Fed Ponders If SFR Investors Help or Hurt Communities

As the cost of homebuying rises further out of reach for many Americans and home inventory remains tight, many people around the country — including Senators and local officials — are asking how much of the blame lies with the hedge funds and mega investors snapping up affordable homes to convert into rental properties.

A new report from the Federal Reserve Bank of Minneapolis suggests the answer is complex.

The study focused on the seven-county Minneapolis metropolitan area, where investor ownership of single-family rental homes doubled from 2006 to 2015 and now accounts for 3.4% of SFR detached homes.

That figure is slightly lower than the 3.8% national share of institutional ownership calculated by the Urban Institute. “As of June 2022, we calculated that large institutional investors [entities that own at least 100 single-family homes] own roughly 574,000 single-family homes,” the Institute reported.

On the pro side, SFR rentals can be helpful in neighborhoods with little multifamily housing for tenants who want more space, the Minneapolis Fed commented. Large investors may even have helped the housing market recover after the Great Recession of 2008-2009, the report noted.

The Fed found evidence that large investors target homes with significant repair needs or deferred maintenance; if they make the necessary repairs it can improve the quality of housing stock, especially in historically devalued neighborhoods. But a settlement in March cited in the Fed report demonstrates this is not always the case. Under the $2.2 million settlement reached in Minnesota, HavenBrook Homes and six other defendants were also required to grant $2M in debt forgiveness to tenants and create a path for sale of the rental homes to affordable-housing entities.

On the con side, the Fed report said the influx of investors “likely contributed to the decrease in the country’s homeownership rate.” And in neighborhoods where investors own more than one in five single-family homes, it discovered growing worries. Renters find investors often unresponsive to their needs, while would-be homebuyers lose out to deep-pocketed, cash-paying competitors with billions of dollars at their disposal.

The problems are compounded by a lack of good data, the report found. Public property records often don’t distinguish between whether a house is owner-occupied or rented. Even where rental registries exist, they are often not up-to-date or inclusive. Even where the true owners are named in the public record, their identities may be obscured by layers of corporations, limited partnerships or other entities, preventing renters from knowing who is responsible for maintaining their home.

To overcome this and ensure accountability, the report said, new rules governing how owners are defined and recorded will be needed. “Such data would make it easier to understand whether investors are disrupting the housing market and creating challenges for renters and neighborhoods.”

Better data would also help clarify whether large corporate owners of SFRs are more likely to file for evictions or use shoddy maintenance or exploitative rent-collection practices.

The report noted that several factors hamstring individual homebuyers.

These include capital-related pressures “such as downpayment and closing-cost shortfalls and less-than-ideal credit scores. In contrast, large investors have access to capital and lines of credit. “Providing downpayment assistance—particularly downpayment assistance that keeps up with the timelines of competitive home-buying processes—could help potential homeowners compete, and could be particularly helpful for people without access to generational wealth,” the report said.

Another barrier noted is that investors have “the sophistication and experience necessary to navigate foreclosures or other distressed-property protocols” to purchase less expensive properties.

And when large investors sell SFRs, they often sell them in bulk, squeezing out the average buyer. Even when properties are sold individually, investors often demand cash payments and short time frames. Purchases by non-profit organizations, land trusts and land banks could help create affordable buying opportunities, the report suggested. The City of Minneapolis’s Single-Family Investor-Ownership Intervention Pilot program is one such effort.

Meanwhile policy makers at all levels across the country are trying to figure out ways to address the problem while also addressing the concerns of homeowners anxious to sell their properties for the highest dollar. In Minnesota, state representatives are considering a bill to ban corporate entities, developers and contractors from converting single-family homes to rental units.

In Congress, U.S. Sen. Jeff Merkley has introduced the End Hedge Fund Control of American Homes Act to bar hedge funds from buying new homes and require them to sell those they own. Another Senate bill, the Stop Predatory Investing Act, would prevent large-scale investors from deducting depreciation and interest from single-family homes.

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