Bill proposes kicking institutional investors out of the U.S. housing market. But would it actually improve affordability?

On Tuesday, U.S. Senator Jeff Merkley (D-Oregon) and U.S. Representative Adam Smith (D-WA-09) introduced the "End Hedge Fund Control of American Homes Act" in both chambers of Congress, seeking to push institutional investors out of the U.S. housing market.

The bill aims not only to ban "hedge funds" from amassing large portfolios of single-family homes but also to force them to sell off their portfolio. The bill would require “hedge funds” to “sell at least 10% of the total number of single-family homes they currently own to families per year over a 10-year period. After a 10-year full phase-out, all hedge funds will be completely banned from owning any single-family homes.”

Merkley argues the bill would improve housing affordability.

“The housing in our neighborhoods should be homes for people, not profit centers for Wall Street. Yet, in every corner of the country, giant financial corporations are buying up housing and driving up both rents and home prices,” wrote Senator Merkley in the press release. “It’s time for Congress to put in place commonsense guardrails that ensure all families have a fair chance to buy or rent a decent home in their community at a price they can afford.”

As of Thursday, the bill has yet to gain the support of the White House, nor has it garnered support from Democratic leadership in the Senate or Republican leadership in the House.

The announcement cited an Urban Institute study that claimed as of June 2022, institutional investors owned roughly 574,000 U.S. single-family homes.

A close examination of the Democratic bill, co-sponsored in the Senate by Tina Smith (D-Minnesota), reveals a broad definition of “hedge funds,” encompassing real estate investment trusts (REITs) and corporations. This suggests that the bill would not only force out giant single-family rental operators but also halt many future build-to-rent projects, as the buyer is often a large institutional investor.

That raises the question: Would this bill—which could also drive out institutional investors helping to create more supply—actually improve housing affordability?

To understand if Senator Jeff Merkley’s bill would actually improve housing affordability, ResiClub reached out to housing economist Kevin Erdmann. (Hint: He isn’t a fan of the bill).

Erdmann, the author of "Shut Out: How A Housing Shortage Caused the Great Recession and Crippled Our Economy" and "Building from the Ground Up: Reclaiming the American Housing Boom," believes the U.S. has been underbuilding for decades and faces a significant lack of adequate housing supply. He also writes a newsletter called the Erdmann Housing Tracker.

Erdmann’s take on the bill 👇

“In 2008, the Federal government put strict regulations in place that locked millions of Americans out of the homebuyer market. Before 2008, the median credit score on originated mortgages was usually around 720. Since then, it’s been around 760. Removing the majority of buyers from the entry level single-family home market had predictable results, causing home values in working class neighborhoods to collapse by double-digit percentages in almost every city across the country. Eventually, investors started buying up those homes at those discounts. Who else could have? Washington has made sure that they were the only buyers who could get capital. Since those homes were at deep discounts for years, few were built. Rents had to rise substantially before investors were willing to pay enough to make it worth building more. Finally, in the last few years, rents have risen high enough to trigger some new building. But, it is still illegal to provide a mortgage to the traditional residents of these homes. If it was legal, they could easily outbid institutional buyers as they had for decades before 2008. So, institutional investors have to be the buyers. Now, come along Oregon Democratic senators Jeff Merkley and Adam Smith of Washington (a certain famous Scotsman is surely turning in his grave) to make it essentially illegal for institutions to buy these homes. As a result of the regulatory tightening after 2008, we need millions of new homes, and this new bill would force builders to sell them piecemeal, a few at a time. Rents are already undermining this country’s economic fairness and capacity. I shudder to think of the potential ramifications of this travesty. If this passes, I cannot fathom a functional source of new housing that could stop the bleeding in American rent inflation. I suppose after this, Merkley and Smith will have to go after “big tent”, the institutional speculators driving cardboard box production, and the bridge building cartel. Those are increasingly the only legal sheltering options for the victims of this idiocy.”

Later this week, ResiClub PRO members will get access to an interactive map displaying Realtor.com’s “Hotness Score” at a county-level. It’ll also include Realtor.com’s county-level “Demand Score” and “Supply Score.”