The role of investors in the housing crisis | Think real estate


When we look at the economy, we see an ecosystem that works like a well-oiled machine. It has many parts and wheels, each of which plays a vital role in its operation. If one part of the machine is worn, the other parts will be affected. But you can recover the affected part by applying measures to ensure continued functionality.

Every player 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 must weigh the risk and reward in such a way that it benefits them. Striving for just one means straying from the others. One wins while the other suffers. Knowing how to achieve this balance is key. Understanding the role each piece plays and how they can affect the entire machinery is vital. Therefore, we will look at the role investors play in the current housing market.

The housing crisis

The fluctuations of the economy can influence housing crises. It’s what happened in 2008 and past recessions. With the economic crisis in 2008, we understood the role that subprime mortgages played in impacting the lives of so many people across the country and the world.

The causes of the housing crisis are up for debate. You can see how the climate crisis created the phenomenon known as climate migration patterns. You can look at the fossil fuel industry and the power it is allowed to have over the world over supply shortages. You can even look at tech companies, fashion trends, and politics, but for this article, we’re going to take a closer look at the real estate market and investors.

The real estate market has several players. There are consumers or households, suppliers or producers, and investors or landlords. Consumers can also be investors and vice versa. We separate the two types of players in households and corporate landlords and focus on the latter, also known as institutional investors.

The role they play as investors in the housing market is to seize opportunities and make a profit. That can mean buying an apartment building when prices are low and then renting it out, but it can also mean building and renting out multiple properties. This can create an unbalanced market for renters or home buyers.


Besides the fact that the US has a 10-year accumulation of housing shortages, about 74% of the homes bought by real estate investors in 2021 were low-cost single-family homes. To top it off, the supply of affordable housing is bleak due to local resistance to affordable multi-family housing. Relaxing some legal requirements can: reduce construction costs of new homes and thus the cost of housing. We have seen an increase in construction in recent years, but the building types do not meet the demand. From 1990 to 2019, 13.3 million rental homes were built. Still, the number of affordable homes being built fell to 3.4 million. This allows some of these landlords to increase their profits at the expense of the tenants by pushing rents higher because the tenants have nowhere else to go.

We all see that rents have risen when moratorium orders were out of place, leaving many of those households in a housing situation they were not prepared for. In May 2022, the median monthly rent in the US went above $2,000 for the first time in history, a 15% increase since May 2021, higher than inflation, which stands at 8.5%. Cities like Nashville, Cincinnati and Seattle saw rent increases of 30% and Austin reached nearly 50% rent increases. Yet rents are rising faster than wages.


When we look at how much households can afford and how much they have to pay, we begin to see a difference between the two. While renters are advised to spend no more than 30% of their income on rent, many end up paying around 50% just to cover their housing costs. This is true for both buying and renting, as many renters struggle to cover their living expenses to put something aside for a down payment. In addition, because in 2021 18% of homes were bought by real estate investors, and that percentage reached 22% in January 2022, buyers have fewer options. During the same period, buyers bought 33% in January 2021 and that figure fell to 27% around the same time this year.

With regard to rent increases, we can look at landlords who increase rents. While some do this for understandable reasons, others blame the economy, inflation or wages for not growing. Still, it is important to understand their role if we want to understand rental properties.

Role of real estate investors

Investors need to understand that they are not the only player in the real estate market and make housing a human right in the US, as happened in France, Scotland and South Africa. Did you know that 72% of US citizens believe this to be the case? Unfortunately that is not the case. The role of real estate investors in the market has the serious side effect of affecting households across the country in more ways than one.

Household vs. Investors

As a starter on your home, you need an average of 20% down payment and usually opt for mortgages to cover the rest, leaving you with 30 years of mortgage payments. As a real estate investor, you can more easily pay in full thanks to other properties that bring you income, access loans more easily by using properties you already own as collateral, and pay on average 10% less than the asking price because capital means you are more reliable.

So that leaves you with real estate investors who own more than they use, able to influence prices because the average Joe has no other option, and they’re stuck renting indefinitely. But even if they rent, they have limited leeway to stick to that lease.

Rent increase

When landlords want to raise rents, it’s not just the rent of one apartment. The whole market is going up, and since landlords control much of the available housing market, they control the price. Real estate investors buy real estate to sell, rent, share shares, rent or buy on the short term. But as 42% of the properties bought by real estate investors in 2021 were rented out and their market share increased, fewer homes remained on the market for others to buy and live in or rent as second homes.

In counties where investors had a larger market share, the number of available homes decreased and prices rose. Across the country, 28% of counties have a larger share of real estate investor purchases than the national average, with Dallas, TX having 43% while Texas has 28%. Other states to note here are Georgia (19%), Oklahoma (18%), and Florida (16%).

Tenant’s rights

Across the country, about 35.6% of homes are 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 US can an employee earning the…minimum wage afford a modest two-bedroom rental home.” So what can renters do to keep renting if they can’t afford to buy, but rents keep going up?

When it comes to tenants’ rights and how landlords’ actions may affect them, we can note other issues. One of the measures taken to help tenants avoid massive rent increases is rent stabilization that applies to older homes. Yet this law only exists in California, Oregon and Washington DC. If tenants in rent-stabilized homes don’t agree to a rent increase, the landlords can put extra stress on letting them leave through renovations or other means.

As mentioned above, more than 23.4 million people pay more than 50% of their income in rent without federal housing assistance due to funding restrictions. These housing choice vouchers (Section 8) are designed 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 are unable to pay the rent.

About half of evictions are settled in court, where we see the biggest disadvantage for tenants. Tenants are not allowed legal representation in most places, with an attorney representing 89% of Colorado landlords in 2021, compared to less than 1% of tenants. In 2017, New York City became the first and to date only place in the US where tenants were given access to legal representation. In addition, eviction fills stay on someone’s file for years, even if they won in court for housing, making it nearly impossible for those tenants to access future housing.


Measures are needed to balance the balance, and apart from agreeing that housing is a human right, we must have policies that benefit tenants. Massive federal investment in housing assistance and increasing the number of new affordable housing being built are two measures we can take. Grants are another, and while grants are available to many households, those who need them most remain stranded. Prioritizing the protection of individuals over investment levels the playing field, giving investors less leverage over home prices, so they can’t fully offset the market for gains.

As we said at the beginning of the article, the housing market is a complex part of the economy, and it’s not easy to understand what we can do to make it work properly. We can design a market where no one side can gain significant power over the others, leveling the playing field for all, increasing affordability. Incomes need to match growth trends in inflation and spending, but we can’t just look at that.

Visit Source link!

Leave a Comment