Vice president Harris announced her support of a recently introduced bill aimed at curtailing investor activity in the housing market that she says is driving up home prices. This new bill is one of the cornerstones of Harris’ housing policy. The Stop Predatory Investing Act is targeting single family investors. What is in the newly proposed bill and how will this impact the real estate market. Will this act reduce real estate prices?
What is in the stop predatory investing bill?
First, the name of the bill is misleading. There is nothing predatory about someone or an entity owning 50 single family home rentals. There are millions of apartments, and a single complex could have several hundred units, but that is not considered predatory so I’m not sure why someone who owns a comparable number of single family homes is being specifically targeted.
Here are the key highlights in the Bill:
- Investors who purchase more than 50 houses would be restricted from deducting interest and depreciation.
- If a property is sold to a qualified owner occupant or non profit then interest and depreciation can be taken in the year of the sale.
- Bill applies to any property less than 4 units. Townhomes/condos are considered individual units and subject to the bill.
- The new regulations will apply to any properties “placed into service” after the effective date of the signing into law.
Huge loopholes in the stop predatory investing bill
The way the bill is written there are some glaring loopholes. Someone could set up separate entities that max out at 50 investment single family homes. For example, an entity could be created for Denver that holds 49 homes to get around the new law. It would be a pain, but companies would do this order to save substantial dollars on interest and depreciation.
Is the predatory investing bill even needed?
I think it is ironic that this bill is now being introduced. Homes purchased by real estate investors saw their largest annual decline on record in the first quarter of the year amid falling home values and high mortgage rates, according to a report released on Wednesday.
Real estate investors purchased 48.6% fewer homes in the first quarter of 2023 than they did a year earlier as elevated interest rates along with declining rents and housing values ate into potential profits. That’s the largest annual decline on record, and outpaced the 40.7% drop in overall home purchases in the major metros tracked by Redfin.
How will this new bill impact what occurred in the last recession
In the last recession house prices plummeted. Investors came in and bought in bulk large pools of houses. For example if a builder went bust, a bank would end up with an entire subdivision and would sell this off to investors. Ironically many of these sales were made by the FDIC when banks failed. It was most efficient to get rid of these loans in bulk as opposed to individually due to carrying costs, etc… When there is another economic downturn, there will not be buyers that are willing to take the houses in bulk from the FDIC which will create further problems when house prices reset. Taxpayers will then in turn absorb these losses.
Will this new bill have the intended result of lower house prices?
Absolutely not. There is this theory that institutional investors are somehow distorting the single family home market. Currently, institutional investors only own about 0.2 percent of all single-family homes, and just one-percent of rental homes, according to recent data presented to the U.S. Senate by The Heritage Foundation. The Heritage Foundation also pointed out that in no state, do institutional investors own more than 1 in 100 of all available housing.
“‘Institutional owners’ of rental properties are being scapegoated for the rise in home prices and rental costs,” Joel Griffith, a research fellow explained. “…The bottom line is that institutional SFR ownership is not measurably impacting local home price dynamics to the upside.”
Predatory investing bill will have unintended consequences
Although the intention of the bill is to lower prices for other homeowners to buy properties, the unintended consequences of this legislation will have the opposite effect.
- Less supply: Many large institutional investors are now building “for rent” subdivisions which is drastically increasing the supply of rentals in many markets. With the new legislation, these projects will not be economically feasible leading to a large drop in supply. As supply drops, prices will rise for both rentals and homes for sale.
- Allow prices to fall further in downturn: We have seen in prior downturns that institutional investors put a “floor” on how much prices could fall. Institutional investors were the largest purchasers of defaulted notes and properties. When there is a repeat of 2008, the market will fall considerably more if there are not deep pocketed buyers willing to step in. Imagine if every property held by the FDIC or the Fannie Mae, etc… could only be sold to an individual owner or a very small investor. It would take 3-5 years to get rid of all the properties leading to a much worse outcome and slower recovery.
- Slippery slope on business investment: The whole premise of targeting one specific type of buyer in a specific industry for tax policy is very concerning. What happens if next they say that you can’t depreciate apartments or industrial properties or any myriad of other business assets. This proposal is going down a very slippery slope that will have far-reaching ramifications for future business investment.
What has caused the huge rise in prices?
It is interesting that investors are being scapegoated for the huge run up in prices as the real culprit is interest rates. As interest rates were pushed to historic lows during the pandemic it created ripe conditions to use ultra cheap leverage to make hefty returns on real estate. It wasn’t just institutional investors that benefited as individuals and smaller investors also took advantage of the ultra-low rates to buy a second home, or upgrade to a larger home, etc… The huge demand for real estate was driven by the once in a lifetime low rates. This in turn pushed up real estate prices and in turn rents.
Summary
This new proposal to target large investors will not have the intended effect of lower prices. The new bill will do the opposite and raise prices due to a reduction in inventory/investment in single family rentals. Furthermore, the predatory investing bill creates a slippery slope and opens up pandora’s box on who could be the next target. This will ultimately lead to less investment and even lower inventory, furthering price increases and rent increases.
The real solution is to let the markets work as intended with increasing supply and less government subsidization of ultra-low rates. The predatory investing bill is the wrong solution as the market is already resolving itself without this bill. We are already seeing this happen in real time with investors cutting their purchases as rates have risen. Even with the reduction in investor purchases prices are not falling in most markets as the real culprit continues to be the lock in effect of ultra-low interest rates.
Additional Reading/Resources
- https://www.banking.senate.gov/imo/media/doc/stop_predatory_investing_act_one_pager.pdf
- https://www.banking.senate.gov/imo/media/doc/stop_predatory_investing_act1.pdf
- https://thehill.com/business/4091602-senate-democrats-take-aim-at-investor-home-purchases/
- https://news.theregistryps.com/as-institutional-investors-buy-up-single-family-homes-everyday-americans-must-sprint-to-catch-the-american-dream%EF%BF%BC/
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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