With the housing market facing constant undersupply, Americans are facing increased rent and home prices. There are several reasons for this trend, including rising material costs, supply chain issues, and labor shortages. On top of that, Americans are not only contested for the scarce homes only between themselves but are pitted against hedge funds. Why are hedge funds buying homes? This is one of the questions that is coming to the minds of so many people struggling to find a place to live.
In the last decade, investment funds identified homes as a great investment due to several upsides. They are considered to be a valued investment class due to attractive returns. The low supply of homes is driving the rent higher, bringing higher returns to institutional investors. Real estate also offers diversification to the investor portfolios.
Investment companies like Blackstone have pushed for the institutionalization of rental markets after they saw benefits from owning large chunks of the home rental market. These companies developed a model in which they are renting and managing single-family homes, which proved to be a great investment. The downside is that individual buyers are priced out, facing difficulties in settling into a home.
Voices of concern pointed out this issue, and Democrats are already pushing for the implementation of the bill "End Hedge Fund Control of American Homes Act." It would ban hedge funds from buying and owning single-family homes in the US. From surveys dating to June 2022, institutional investors own up to 5% of single-family homes, which is a steep rise from 1% reported in 2012, which is a strong claim for this bill to be implemented.
Key Takeaways
- Hedge funds and private equity firms identified the housing market as a great place for investing and diversifying their portfolios. They pursued investments in the housing market at a higher rate than in the last decade.
- The housing crisis is triggered by several reasons, including labor shortages, higher material costs, and the switch from low, and almost non-existent, interest rates to much higher rates. This caused the monthly mortgage payments to skyrocket.
- While many voices are pointing out that institutional investors are not the primary cause for the unaffordability of housing, it is certainly one of the reasons for the concern. Two senators from the Democratic Party already presented the act, which would push them out of the market.
What Are Hedge Funds and What Homes Offer to Them
Hedge funds are complex alternative investment vehicles that provide to the investors several crucial upsides. For one, they offer a means for portfolio diversification, followed with a tactic to always look for maximum returns. Unlike other investment options with hedge funds, you can invest in almost everything—public and private equity, all sorts of commodities, special situations, and debt.
With this in mind, there is always a downturn, and in this case, it is availability for investors and the risk that comes with every investment decision. Hedge funds operate only with accredited investors, meaning that every investor must comply with demands that are up there. The most important ones are net worth and annual salary.
When talking about risks, hedge funds aim for high alpha generation. To achieve it, they often resort to the use of leverage and unorthodox investment strategies. That is why risk management is kept in high regard in every hedge fund operation.
How does housing come into play? Like we mentioned, hedge funds can invest in almost anything, and they, in most cases, have a portfolio diversified amongst different asset classes. Real estate is another asset class that comes with its ups and downs, and currently they offer something that is drawing these companies towards them. The two biggest turn-ons are constant gains through rental and hedging against inflation.
Key Reasons Why Hedge Funds Are Buying Homes
One of the reasons why hedge funds have become so drawn to the real estate market in the last decade is the lack of supply. Either single- or multifamily homes, these markets are struggling to meet demand. Where there is a lack of supply and an abundance of demand, hedge fund managers are seeing an investment opportunity with a large upside.
Some characteristics of owning rental properties are also highly appealing to hedge funds, like property appreciation and constant cash flow. With the passing of time, housing values usually increase, providing an increasing income. Also, rent is something that is a priority and, as such, provides a stable cash flow. As a result of limited housing inventory supply, there is a high demand in the market, pushing the prices even higher.
Hedge funds diversify their portfolios for several reasons, with one of them being a hedge against inflation. During inflationary periods, real estate values tend to rise, keeping the investment value steady. Also, with keeping a part of the portfolio in real estate, hedge funds are combating volatility through balancing risks coming from equity and bonds.
Another significant upside of investments into house markets is the potential scalability. Large investors can increase their homeownership portfolio pretty quickly, and as a result, they can also make an impact on future prices and generate higher gains.
Current Trends
The impact of giant financial corporations on the home market in the US is growing. According to recent data, institutional investors bought 44,000 homes just during Q1 2024. That is 19% of all homes sold during that time frame and a whopping 26.1% of lower-priced homes sold.
Another study shows that institutional investors entered the housing market in nearly 50 US cities, where they take noticeable shares. Also, almost a quarter of all single-family homes in the US in 2021 were investor purchases, when compared to 15% in 2012.
This trend picked up the pace after the recession in the 2007-2009 period. During the late 2000s, subprime mortgage foreclosures were at their peak, meaning that the single-family marketplace was wide open for investors. Large institutional investors picked up the scent and increased their portfolios of housing stock shares.
End Hedge Fund Control Of American Homes Act
The issue of institutional investors, including hedge funds, increasing their interest in the housing market didn't go unnoticed. While it is not against the law to buy homes, when the scale can impact the housing market and availability to an average buyer. Democrat senators Jeff Merkley and Adam Smith composed legislation to combat the increased difficulty for middle-class American citizens to purchase a home.
They recognized that home prices under the impact of Wall Street hedge funds have grown much higher than the average salary, practically pricing out the majority of the population from a chance of buying a home.
Senators devised the act so hedge funds would effectively be banned from buying single-family houses. Also, it would be required of hedge funds to sell at least 10% of homes they keep in their portfolio per year over a ten-year period. After a decade hedge funds would not own any houses, and it would keep them out of this market.
Currently, this act is introduced, and now it is in the Committee on Finance playground. This is an early stage in the process of making an act into a law. It still has to pass the Senate, the House, and the president, and only then would it become a law. However, the first, and most important, step has been made. The problem is recognized, and it is acted upon.
Critics of the act are pointing out that the senators are just looking for a scapegoat for high home prices and that the act would not solve the real issue. The problem of unaffordable housing is coming from several angles, and recognizing all of them is essential for finding a way to tackle this nationwide crisis.
Surely the prices of homes have increased due to the increased costs of materials and the complex process of acquiring a building permit, but amongst them, at some point, is also the impact of institutional investors. A wider debate would surely shed more light on the issue, since until now the public mostly heard accusations spewing from one side to the other. In the end, all sides should keep in mind the real problem—making housing affordable for the wider masses.
