New York Governor Kathy Hochul has proposed restrictions on large financial firms buying homes, and state legislators in Virginia and Nebraska have similar ideas. Their rationale is not difficult to divine: Homes are increasingly expensive in many parts of the US, so if demand is limited, perhaps the price will fall. Not to mention that, politically speaking, large financial firms are not the most sympathetic actors.
Unfortunately, even if these proposed laws prove popular, they are not in the general interest.
First, the trend of large financial firms buying homes is overstated. The number of US homes owned by private equity firms is about 500,000 — or less than 1% of the 145 million-plus housing units in the US. Looking at institutional investors more broadly, the five largest own about 2% of the housing stock, a noticeable but still not huge proportion. As for the flow of homes entering the market, investors are buying about 16%.
From 2016 to 2023, the US personal home ownership rose from 63% to 66%, so it is hardly the case that Americans are being pushed out of their houses. That rate was higher before the Great Financial Crisis, when it reached 70%, but at least it has moved in the right direction.
The simpler point is this: If large financial firms can buy your home, you are better off. You will have more money to retire on, and presumably selling your home will be easier and quicker, removing what for many homeowners is a major source of stress.
And all of this makes it easier to buy a home in the first place, knowing you will have a straightforward set of exit options. You don’t have to worry about whether your buyer can get a mortgage. Homeowners tend to be forward-looking, and a home’s value as an investment is typically a major consideration in a purchase decision.
More generally, more liquidity in a market is almost always a good thing. As an art fan, I might prefer it if very wealthy individuals were prevented from bidding on and buying Andy Warhols, as the works might then be removed from public view. But that would hardly be good for the market as a whole.
A less obvious point is that lower-income groups can benefit when financial firms buy up homes. Obviously, if a hedge fund buys your home, no one at the fund is intending to live there; they probably plan to rent it out. The evidence shows that when institutional investors purchase housing, it leads to more rental inventory and lower rents.
If the tradeoff is higher prices to buy a home but lower prices to rent one, that will tend to favor lower-income groups. Think of it as a form of housing aid that does not cost the federal government anything. Economist Raj Chetty, in a series of now-famous papers with co-authors, has stressed the ability to move into a better neighborhood as a fundamental determinant of upward economic mobility. Lower rents can enable those improvements.
None of this is to argue that expensive housing isn’t a real problem in the US. My argument is that there is plenty else that can be done to address it. The YIMBY movement, for example, has called for greater freedom to build. Deregulation of new home construction would lead to lower prices and greater buying opportunities. Even if average measured prices rose (if, as seems likely, more new homes were built in places like San Francisco and Oakland rather than rural Nebraska), the result would be more availability in more desirable locations.
Some of the other proposed remedies are just new ways of making the problem worse. One proposal in Virginia, for example, calls for employers to aid their workers in buying new homes, backed by a governmental tax credit. That idea, if adopted on a large enough scale, could push up the price of homes, induce employers to lower wages and impose a major fiscal burden on state governments.
When it comes to home prices, as with those of other goods and services, the best policy is often just to let the market work.
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