It has always been quite hard to square the Trump presidential campaign’s regular focus on ‘affordability’ – or sometimes just ‘the price of eggs’ – with the actions his second administration has embarked on in office. In the view of most economists, the President’s signature economic policy – the imposition of tariffs – makes many goods less rather than more affordable. In recent weeks, the attention has turned towards housing affordability.
Of course, in the short run, the higher interest rates – and mortgage rates – associated with the war in Persian Gulf are dominating the debate, but, in the medium term, legislation currently making its way through the legislative process may be more significant. This week, the Senate, in a nowadays rare display of bipartisanship, passed a housing affordability bill in an 89-10 vote. With midterms on the horizon, being able to boast about having voted to improve housing affordability is rather attractive to legislators.
As Reuters explained, the bill covers a broad range of policy areas:
The bill would provide a range of government incentives for the housing and financial industries to narrow an estimated 4 million home shortfall that is the result of several factors.
Those include high mortgage interest rates, a 60% increase in home prices since 2019 according to some estimates, construction material shortages following the COVID pandemic, and the lasting effects of the 2008 financial crisis.
Under the bill, environmental reviews for construction projects would be waived or sped up and more financing would be freed through federal block grants to states.
Also, loan limits would be raised for federally-backed mortgages for multifamily homes.
More controversially:
…the bill would cap institutional investors’ ability to buy single-family homes at 350 and require them to sell newly built rental housing after seven years of ownership. The goal is to tamp down investors outbidding individual buyers.
This measure, championed by long-time Wall Street critic Senator Elizabeth Warren has not only received a great deal of push back from investors but also, to the surprise of many of those same investors, gained the apparent support of the President. As the Financial Times reported earlier this year, this has left some institutions more than a little befuddled.
“This president is a real estate guy,” says Tony Julianelle, chief executive of Atlas Real Estate. “Everybody I know who voted for him was like, ‘Yay, we got a real estate guy, and we’re all going to win now.’ And you know, it’s like he’s doing something Elizabeth Warren has tried to do for the last five years. Like, wait what’s happening?”
Whether or not the proposed change will make its way into law now depends on the House. Although an Executive Order this January is already in effect.
Both the Clark Center’s US Economic Experts and Finance Experts Panels have recently been asked about such proposals. Neither is especially impressed.
Asked, in a poll published on 2 February this year, whether “restrictions on large institutional investors buying single-family homes would measurably improve the affordability of home ownership”? 19% of Finance Panel respondents, weighted by confidence, strongly disagreed, and 54% disagreed. Just 10% were in agreement, with the balance uncertain.
When the US Economic Experts Panel was asked the same question a week later, the results were very similar, with 9% strongly disagreeing, 66% disagreeing, just 9% agreeing and 17% uncertain.
Fiona Scott Morton of Yale, who was one of the minority agreeing with the statement in the question, argued that “Larger owners may be more likely to use tools enabling algorithmic collusion. They may also deploy sophisticated strategies to create concentration in markets (e.g. university campus neighbourhoods) that escape antitrust scrutiny because they are small but have inelastic demand”.
For most respondents, though, the relatively small size of the single-family market segment owned by institutions meant that restrictions there would be unlikely to have a major impact on wider questions around affordability. As Campbell R. Harvey of Duke Fuqua noted, “First, these institutional buyers are a small part of the overall market (less than 4% of single family homes, the last time I looked). Second, it is important to consider the knock-on effects such as reduced liquidity, less future supply, impact on financing costs”.
More broadly, several respondents argued that ‘housing affordability’ was something distinct from ‘house prices’. It is perfectly possible, for example, that some policies could increase the affordability of home ownership while making the rental market tougher. As Jonathan Parker of MIT Sloan argued, “If institutional investors lower rents for nice single-family homes, some Americans will choose to rent instead of buying. Whether this lowers house prices, depends on how elastic is the rent-own decision for single family homes and how much rents might decline”.
Politicians up for election have every incentive to talk up measures to improve housing affordability. And if interest rates do head northwards as a result of the turbulence in the Middle East, more such calls will be heard. But, in the view of the expert panels, restricting institutional owners from building and owning single-family homes is more likely to add to the problems than mitigate them.
