Corporate landlords aren't the real villain

0:01What tour? The world tour! We're heading to Canada for the Planet Money Book launch April 27th in Toronto. It's going to be me, Darian, along with Waylon Wong, plus Planet Money Book lead author Alex Mayasi. We also have special guest AI expert Avi Goldfarb. So, our dear neighbours to the north, you can get your tickets at planetmoneybook.com. See you there.

0:40A few years ago, Amanda Cantrell was looking for a new house to live with her boyfriend and a friend. She wanted to rent a home with a large garage that would take pets. I have a rescue dog. His name is Digby. Amanda was searching in one suburb in Murfreesboro, Tennessee, and she noticed a lot of the houses were owned or managed by big corporations. It seems that those companies own all of those houses in that suburb, but I didn't see one private landlord when I was looking. This made Amanda a little concerned for when she becomes a buyer. We would like to buy a home in the future, and the fact that corporate investors can take all of them feels unfair.

1:18This feeling of unfairness crosses the political spectrum. The 21st Century Road to Housing Act is a bill aimed at improving housing affordability. It was passed in a bipartisan sweep in the Senate and was sent to the House. This bill restricts large institutional investors from owning too many single-family houses. There are pockets in the country where institutional investors account for a higher share of homeowners. But across the country, it's tiny, less than 1%. So we wanted to know, could banning institutional home investors improve housing affordability? This is The Indicator from Planet Money.

1:55I'm Darian Woods. And I'm Waylon Wong. Today on the show, corporate landlords and house prices. We comb through the evidence on big investors owning homes and ask whether there's a case for banning them. This message comes from 1-800-Flowers. In a world full of quick texts and digital notifications, a thoughtful gift can say something more. For over 50 years, 1-800-Flowers has helped people show up for the ones they care about, with expertly curated flowers and gifts delivered nationwide. With quality you can trust and a 100 % smile guarantee, they make meaningful connection feel effortless. Discover more at 1-800-Flowers.com slash NPR.

2:39Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? It means brave first leaps, tearful goodbyes, and everything in between. With over 100 years of experience navigating the ups and downs of the market and of life, your Edward Jones financial advisor will be there to help you move ahead with confidence. Because with all you've done to find your rich, they'll do all they can to help you keep enjoying it. Edward Jones, member SIPC. This message comes from Rosetta Stone. Spring travel coming up? Rosetta Stone has been the trusted leader in language learning for over 30 years.

3:18Ready to start learning a new language this spring? Visit rosettastone.com slash NPR today. If the 21st century Road to Housing Act were to pass as is, it would throttle the entire industry of large corporate landlords in suburbia. Basically, they wouldn't be able to buy any more single-family homes. Strong stuff. So let's start with the history. Stephen Billings is a professor of real estate at the University of Colorado Boulder. Stephen starts the story during the 2008 Great Recession, when homes all around the country were going into foreclosure. We saw a lot of investors see an opportunity to buy things really cheap.

3:57These investors soon realized that having these regular rent payments coming in was actually more lucrative than selling the homes, flipping them. Finance people would take a whole lot of properties with these regular cash flows and sell it as an investment product. Some of these are called real estate investment trusts or REITs. For investors in REITs, it's a way to get skin in the real estate game without needing to do the messy work of actually being a landlord. This became a real boon for this whole industry because it led to tons of money. It also led to a backlash from people like Amanda Cantrell, the renter in Tennessee.

4:34When house prices in general started to rise a lot in the early 2020s, politicians from Democratic Senator Elizabeth Warren to Republican Vice President J.D. Vance would blame institutional investors. Stevens says there's a grain of truth here. In general, the large presence of institutional investors will drive up housing prices a little bit. But just a grain of truth. Because these companies make up such a small share of home purchases nationally, less than 1%. The much bigger drivers of housing prices are low construction and low interest rates. Also, Stephen says corporate landlords actually tend to reduce rental prices by bringing more rental homes into the market.

5:16That matters because about a third of American families rent. Lori Goodman runs the Housing Finance Policy Center at the Urban Institute, a think tank. She's also involved in the housing industry as a consultant. Lori points out that institutional investors tend to buy houses that are in worse condition than average and then fix them up. They know exactly what needs to be repaired. They've got a crew that comes in and takes a look at it. They can buy the paint. They can buy the air conditioning systems. They can buy the heating systems. They can buy the carpeting in bulk. The large home investors can also finance for renovations in a way that's hard even for homeowners.

5:53The denial rate on home improvement loans for homeowners is just huge. It's over 40 percent. Now, Stephen Billings's research has painted a more nuanced picture here. He finds that for similar houses, apples to apples, institutional landlords actually apply for fewer renovation permits than other owners. But the point remains that institutional investors do tend to buy up homes in need of a spruce up. And they do spend tens of thousands of dollars on quickly tidying them up. They also build a fair share of new home construction. About 7 % of houses are built specifically to rent them. So Lori worries the Senate bill could actually backfire and make housing more costly.

6:37Because inside that Senate housing bill, large institutional investors will have to sell these newly built homes within seven years. build-to-rent activity would stop. These are homes that probably would not otherwise be built. I mean, this is a bill designed to increase supply, and you're actually cutting off the activity that is designed to do exactly that, which doesn't make sense. Adrienne Todman agrees. She's the CEO of the National Rental Home Council. That's an industry body that represents a lot of institutional homeowners. It has a real unintended consequence of really chilling, have a chilling effect, to build these units from the get-go.

7:18I've been doing this business for a long time. That is never anything anyone has said to anyone who builds apartment-style units. But unfortunately, that's the concept that's being introduced now for build-to-rent communities. Adrian says that rental homes may allow families to live in neighborhoods they otherwise wouldn't be able to afford. These are homes that a average first-time homeowner would perhaps they could afford the mortgage, but might find it difficult to also finance the upfront capital needs that the single-family home has. Stephen recognizes this advantage, but in his research, he has also seen some negative effects.

7:59When corporate landlords buy more houses in a neighborhood compared to homeowners, he saw a 2 % increase in property crime, a 4 % increase in violent crime, and a 7 % increase in drug crime. That said, if renting allows low-income families who move to neighborhoods with better schools and more social support, that can pay off hugely for the children. Research from Harvard economist Raj Chetty and others shows enormous benefits for children from low-income families who mix the families from different backgrounds with no detrimental effects for the children from the higher-income families. In fact, the CEO of the parent company of a major rental firm, Progress Residential, has a similar story.

8:40He grew up renting in a neighborhood his parents otherwise wouldn't be able to afford, allowing him to go to a better school. And he says that's part of what drives him to make rentals available. Balancing all of this, Stephen agrees that the 21st Century Road to Housing Act goes too far. I mean, it's shocking. I will say this. I think I agree with some of the conservatives on this view of let's, you know, let's allow more building of housing. Plus, many tenants have good experiences with big landlords and management companies. Amanda Cantrell ended up going with one. We asked her to rate her experience out of five stars.

9:20It's a solid four out of five. We renewed for three years, and then actually we just renewed for the fourth year, and our rent went down slightly. Overall, the evidence doesn't show that institutional investors are a major driver of housing costs. But cracking down on companies building new homes has a good chance of making housing affordability worse. This episode was produced by Cooper Kassmer-Kim and Corey Bridges with engineering by Robert Rodriguez. It was fact-checked by Sierra Juarez. Kate and Cannon edits the show, and The Indicator is a production of NPR.

10:17in-depth analysis of both the stock and the bond markets. Listen today and subscribe at schwab.com slash oninvesting or wherever you get your podcasts.