Targeting homeownership by hedge funds

A proposed bill seeking to end hedge fund control of properties is among the latest ideas to emerge aimed at solving the home availability crisis in the US. Yet the proposed legislation is being seen as a move helping to further discussion on the problem rather than a panacea.

Sponsored by Sen. Jeff Merkley (D-OR), the End Hedge Fund Control of American Homes Act would mandate hedge funds – defined as corporations, partnerships or REITs managing investors’ pooled funds – to sell all single-family homes in their portfolios over a 10-year period. Ultimately, the legislation would completely prevent such investors from ownership of such properties – a process aided by stiff tax penalties contingent on housing ownership levels.

“The bill is to get hedge funds entirely out of owning single-family real estate because that’s the political hot button issue right now,” Kurt Carlton (pictured), co-founder and president of New Western, told Mortgage Professional America during a recent telephone interview. “If you’re a first-time homebuyer and you’re trying to purchase an affordable home – which is the type of homes these hedge funds are interested in – you don’t want to compete with Wall Street.”

The invisible hand of commerce has curbed investment

For now, Carlton noted, rising rates have created a mechanism to deter such ownership by institutional investors. But the likelihood of falling rates this year as the market seeks post-inflation normalization has helped to reenergize the bill’s aim.

“The reality today, though, is most of these funds are on pause and have been on pause for some time now,” Carlton said. “The securities market has really done a doozy on these guys.”

Which isn’t to say hedge fund ownership is negligible. “But these guys still own a lot of houses, although not quite as many people think,” Carlton added. “There are 100 million homes in the US – 92% are owned by individuals, 8% are owned by entities. Less than 1.5% of the homes in the US are owned by companies that own more than 50 homes. It’s just a very small fraction.”

But that ownership still adds up: “If the bill were to be successful, what would ultimately happen is 1.3 million homes would be returned to the market for homebuyers,” Carlton said.

Surveying the landscape by crunching the numbers

The calculus also depends on how one slices the pie. According to CoreLogic, the sizeable US home investor share tracked over the past couple of years has held steady. In March 2023, investors accounted for 27% of all single-family home purchases. By June, the number registered was virtually unchanged at 26%.  

In its Economic, Housing and Mortgage Market Outlook report released Monday, Freddie Mac also pointed to housing industry woes – including the dwindling supply of homes in the American market. “The housing market felt the impact of higher rates in 2023 with total annual home sales on track to be the lowest since 2012,” the report reads.

According to the GSE’s report, existing inventory grew 15.3% year to date in November, but the level of inventory – 1.1 million homes available for sale in November – remained “extremely low” by historical standards. The report’s authors attributed the main driver of the lack of existing inventory to the rate-lock effect – the phenomenon marked by homeowners unwilling or unable to list their homes for fear of losing their historically low mortgage rates of 2% to 3% secured at the height of the COVID-19 pandemic.

So returning to market homes controlled by hedge funds – however small the percentage might be in the aggregate – would have an impact. But then again, Carlton noted, another problem would emerge.

“When we say ‘returned to the market’, there’s no new inventory coming,” he said. “These are houses that people rent today, so you’re kind of trading one problem for another. Homebuyers can afford homes, that’s great. But you’re dislocating 1.3 million renters. The other problem you have is that would obviously affect rental rates in that segment of housing significantly if you all of a sudden removed 1.3 million renters.”

Amid a housing shortage, Jeff Bezos, founder and executive chairman of Amazon, inadvertently added fuel to the debate fire recently. Arrived Homes, a real estate investment platform backed by the billionaire businessman, last month revealed details of its new fund focused on buying single-family homes.

The news prompted US Rep. Ro Khanna (D-CA) to promote her own anti-investor bill – the Wall Street Landlords Act – that is similar in scope to the End Hedge Fund Control of American Homes Act. “Housing should be a right, not a speculative commodity,” she fired off on X (formerly Twitter).

If such large-scale legislative efforts are the work of macroeconomic muralists, Carlton seems content to see himself as more of a miniaturist. While he doesn’t envision eventual passage of such bills given the issue’s complexity, he is buoyed by the substantive discussion each effort has engendered.

“I think they’re creating a need for more information and a look at other opportunities available,” he said. “There’s a lot we can do there. We can make it easier and get out of our own way with the regulatory burdens builders have. I think we can encourage local investors to rehab existing inventory in areas that aren’t financially viable for them to enter into. You can do that with tax incentives. It doesn’t take much – you can rehab five or six houses in a distressed, depressed area and it all follows naturally.”

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