parts of the country has shown not only a demand for more unique and diverse homes, but also more affordable In Austin, Texas, local government allowed more flexibility in density, resulting in rent prices dropping by up to 22.
Local governments often slow the development of homes through bureaucratic holdups from land use planning regulations, keeping builders waiting. This causes builders to lose money. Moreover, regulatory limbo causes uncertainty and confusion, leading to hesitancy among builders and slowing the development of new homes. To address this, local governments should face consequences for unjust delays. This is a step forward in incentivizing a productive government while providing builders with a level of confidence that their project won’t be stuck on a desk.
Local impact fees can also prohibit the supply of more affordable homes. In many cases, impact fee schedules can be difficult to find and have varying terminology by county, which causes confusion for homebuilders. Additionally, impact fees are often regressive, meaning lower square foot properties are paying a disproportionate percentage of their value in fees. Because of this, builders are less incentivized to build smaller homes when their profit margins are cut into at a higher rate than with larger, more expensive homes. Policymakers should provide uniformity of terminology, visibility of standards behind impact fees, and ensure that impact fees are complementary to a home’s size and impact.
Ultimately, allowing flexibility in the type of homes that can be built, refining housing approval processes, and reforming impact fees will allow developers to sell more homes and, as a result, rent prices will begin to fall.
Conclusion
Institutional investors are consistently scapegoated as a leading cause of the housing affordability crisis, when the real culprit is overregulation and lack of supply. Increasing the supply of SFRs is critical to addressing the housing affordability crisis. Restricting institutional investors, though politically popular, hinders the supply of SFRs. This prohibits the market from acting naturally and limits options.
Policymakers should instead focus on cutting red tape that makes it harder to build homes, by creating transparency and consistency in fees, expediting permitting, and allowing more flexibility in the types of homes that can be built. SFRs allow families to reap the benefits of living in a residential neighborhood, even if they are not yet able to take on the financial commitment of purchasing a home. SFRs meet a demand that traditional multi-family apartments don’t meet. Additionally, SFRs may serve consumers who want to live in a home but don’t want the commitment of homeownership. American families deserve options and if more homes are built, affordability will follow. Policy solutions should not be based on convenient narratives and populist rhetoric, but rather on a foundation of reality-based data.
