Economist reveals the true impact of the president's latest housing initiative
As mortgage industry experts discuss how to improve housing affordability, they all seem to agree that more supply is needed in almost every market.
This was one of the reasons why President Trump announced earlier this month a ban on the purchase of single-family homes by what he called “large, institutional investors.”
He signed an executive order last week putting this in place and ordered agencies to issue guidance on preventing federal programs from facilitating bulk purchases. One of the agencies in question is the Federal Housing Finance Agency (FHFA).
Thom Malone (pictured top), principal economist at Cotality, said there are still many questions that need to be answered to see the true benefit of the move.
“We still don't have a definition of what they consider to be an institutional investor,” Malone told Mortgage Professional America. “Let's just assume for a second that it is a big investor who owns thousands and thousands of properties and rents those properties out. If they just stopped making any purchases at all, the impact would likely be very limited, because they own a very small portion of the market, like 1% to 2% historically.”
Commercial impacts
One thing Malone noted is that the executive order includes an exemption for build-to-rent properties. So, for brokers working with investor clients, there might not be a huge impact.
“They have included a carve-out in the executive order for build-to-rent,” Malone said. “So this would probably mean that this wouldn't hurt supply, because they'd still be able to buy new construction. So the construction sector would not pull back. That being said, if investors aren't buying properties, that means there are fewer rental properties on the single-family market.
“On the rental side of the market, there's a reduction in supply, and that, in theory, could raise rents. However, since we're again talking about such a small share of the market, none of these theoretical effects would probably be notable. They might not even be really detectable, except for some specific areas where there's a high concentration of investors.”
The large investors are mostly concentrated in large cities. Malone said it’s much easier to manage properties concentrated in a city than spread out across the US. But even in those cities, Malone expects the impact to be minimal.
“It’s easier to own and manage 2,000 homes in one city than it is to manage 2,000 homes across big swaths of rural America,” he said. “There are a few hot spots: Atlanta, Memphis, and Charlotte are the ones that come to mind. There's high population growth, so they perceive that there will be high growth and rental demand in the future. There might be some impacts in particular neighborhoods in those areas, but it would likely be a very limited impact.”
Is the ban enforceable?
One of the biggest questions about the ban is how enforceable it will be. Federal agencies, including the FHFA, will be tasked with developing plans to implement the ban. However, large investors aren’t going to their local broker to ask for a mortgage to buy thousands of homes.
“These big investors, they don't get a mortgage like an individual does when they buy a home,” Malone said. “They’re basically tapping their equity, tapping capital markets directly, and then they're paying more cash for the home. So they're not getting a loan from a lender that's securitized by Fannie or Freddie. So they're outside of the purview of FHFA.”
To make the ban enforceable, an institution’s actions would have to rise to the level of investigation by the Department of Justice or the Federal Trade Commission. Malone said Congress may also get involved in passing laws to put this ban on the books.
“The executive order, in and of itself, doesn’t really have teeth,” Malone said. “It does instruct the DOJ and the FTC to investigate some large investors for anticompetitive practices. But that's more an unknown, that's more a cloud of uncertainty than a definite impact. This would require legislative action, as it does instruct Congress to codify it in some way. It can't ban people from buying homes.”
Malone believes this is a good step in the right direction because it is hard for smaller investors and owner-occupied buyers to compete with large investors who can waive procedures to speed up the purchase process.
“If you're an owner-occupied buyer, and you happen to be bidding against a large investor, you're going to have a hard time putting together a more competitive offer,” he said. “They're paying all cash, so that means appraisal contingency, financing contingency; they don't need them. They can probably waive the inspection contingency because the risk that something is wrong with the property is diversified across many properties.
“If I'm buying my home, I'm much more hesitant to waive an inspection, because if there's something wrong with the plumbing in my home, I really want to know about that. If you're an investor with thousands of properties, if there’s something wrong with the plumbing, that’s fine, whatever. We'll fix that, and that's just part of the cost of doing business.”
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