Sen. Jeff Merkley introduced a ban last week on arguably the
largest driver of high rents across the country: Private equity hedge funds in
residential real estate.
Since the 2008 recession, Wall Street speculators have
bought up foreclosed residential properties at unprecedented rates, effectively
positioning hedge funds as landlords.
But because hedge funds have relatively short
“lifespans” – often less than 10 years – investors want to see quick
and maximized profit. This in turn puts investors at cross-purposes with
affordable and even safe housing: Studies show these private equity landlords
offer fewer services and delayed maintenance, while being more ruthless in
raising rents, levying fines and evicting tenants.
At a time when much of the country is contending with a housing shortage,
economic hardship due to the pandemic, inflation coupled with stagnant wages –
and with mortgage interest rates that have more than doubled over the past year
– Merkley and other housing advocates see this investment method as little more
than profiteering.
“By the hedge funds controlling the rental market in
kind of an oligopoly – one hedge fund has over 80,000 homes – they really are
in a position to control a huge share of the rental housing and thereby drive
up the rents for people,” Merkley told The Skanner.
“Whether for home ownership or for rental, we need to
get the hedge funds out of this business.”
Called the End Hedge Fund Control of American Homes Act, the proposed
legislation would impose a federal tax penalty for large-volume home owners: An
entity can own up to 100 single family homes, but each property beyond that
would be fined $20,000. Tax revenue would be put into new state housing trust
funds to finance down payment assistance for families.
To ease the transition, the bill requires hedge funds and
other high-volume residential property owners to sell off a minimum of 10% of
their single family properties per year. They would be required to sell homes
to individuals or families, and would not be allowed to sell to other
corporations.
The bill makes exceptions to nonprofit organizations, public
housing agencies and home builders.
‘Faceless Bureaucracy’
Among the largest holders of multifamily residential
buildings, half the units are backed by private equity, according to a
ProPublica report published in February. The top 35 private equity-backed firms
hold about a million apartment units nationally.
Of the top 10 such firms, five own numerous properties
throughout Oregon, according to the National Multifamily Housing Council.
This gives hedge funds undue influence over pricing in
rental and housing markets, Merkley argued, while putting renters at the mercy
of often unresponsive property managers.
“You have a faceless bureaucracy operating from a
corporate building on the other side of the country that cares nothing about
the family, cares nothing about the neighborhood that it’s in, and is just
squeezing every dollar it can out,” Merkley said. “That includes by
deferring needed maintenance.”
Lack of access to management can be devastating for tenants,
especially those who experienced financial uncertainty earlier in the pandemic
and were required to work with landlords to secure federal rent assistance.
It is difficult to find exact numbers on how many properties
are financed by private equity across the country. However, in cities where
such data is available, the effects are significant: In Atlanta, hedge fund
investors bought nearly 43% of the homes on the market last year; one study
found such investors were 68% more likely than smaller landlords to file for
evictions.
Merkley pointed out this was especially concerning when
paired with House Financial Services Committee report findings that hedge fund
investors tend to buy homes in predominantly Black neighborhoods, where a higher-than-average
number of households were headed by single mothers.
Squeezed on Both Sides
There has been little public awareness of how private equity
stakes in the rental and housing market impact the majority of Americans, but
housing advocates point out it puts tenants at greater risk of homelessness and
undermines their ability to save money for eventual home ownership.
Meanwhile, those in a position to purchase a home find
themselves increasingly outbid.
“My first awareness of this was back during the
mortgage foreclosure crisis of 2008, 2009,” Merkley told The
Skanner.
“Fannie Mae and other governmental groups that insure
mortgages were selling the homes that had been foreclosed on in blocks, and I
proposed at that time that every home should be offered to a family before it
could be put into a block of a thousand houses, because only hedge funds could
buy blocks of a thousand and those were the richest people in America, buying
houses at a 50% discount.
“I lost that argument with the Obama administration.
They just felt they needed to clear the inventory quickly and declined to offer
(homes) on a one-by-one basis. I strongly disagreed.
“It’s been this last year I started to hear people in
my blue-collar neighborhood on the eastside of Portland talking about looking
for a home and competing with representatives of businesses that have all-cash
offers. And I saw that last year in Phoenix and Atlanta, about four out of 10
houses were being sold to the hedge funds and the families who were buying the
other 60% were probably competing with the hedge funds, so prices were much,
much higher.”
Merkley, who ran Habitat for Humanity in Portland prior to
running for Senate, summarized the issue: “It really does raise a
question, given that home ownership has been the biggest driver of middle-class
wealth, whether we want to transfer that wealth growth from the middle class to
the already richest Americans, which is what is happening.”
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