Earlier this month, the U.S. Senate passed the 21st Century ROAD to Housing Act by a margin seldom seen for an important piece of legislation, 89 to 10. The measure, primarily written by Sen. Elizabeth Warren (D-Mass.) and her staff, targets the single-family home rental industry as a major cause of America’s painful housing shortage.
The idea motivating the bill: These enterprises are either buying or building, then renting out for profit, houses that would otherwise get listed for sale, shrinking the supply on the market and hence raising prices and limiting shoppers’ choices for the ranches, colonials or condos available in the neighborhoods where they’d like to live. That idea has broad bipartisan support: President Trump has said he supports keeping investors out of the single-family home market, and issued an executive order to that effect in January.
It’s unclear if the law will get adopted in its present form, since the House is currently debating whether to add its provisions to its own housing bill passed in February. But if the ROAD Act’s principal elements become law, it’s likely to undermine its own intentions—by severely curbing investment in new single family housing.
As Ed Pinto, director of the American Enterprise Institute’s Housing Center and former chief credit officer at Fannie Mae, told Fortune, “The Senate bill makes it clear that the rental-home industry is an unwanted sector in America. It’s a textbook example of the law of unintended consequences.”
Pinto stresses that this now-threatened business barely existed 15 years ago, and that it arose out of a need. “People rent single-family homes for three good reasons,” Pinto avows. “First: They can’t qualify to buy because they don’t have enough savings, or sufficient income, or suffer from low credit scores. And we’re seeing more and more of that situation as prices have exploded. Second: They plan on moving in a year or two. Or third: They want in live in a house but don’t want the restrictions and responsibilities of ownership.” In all three cases, he adds, the renters are seeking the likes of three-to-four bedrooms and a backyard, features they can’t get in an apartment.
Today, the companies that have sprung up to serve this growing population—folks that, say, either couldn’t meet the monthly nut to buy, or frequently changed locales for a new job—acquire those properties in two ways. The first: Purchasing existing single-family residences that are typically extremely run down, with the intention of renovating them. For example, Amherst––one of the industry’s major players––has fixed up some 58,000 homes, spending around $40,000 apiece on improvements, for a total investment of over $2 billion. Second: The build-to-rent cohort pays developers to construct neighborhoods of homes expressly for rent rather than sale.
The ROAD Act’s supporters argue that the purpose-built rentals add nothing to supply and in fact push housing dollars in the wrong direction, and that the buy-and-rehab part of the equation reduces the for-sale pool. According to Pinto, both views are radically wrong.
The homes that companies like Amherst repair and place on the market often start off in such terrible shape that they’re not really part of the housing supply at all. They can neither be readily rented nor sold. Outfitted with new roofs and kitchens, they eventually often come back on the market as prime candidates for sale. In fact, says Pinto, “The math shows that over the last two years, the rehab investors are selling more of their homes than they’re buying. These companies watch the market. When prices rise and make selling a better deal than renting, they sell. That may be two years after they purchase or seven years after they purchase. But the net effect is that a renovated home goes on the market.”
ROAD Act provisions could kill investment in new homes
The ROAD Act contains two provisions that would chill activity in both areas. First, it mandates that “large institutional investors,” defined as any for-profit entity that owns 350 or more homes, cannot buy any more properties than they own today. The penalties are stiff: If a participant harboring a portfolio of 1,000 homes bought just one more, they would be subject to a fine of around $1 million.
The second provision involves new construction. ROAD does allow the building of new homes for rent. But here’s the catch: It also requires that after seven years under lease, those residences must be sold. “That’s already totally chilled financing for purpose-built rentals,” says Pinto. “They’re mainly financed by private capital from entities such as insurance companies, and pension and sovereign wealth funds. They’re long-term investors. Imagine if we have another crisis like the GFC in 2008, or just a big downturn, and the investors are forced to sell because it’s year seven? They don’t want to take those kinds of risks, so they’re retreating.”
Pinto also notes that ROAD awards alarmingly broad power to the Secretary of the Treasury. “It states that the Secretary can essentially change the law almost anyway he or she wants,” he notes, “by changing the definitions in a way that that shuts off any possibility of owning these homes.”
Given the damage Warren and other advocates claim that own-to-rent is inflicting on potential homeowners, it’s surprising to learn that the industry’s total portfolio amounts to around 800,000 properties—approximately 1% of all existing homes in the U.S. Still, Pinto points out that the industry’s plays in extremely important part on bringing on new supply “at the margin.” About 40,000 purpose-built homes for rent sprout each year. Pinto says they’re a big factor almost exclusively in such states as Texas, Florida, and North Carolina, which are among the nation’s most affordable markets. Rehab buys are also most common in those markets. Those facts, Pinto argues, negate the concept that rental homes artificially inflate prices. “In fact, there’s no statistical evidence that’s the case,” says Pinto. “It’s in states like California where there’s almost no rental home industry that prices are highest.”
ROAD simply doesn’t make economic sense. Rentals are in constant competition with homes for sale. Curbing the supply of either raises the costs of its rival category. If build-to-rent home production declines due to the “seven years to sell” rule, potential single-family customers will rush to apartments, pushing up rents. That dynamic would give single-family sellers more space to raise prices.
Better to let the market do what it’s always done. When home prices get extremely high relative to incomes so that monthly costs get unaffordable for many, more people rent single family homes or apartments instead. That takes pressure off for-sale housing, helping to dampen prices, not inflate them. Houses then become a better deal, demand and prices rise, and that’s precisely when the own-to-rent crowd put more of their holdings up for sale, helping balance the market and contain the upswing. It’s a healthy ebb and flow that the own-to-rent players help make work.
To be sure, America is short by multiple millions of houses. But ROAD is effectively the road to killing billions in investment that is often delivering what backers of the Act say they want: More homes—newly upgraded to boot—put up for sale.
