A bill has been introduced in both houses of Congress that would attempt to ban hedge funds – large companies with deep pockets – from buying up swaths of homes.
Filed by Oregon Democrat Jeff Merkley, the End Hedge Fund Control of American Homes Act of 2023 would force large companies to eventually sell off all the single-family homes they own.
The goal here is to limit big institutional investors’ access to the housing market with the hopes of making the American dream of home ownership more accessible to everyday people – folks who may be getting outbid by big companies who can throw down massive cash offers.
Steven Pedigo is a professor at the LBJ School of Public Affairs at the University of Texas at Austin who studies urban economic development. He joined Texas Standard to talk about whether or not the bill has a shot at changing the housing market. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: Tell me a little bit more about why this is getting so much attention – hedge funds and what interest hedge funds have in single family rental homes. I’m guessing they see a lot of money in it.
Steven Pedigo: Yeah, I mean, it’s very prevalent. I mean, you look across the country and particularly you look across the Sunbelt, Texas included, and what we see is that institutional investors are having a larger presence as homebuyers.
And in fact, as you noted in the introduction, now, institutional investors own almost 700,000 single family rentals now. And that’s a big chunk of what’s out there. It’s about 5% of all the single family rental market rental houses available.
And in fact, if we look kind of what’s happened in the last year, institutional investors have really made this a priority. In fact, 75% of all the purchases that these investors are making are now in that single family zone. So it’s having a big, big impact. And there’s a lot of studies out there to suggest that actually this is only going to continue to grow as we look to the future.
Well, we should talk about the kind of impact it is going to have here in Texas. But, you know, this doesn’t come out of the blue. I mean, back in 2008, the Great Recession, as everyone remembers, there were a lot folks holding mortgage debt and just literally holding bad debt. And then you had some institutional investors swooping in and buying basically this cheap debt and abracadabra: you have a whole new industry of companies holding these single family, usually rental properties, given the status of the mortgage themselves, right?
Yeah, that’s right. And in fact, I think the irony of this is that the federal government was actually incentivizing this type of work. And so we were looking to institutional investors to really kind of stabilize our housing market.
And a lot of folks maybe point to that as bad policy and maybe what we should have been doing, looking to the future or thinking about affordability, was to look to say “well, why not try to support regular individuals that are looking to make home purchases that had the resources during the time.” But you can see where we are today in terms of the impact they’re having on the market.
So let’s talk about what’s being contemplated on Capitol Hill. This is End Hedge Fund Control of American Homes Act would apparently force large companies to eventually sell off their holdings. I’m wondering about the legality of that. What’s your take?
Yeah, no, that’s right. It’s a bill that’s being sponsored by Oregon Sen. Jeff Merkley, and it’s being co-sponsored in the House by Representative Adam Smith of Washington – both Democrats, by the way. And likely that this will not pass, just given the politics and then how the split of the partisanship in our House,.
But this act basically says that over ten years they’re going to force hedge fund investors to disinvest of their single family real estate portfolios. And then moreover, any purchases made in the future would be a 50% tax on the fair market value.
So all that is to say a lot of this legislation is really trying to push the institutional investors outside of the market and create maybe more and more market opportunity for the regular Joes and Jims that are out there trying to purchase a house.
I guess that’s the question, right? I mean, could this have an effect on housing affordability and supply? I mean, could it have a real world effect here in Texas, do you think?
In the state of Texas in 2021, we led the country in institutional buyers in our single family market. In fact, nearly a third – about 28% – of all the homes purchased in 2021 were by these institutional investors.
The question is, “could it possibly have a big impact in Texas?” Possibly, right? Because what we know is that many of these institutional investors are playing in that lower market value rate. And that’s where a lot of first time homeowners are potentially looking to purchase homes. And so there’s possibly a big impact.
The other flip to that is that critics would say is that this possibly diverts capital from the market and could unstabilize the market. So there’s a lot of folks that are advocates of this and opponents of this as well.