President Donald Trump and Senate Democrats have finally found something they can agree on: banning institutional investors from buying single-family rentals. But it won’t be the cure-all to the housing affordability crisis they think it will be.
“We want homes for people, not for corporations,” Trump said during the State of the Union address in February, touting his plan to cap institutional ownership to 100 single-family homes.
On Thursday, the Senate voted 89-10 to pass a bill containing number of measures to make housing more affordable, including banning any investor that owns at least 350 homes from buying more.
The proposed bans come as the U.S. housing market is facing a shortage of 4.7 million units, an all-time high according to Zillow, and the median age of the average first-time homebuyer in the United States has shot up to 40 years old.
The affordability crisis is real, but economists say both proposals won’t break fundamental barriers to homeownership and may backfire for the low-income Americans the bills aim to help.
“People want to identify a boogeyman that can say, ‘Hey, this is the problem, and give me an easy button to solve it right now,’” rental housing economist Jay Parsons told Fortune. “It’s an emotionally satisfying answer, even if it’s not a real solution.”
He said targeting large institutional investors—who only own about 3% of the single-family rental market—is unlikely to have an impact on affordability for lower-income Americans and could leave millions unable to afford a place to live.
Institutional investors serve tenants who are typically locked out of the gates of homeownership for reasons that have nothing to do with corporations. Parsons said many rent because they cannot meet the requirements to apply for traditional mortgages due to lower incomes and credit scores, or they can’t afford the additional $1,000 a month in homeownership costs.
“These are real people, real families, who live in these homes, and the assumption and the narrative is they would be homeowners, if not for the fact that the investors own these houses,” Parsons said. “The reality is that most of them can’t.”
Homeownership is a ‘sacred cow’
Despite Trump’s claim that the U.S. is at risk of being “a nation of renters,” there are about a million fewer single-family rentals than a decade ago, and the share of single-family homes being rented has gradually decreased since 2014, according to the National Association of Realtors.
Meanwhile, Sean Dobson, the CEO of real estate investing giant The Amherst Group, said he sees younger generations rethinking which assets are the most valuable, challenging the notion that homeownership is a “sacred cow.”
Homeowners can lose up to 9% of a property’s value from transaction fees, which have increased as home prices have soared over time, making mortgages become less valuable. Rather than “being tied to one asset in one town,” young people are prioritizing freedom, saving, personal choice, and life balance, he said.
Dobson also argued people should adjust their expectations to align with longer life expectancy and explained that Americans are accomplishing major milestones like getting married or having children at later ages as life becomes less affordable.
Amherst rents to more than 200,000 people, and 71% of its current residents would not be approved for a mortgage at the current credit and income standards, according to internal research shared with Fortune. An 85% majority of their residents would not qualify to buy the homes they live in today, Dobson said.
The average single-family renter has a FICO score of 650 and a household income of $88,000, much lower than the average single-family homeowner, who has a FICO score of 730 and an income of more than $150,000, according to Amherst Group data. A lower credit score often leads to higher interest rates, so renting from institutional investors is often cheaper.
Renting also has become a way for low- and moderate-income Americans to avoid the traps of subprime mortgages, Parsons, the economist, said. At the same time, mortgage delinquency rates for low-income Americans have been increasing over the past few years due to growing unemployment and higher home prices, according to the New York Federal Reserve.
Moving the needle on affordability
Banning institutional investors would reduce rental housing supply, slow down new unit development, and displace more than a million people from their homes, the National Rental Home Council said in a statement to Fortune. The council’s members include some of the largest single-rental family owners, including Invitation Homes, Progress Residential, American Homes 4 Rent, and Tricon Residential.
“There’s a real problem in America where we have a severe shortage of affordable, quality housing of all types,” Laurie Goodman, an institute fellow at the economic policy think tank Urban Institute, told Fortune.
Zoning laws as well as high land, labor, and materials costs are the main reasons for the 4.7 million housing unit shortage and high costs, she said.
Preventing institutional investors from buying single-family homes will just mean a small investor gets it, Goodman added. In fact, as interest rates and maintenance costs have gone up, institutional investors have slowed down purchase units in recent years, she explained.
“Banning a small piece of the market does nothing to solve for the actual affordability challenges facing people who want to buy a house,” Parsons said. “Ninety percent of single-family rental investors are smaller local moms-and-pops.”
