Ownership Isn’t The Problem, Scarcity Of Housing Is

Last month I attended a community meeting in Cincinnati students of the Housing Systems course in the University of Cincinnati School of Planning to discuss “how institutional investors are impacting our city; what is currently being done to address this issue and what more we need to do.” I’ve posted before about the Port of Cincinnati’s efforts to thwart institutional investors buying single-family housing in the city. The question that was hard to answer at the meeting was what exactly is an “institutional investor” and whether ownership is causally related to bad housing outcomes, like higher rents, eviction, or dilapidation. Worrying about who owns housing seems to be yet another distraction from the real problem, lack of supply in the face of rising demand.

The students are taking a course called Housing Systems, taught by Professor Hayden Shelby. The course includes taking a look at the “nature of housing problems and housing markets” and “addressing housing market failures.” Looking at ownership patterns and how they relate to outcomes in the housing market is certainly worth a classroom exercise, but should policy interventions concentrate on who owns property? It depends on whether there can be a clear, consistent, and causal relationship between ownership and bad outcomes. So far, I have not found any data that establishes a connection.

In fact, for a while, the big buzz was around foreign acquisition of housing in the United States. The scary narrative was that Chinese investors were “parking” cash in the American housing market, buying up lots of apartment buildings, emptying them out, then waiting to sell them. About 5 years ago, there was a proposal to tax the purchase of housing by foreign investors to stop this.

However, the problem, sketchy investors buying up and emptying apartment buildings, wasn’t real. Certainly, there were some transactions with investors outside of the United States, but they were trying to make money, not lose it. When those investors purchased buildings they ran them just like any other owner, they didn’t empty them out; the bizarre argument was that by leaving them empty, prices would go up and so would the value of the investment. Except that to create a 1% uptick in average rents, they would have to buy and remove 1,400 units from the Seattle market, something that simply wasn’t happening.

Today’s worry is that somehow investors – and the modifiers now are not “foreign” but “large,” or “out of town,” or “big,” or “corporate,” or all of the above – are necessarily bad actors. Advocates point to the outcomes of rising rents, evictions, and dilapidation as evidence. But all those things happen anyway regardless of whether an owner lives a mile away or 1,000 miles away. And there simply isn’t anything wrong or sinister about Real Estate Investment Trusts (REITS) or pension funds buying housing if they think it will make a return. The notion that such transactions will be more profitable by letting the buildings fall apart, harassing tenants, and evicting them not only makes no sense, but isn’t supported by any quantitative evidence.

There are bad housing providers – and there are bad bus drivers, police, teachers, and maybe even politicians – but one doesn’t try to attribute these actors’ failings to something like where they live or where they went to school. If any one of these kinds of actors does something wrong, what makes sense is to sanction them for breaking rules or endangering the community. Such sanctions already exist for people who mismanage properties in a way that creates blight and the eviction process is presided over by a judge, not the housing provider themselves. And if rising rents are the issue, the best way to offset that is by creating a competitive housing market so people unhappy with the price can easily find a substitute nearby.

The underlying sense of outrage in the room at the meeting was clear; some “faceless corporations” are making money, lots of money, at the expense of poor people. Clearly, the logic goes, those corporations must be stopped from owning property in Cincinnati. One participant suggested not allowing more than a certain number of homes to be owned by investors of any kind.

Oddly, the Port of Cincinnati agrees. Another story recently published highlights the Port’s efforts to buy up as much housing as possible with its public dollars or the proceeds of bond sales. The idea is that there won’t be anything left for “intuitional” investors. Is the Port an institution? And what happens when someone stops paying rent or violates lease terms? Will the Port evict them? Non-profits and housing authorities, also institutions, evict many, many tenants for non-payment and lease violations. The Port will too. The Port plans to “make back its money from renting and, eventually, selling the homes. But the whole point is to keep rents affordable, and sales prices low enough that people can pay.”

Hmmmm. How are they going to do that? Indications from the story are that the $10,000 the Port guessed they’d spend to improve homes isn’t enough. The Port is beginning to realize – like any other owner, large or small – that someone has to pay for repairs. If it is the end user, a renter or a buyer, then the price will go up. It’s simple math. The truth is that any buyer, whether it is a REIT or a first-time investor buying a single rental property, rent is the only way to pay for improvements. If there a problem with housing, the best way to tackle them is to incentivize improvements, not mandate them. If a mandate comes, renters will pick up the tab, and the units will no longer be affordable.

It may be reductionist, but there is always one way to fix any housing issue: allow the market to produce lots and lots of housing, so much that producers and providers have to compete with each other to get people to rent or buy their product. Anything less than this will slant the playing field away from the consumer, forcing them to compete with each other and accept less than ideal prices and conditions. And here’s the key point in this whole discussion: even if there was a measurable and strong causal connection between ownership and housing outcomes, the best solution to that would still be more housing. The solvent for most housing issues is creating enough supply so that people have the opportunity provided by have the freedom to choose an affordable alternative.

Professor Shelby was patient with my questions at the meeting and also was gracious enough to answer some questions I sent her about the topic of investor ownership and the class. Here are my questions and her answers in full.

How important is it to settle on a clear definition of what is meant by “investor?” For example, the Port is using investor money from bond sales to buy homes to stop other investors from buying them; is this really about “good” versus “bad” investors? How is that measured?

I think it is really important to differentiate between different kinds of investors. In this project we’ve relied on the term others have used to describe this phenomenon, ‘institutional investors.’ But I recognize that’s an imperfect term. We’ve struggled to come up with a better term to describe what kind of actor is actually problematic in this field. The types of entities we’re concerned about are those that are having negative impacts on our citizens and communities by (1) raising rents to levels that are unmanageable for tenants without materially improving the properties, (2) evicting at higher rates than most other market landlords, and (3) not maintaining properties adequately, such that tenants have to live in poor conditions and neighbors may experience knock-on effects on their property values. We probably need a better term for these types of investors. Maybe just “bad actor investors” would suffice. But the reason we wanted to host this community conversation is that in Cincinnati many people and organizations in our city have noticed that we have a few large entities, mostly REITS, that have come onto the scene in that last few years and seem to be producing these material problems for residents at much higher rates than the typical landlord.

What are the negative outcomes that can be linked to “bad” investors? Are those outcomes causally linked to the distance and size of the investor? Obviously there are going to be large distant investors that have “good” housing and small local ones that have “bad” housing.

I don’t know that size is necessarily caused by (or even always correlated to) these bad outcomes I listed above. It is certainly possible (and plausible) for small-scale investors and landlords produce these problems, as well as for large-scale investors to produce quality affordable housing. However, when there are large investment entities producing these problems—and we have a couple of companies in Cincinnati—those companies can produce a lot of pain because of their size and impact. There is also the issue that these large entities are often hard to hold to account because they are operating under multiple LLCs and often don’t have a local representative who is easily reachable by tenants and community advocates when problems arise. That is the fundamental issue.

Rather than try to regulate ownership, would it make sense to address bad outcomes using existing code and developing programs to incentivize different behavior. For example, if a housing unit has become dilapidated, the City could offer a low interest loan for grant from a fund that could allow repairs more affordably and prevent the costs being passed on to residents.

I think one way to combat this is to enforce existing regulations, and certainly folks I’ve talked to at the City are trying to do just that. And it definitely makes sense to offer grants and low-interest loans to help landlords maintain properties. It is definitely the case that small-scale landlords, in particular, often operate on very tight margins and genuinely have difficulty maintaining their properties, especially now that materials and labor have become so expensive. But the issue we’re focused on here is not mom-and-pop landlords who need a small loan to upgrade a couple of properties. We’re talking about large entities who are coming into neighborhoods, increasing rents, not really “investing” in the properties in the sense of materially putting anything into them, and extracting value through those rents. That’s the fundamental issue we need to keep in mind about the business model we’re seeing emerge in single family rentals. Most real estate investment in the past has looked to gain revenue through the accrual of value to the property itself over time. So there’s an incentive to maintain the property. But that’s not what these companies are doing. They are extracting short-term gains through increasing rents and cutting costs by not maintaining the properties. I think this is a fundamentally different business model from most mom-and-pop landlords, and we need to keep that in mind when we talk about this issue. We also. Need to keep that in mind when we consider appropriate policy responses. We don’t want to create regulations that hurt small scale landlords who are already struggling to maintain quality units.

Would you have any other thoughts or comments on what you hope this project will yield in terms of better housing outcomes? If it involves regulation, how could new rules avoid creating disincentives that could reduce investment by private developers in building housing in Cincinnati.

From an advocacy perspective, I want this to bring people together to think about solutions that can lead to better living conditions and greater tenure security for renters in our city. I don’t have a predetermined set of policy initiatives I’m trying to push, but rather I’m listening to folks in the community, trying to connect them, and trying to find ways that I might direct research that can be of use. Relatedly, from an intellectual and pedagogical perspective, I think this project has already done a lot of what hoped it would do, which is to stimulate conversation that helps us clarify what the problem is and where our advocacy should be aimed.