If you don’t follow the housing market closely, you might not know how much the price of an average home in American Fork, Utah, increased between March and April.
Or what the Canadian government announced April 8.
Or who is the largest landlord in Spain.
But these seemingly disparate things are all connected and spell trouble for not only for housing in general, but for democracy more broadly. They could even affect the size of American families in coming decades. Let me explain.
As thorough reporting in the Deseret News has already noted, there has been a huge shift in the residential property market in recent years. This change is not confined to the U.S., but is truly a global phenomenon.
The shift started after the Great Recession and has been building steam since that time. As a prelude to the Great Recession, speculative investors began buying up dodgy mortgage securities, and the housing market eventually came tumbling down like a house of cards, with many families losing their homes (and investors losing a lot of money).
The weak point in the scheme were the mortgages; their value depended on homeowners making their payments and many defaulted. But what if you eliminated the weak point? What if speculators simply bought the houses and condos outright, and instead of flipping them, they held on to them?
That’s a whole new game. Now the profit derives not from collecting mortgages, or even from selling flipped homes. Now the profit derives from rents and selling rent-based securities (SFRs), because in a context where new building has stagnated for various COVID-19-related reasons, landlords hold a lot of power. And now powerful Wall Street investment firms are landlords who have shown they wield:
Power to raise rents by an average of 23% nationwide in the last year, and up to 40% in some locales, as well as tack on numerous new fees (some patently extortionate), not to mention the euphemistically called practice of “re-tenanting.”
Power to foist all repair responsibilities onto tenants.
And power to evade SALT deduction caps.
In other words, landlords have the power to make an immense amount of money without needing to be socially responsible. One renter described her Wall Street landlord as “a huge, billion-dollar slumlord.”
No wonder approximately 1 in 5 homes is bought by an investment firm now (in some areas, it’s 1 in 3), and homeownership rates are dropping. In the 1970s, homeownership stood at about 63%; among young adults now, it’s down to 37%, and that’s not necessarily by choice. Last year, about 15% of families looking for a home found they either could not afford a home, or there were no homes to buy. In Utah, year-over-year increases in average home prices are about 20%.
Investment firms can take those large profits from rents and plow them right back into buying additional housing stock, and they’re expanding into buying mobile home parks and college housing. Ordinary homebuyers don’t stand a chance against the money Wall Street investment firms have amassed to instantly pay cash for any property they see, with a premium above the current market value tacked on to secure the winning bid. These buyers show up to home sales with suitcases full of cashier’s checks or cash, which is why the price of a home in American Fork rose by over 6% just this past month.
And it doesn’t matter if all this outbidding leads to housing price inflation, because people will always need a place to live — and landlords can charge them premium rents to offset the premium price they paid. As the Deseret News’ Katie McKellar has noted, “A stunning 1 in 5 Utah renters are considered ‘severely cost-burdened,’ meaning they pay more than 50% of their income on rent, according to state and federal data.”
Investment buyers can even use their profits to build new units — not to sell, but to rent. “Build-to-rent developments,” they call them, and you can see them all up and down the Wasatch Front. Properties that would have been sold to ordinary homebuyers will now never be sold to ordinary homebuyers. Their occupants will simply have to resign themselves to being permanent tenants instead. There is little chance they will ever be able to afford a home of their own, along the lines of the World Economic Forum’s idea of an idyllic world: “You’ll own nothing. And you’ll be happy. Whatever you want, you’ll rent.”
So while it’s true that strategies to increase housing stock — such as innovating new building technologies that are less expensive and not subject to supply chain issues, or buying federal lands for housing construction — can help stabilize home prices and rents, if these new units are simply bought by investment firms, the underlying problem remains the same.
As Elena Botella points out, “Although the number of houses being purchased by mega-investors is currently not enough to move the market in most parts of the country, these firms’ underlying structural advantage is profound and growing.”
This megatrend lurks in the background as various advocates argue for and against density, mass transportation, zoning regulations, accessory dwelling units, rent caps and changes to the property tax codes.
Maybe it’s time to take a harder look at what’s in the background of these foregrounded debates, and ask if change in that background will be necessary in order to see progress on these other issues.
Why ownership matters
My thoughts on this topic were prompted by a superb essay, “Serfing the Future?” by Joel Kotkin and Wendell Cox, who argue that we’re entering an era of land ownership consolidation that hasn’t been seen on this scale since the days of feudalism. They assert this shift has massive implications for the future:
“Unless reversed, young people will be forced into a lifetime of rental serfdom. The assets that drove middle-class stability, wider social benefit, and subsidized comfortable retirements, will likely not be available to them. Property remains key to financial security: Homeowners have a median net worth more than 40 times that of renters, according to the Census Bureau. Shoving prospective homeowners into the rental market not only depresses their ambitions, but it also forces up rents, which hurts poorer households and even solid minority neighborhoods.
“But this impacts far more than just finances. Low affordability and high rents tend to depress the fertility rate, contributing to what is rapidly becoming a demographic implosion in many countries. ... Families overwhelmingly favor less dense housing and frequently decide to have children once they buy a house. A recent National Bureau of Economic Research study draws this conclusion, seeing a 10% increase in home prices leads to a 1% decrease in births among nonhomeowners in an average metropolitan area. ... High prices and density are poison to fecundity.”
Moreover, they say, democracy throughout history has depended upon small-property owners. As President Franklin D. Roosevelt said, “A nation of homeowners, of people who own a real share in their land, is unconquerable.” Dispersed property ownership is one key hallmark of democracy.
If Kotkin and Cox are right, then this shift to neofeudalism facilitated by the consolidation of land ownership by investment firms has immense ramifications for our future, whether we speak of that future in terms of poverty, demography or even robust democracy.
What’s to be done, then? Countries are starting to fight back against this trend, and the United States — and Utah — would be well advised to take a look at what they are doing, and see what can be emulated here.
A number of countries have outright bans on foreign ownership of existing residential housing stock. In fact, Canada just announced a two-year ban on real estate sales to foreigners. Australia and New Zealand already have such restrictions and also impose much higher property taxes on foreign owners of real estate. Other countries allow such sales, but only if local authorities agree to them or other tight restrictions are met. Certainly this low-hanging fruit is something that U.S. and Utah lawmakers could consider addressing forthwith.
Unfortunately, in the U.S. and Utah, in large measure, “the call is coming from inside the house.” While such bans and taxes may help decrease, for example, Chinese investment in the U.S. housing market, they won’t affect American investment firms engaged in these same practices. And American investment firms, such as Blackstone, are some of the very largest global players in this game, as well as generous donors to American politicians. Did you know, for example, that Blackstone is the largest private landlord in all of Spain?
If lawmakers are serious about avoiding the fate that Kotkin and Cox foresee, they must come up with effective ways of prying housing stock loose from large American corporations and investment firms. Housing must be available to be bought, not merely rented, by ordinary people in Utah and the United States. The effects are not only felt in wealth accumulation for families, in the existence of a middle class and in family reproductive trends, but also spill over into neighborhood formation; as one commenter put it, “Owning makes people take responsibility and feel more investment in their community.”
Carrots and sticks
A two-pronged approach is needed. Lawmakers must come up with ways to restrict sales of housing to corporations and investment firms and also devise ways to incentivize corporations and investment firms to sell housing stock they already own to ordinary buyers (aka “owner-occupiers”).
Various countries have begun exploring both avenues. For example, with regard to sales restrictions, the Biden administration is already (slightly) clamping down by new regulations on cash-only real estate purchases, limiting sales of FHA-insured and HUD-owned properties to large investors and proposing higher taxes for investor buyers.
Cincinnati is buying homes that might be bought by large investors, and then planning to sell them to owner-occupants. Ireland has moved to block investment firms from buying large chunks of housing stock by levying special taxes on the purchase of more than 10 properties, and by insisting that 50% of new developments go to owner-occupiers. Other locales have even set a numeric limit on the number of units that can be owned by a corporation or investment firm (and all its subsidiaries and shells), or limits on number of rental units in a given subdivision.
Other strategies include measures that prohibit bulk sales of foreclosed homes or mandate that the owner must live in the property for a year before the unit can be rented out. Still others make such sales very expensive by levying a special social impact tax on investor buyers at the time of sale or on yearly profits that can add up to the price of the home, or by placing restrictions on the bidding process itself to make it fairer to regular homebuyers, or by offering government grants to ordinary homebuyers to help them be more competitive in bidding against investment firms. (Berliners have even voted to force predatory corporate owners to divest and sell units to the government.)
The second prong of the strategy is to make holding onto the housing stock burdensome for the corporate owner. Proposals to establish special (read: higher) property tax tiers for corporate owners, or changing tax law to make certain expenses and taxes non-deductible for corporate owners have been floated, as well as devaluation of property investments for tax purposes for investment firms.
Rent increase caps are a frequently used approach to denying corporate owners exorbitant profits, though they can sometimes have unintended negative effects.
Still other countries and locales outlaw the practice of forcing tenants to repair their own units, fine vacant property owners for failure to keep up the property, impose special taxes on vacant properties or properties owned by foreigners, tighten underwriting for investor buyers, and make it far easier for tenants to fight eviction.
Some countries and locales use a carrot instead of a stick and reward corporate owners who establish “rent-to-own” contracts with their tenants (though care must be taken in crafting these) and also make it easier for renters to qualify for mortgages.
In short, neither the U.S. nor Utah is helpless in the face of this great shift toward neofeudalism. We needn’t countenance the push to turn our children into a generation of serfs, our land into some investment firm’s feudal dukedom, and our government into rule by a landed corporate aristocracy. It’s high time for federal, state and local leadership to face this serious challenge to our future, otherwise, as Kotkin puts it, “Unlike their forebears, the next generation seems likely to live increasingly as propertyless serfs.”
Valerie M. Hudson is a university distinguished professor at The Bush School of Government and Public Service at Texas A&M University and a Deseret News contributor. Her views are her own.