Home ownership, a core component of the American Dream, appears increasingly out of reach for many. Much of the concern involves affordability, driven partly by high mortgage interest rates. But corporations own an increasing number of homes which are available only for rent. Are Americans becoming captive renters?
I have some statistics on corporate ownership later. Let’s first consider why this might be occurring.
Profit seeking is economics’ default explanation. Renting a home can be profitable; many Americans supplement their income in this way. The securitization of rental properties, or aggregating rent payments into bonds to sell to investors, is also driving corporate ownership. The process is the same as the creation of mortgage-backed securities (MBS).
That may raise red flags for many given MBS’ role in the housing crisis and the Great Recession. But securitization is a valuable financial innovation.
Subprime mortgages, also packaged into MBS, drove the housing crisis more than securitization. “Subprime” refers to borrowers not meeting traditional lending standards. The Federal government imposed lending quotas on the market to make lenders write more subprime mortgages.
Rising house prices long obscured subprime mortgages’ weaknesses. Subprime borrowers sold for the capital gain when unable to make payments instead of defaulting. But low default rates made banks’ prior reluctance to lend appear like racism, further ramping up government quotas.
The enormous leverage financial institutions assumed when combining MBS with credit default swaps (CDS) worsened the crisis. CDS promised a payment to the holder in case of default on potentially risky subprime MBS, essentially functioning as insurance. An MBS covered by a CDS appeared very safe – high interest rates if the bond was good, insurance if not.
Unfortunately, investors offering CDS failed to have the funds to make the contracted payments upon default. Once home prices started declining, subprime borrowers began defaulting and the dominoes fell.
Securitization should increase the housing supply and, in time, affordability. Mortgages are long term, illiquid investments and vulnerable to default risk. Bonds can be bought and sold on a secondary market. More people will invest in bonds than mortgages (or rental homes), increasing the financing for home building. This lowers the cost of homes, as opposed to shifting costs to taxpayers through government subsidies.
Statistics from Harvard’s Joint Center for Housing Studies reveal a market more consistent with profit seeking than a corporate cabal against home ownership. Corporate purchases increased in the buyer’s market after the housing crisis and have been concentrated in fast-growing Sun Belt markets. Corporations must own homes to keep them as rentals to sustain the bonds.
Attempting to deny Americans home ownership would be enormously difficult. Market transactions are voluntary: corporate landlords cannot force Americans to rent from them. Manipulation only becomes remotely possible when the manipulators own almost all housing. Otherwise, would-be home buyers will turn elsewhere, leaving corporate rentals empty.
Individual investors still dominate the rental home market despite a modest share decline. Individual investors owned 73 percent of rental homes in 2021, down from 82 percent in 2001. Investors owning 1,000 or more properties – likely the corporate landlords – owned two percent of small unit rental properties (a category including duplexes). Corporations are not about to corner the housing market.
Investment is booming, the expected consequence of securitization. Nationally, construction began on a record 81,000 rental homes in 2022, 20,000 more than in 2021. Increased construction will eventually lower rents and home prices. And building new housing offers the ultimate safeguard against a corporate cabal, however unlikely.
Americans’ growing suspicions of large corporations are not unjustified. But market transactions remain voluntary and delivering what people want is still the best way for sellers large and small to make money. As long as millions of Americans will pay to own homes, the market will supply them. Only government consistently thwarts buyers’ desires.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
