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February 27, 2023

How institutional investors are contributing to the housing crisis

By Liz Crouse

According to The Brookings Institution, homeownership in America continues to be a viable path to building intergenerational wealth, yet this opportunity remains dismal for buyers working hard to achieve the American Dream. One of the most recent obstacles is the rise of institutional investors throughout the nation utilizing private equity funds to purchase affordable housing units for their portfolios, removing much needed naturally occurring affordable housing or “NOAHs” from the market. Investors are targeting lower cost starter homes initially built to fill the for-sale market and transitioning them to single-family rentals.

This has become a crisis throughout the United States, but the Charlotte Region has been hit especially hard as properties are being permanently transitioned into the rental market. For example, in Mecklenburg County, approximately 94% of the units the equity funds have bought over the last decade have been purchased for under $300,000, which is about $25,000 below the average home price in the county. Taking these homes off the buyers’ market further diminishes an already lacking affordable housing supply, leaving many individuals with no choice but to rent.

What is a private equity fund, and why are private equity funds buying homes in Charlotte?

Investors use pooled money from private equity funds for large purchases like residential properties. They see the demand for housing, especially affordable housing, as an opportunity to purchase affordable units and transition them into the rental market.

Usually, the firms and investors hold onto the properties for five to ten years. Recent data has shown that when they are ready to sell, they usually sell to other firms rather than individual buyers, making it difficult for buyers to access the units.

How is Wall Street getting into the affordable housing market?

Institutional investors are taking advantage of a profit strategy that includes I-buyers, rent-to-own opportunities for renters, and price appreciation on the purchased units; flipping and leveraging collateral to purchase properties more cheaply. Thus, they can be much more competitive than the traditional “Mom and Pop” investors because of their level of expertise, economy of scale, ability to close quickly, financing advantages and other resources including paying cash upfront in pursuit of their property purchases.

Specifically, they can offer far more money than a first-time homebuyer while posing much less risk to the seller.  Often it’s not in the best interest of the seller to provide an entry-level homebuyer with the extra time that may be needed to wait for their loans to be processed. This could include down-payment assistance, special inspections needed for Veteran or FHA funding, or the possibility that the transaction falls apart.

What is the impact of investors purchasing affordable homes?

Many sellers view investors backed by equity funds as an optimal choice of buyer when selling a residential home. And, if some of these properties are in neighborhoods that have been previously acquired by state and local governments, or the dwellings are undesirable and in need of major repairs, the sellers are glad to be able to unload them.

Once purchased by firms, investors employ developers to improve the units so they can be rented at higher prices (in some instances 50-100% increase). In turn, this causes the rents and home values of other properties in the area to increase, which can push out original residents of a given area when their property taxes or rents become unaffordable. The sector of the market that is being targeted for this activity is that of first-time homebuyers looking to build equity through homeownership. Without this entry point many people are shut out of the homeownership market.

In the next part of our blog series on Corporate Investors Purchasing Affordable Homes, we’ll examine the proliferation of the corporate investor movement.

To hear more about the challenges to affordable housing and homeownership, please join us on Tuesday, March 14, 2023 at 6 p.m. at CPCC’s Dale F. Halton Theater for the Habitat Charlotte Region annual Building Futures Affordable Housing Symposium. This year’s keynote speaker will be pathfinder, community curator and storyteller Mia Birdsong, author of How We Show Up: Reclaiming Family, Friendship and Community.

To register for this free event, click here


Liz Crouse and Faith Triggs contributed to this article.

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