Preserving our CommonWealth: A Policy Toolkit to Confront the Financialization of Pennsylvania’s Homes

Preserving our Common Wealth: A Policy Toolkit to Confront the Financialization of Pennsylvania's Homes

Housing is the foundation of family and community life. Residents in stable housing can put down roots, work with their neighbors to build a community, help one another and improve their neighborhood. Housing is also an asset that has long been the cornerstone of household wealth in America. Increasingly, however, housing is also being treated as a commodity – a vehicle by which financial intermediaries with access to large amounts of capital can generate robust returns and securitize as financial instruments to be traded on global markets. Unfortunately, this often prioritizes short-term gain at the expense of long-term stability, to the detriment of residents, communities and municipalities.

To ascertain the scale and impact of institutional investor acquisition of housing in Pennsylvania, RHLS conducted a review of existing research, supplemented in specific instances by our own research. Our investigation covered 3 sectors: single-family, multifamily and manufactured home communities. While there has been a great deal of research lately on the scale and impact of institutional investor participation in the single-family housing market, we believe our study is the first to address all three housing sectors.

Key Points

1. There is a lack of data on the scale and impact of institutional investor ownership of Pennsylvania’s housing. This affects our ability to identify systemic patterns of harm and develop appropriate policy solutions.

Corporate ownership of rental housing has long been the norm. The obscurity inherent in corporate structures makes it extremely difficult to determine whether the true, or “beneficial,” owners are institutional investors or traditional landlords. As a result, some researchers conflate institutional investment with corporate ownership.

The most valuable research on institutional acquisitions in Pennsylvania has focused on single-family housing. That research typically relies on some combination of corporate form and the number of properties acquired by a single entity as a proxy for institutional ownership – a process that is both time consuming and imprecise. Identifying investor-owned multifamily housing is even more difficult, as it requires painstaking review of news sources and property records. All researchers agree that a better system of data collection is needed.

2. What we do know about scale and impact of institutional investor ownership is alarming:

• At least 10% of all apartment units in the US are owned by private equity firms. There is no good data on the percentage of Pennsylvania’s multifamily housing that is investor owned.
• At least 66 manufactured home communities in Pennsylvania have been acquired by institutional investors. The vast majority of the acquisitions we identified have occurred within the last 6 years.
• In recent years, nearly 25% of all single-family home purchases in Philadelphia and Pittsburgh have been by corporate investors. This appears to be a growing trend.
• Evictions: Institutional investors are far more likely to file eviction actions against their tenants than small landlords are. Numerous local studies throughout the country have documented this, including in Pennsylvania.
• Rent Increases: Investor acquisition of manufactured home communities leads to high rent increases for owners of manufactured homes. Our research found that, in MHCs that were acquired within the last 5 years, lot rent subsequently increased by an average of 49%. There is anecdotal evidence of similar increases in investor-acquired multifamily housing, but it is impossible to determine whether there is a link due to the lack of available data.
• Lack of maintenance: There appears to be a link between investor ownership and a lack of maintenance. A recent Reinvestment Fund study of single-family home acquisitions in Philadelphia found a correlation. Our survey of Pennsylvania manufactured home communities found that a majority of sold communities experienced a deterioration in physical condition post-acquisition. There is anecdotal evidence of health and safety violations in investor-acquired multifamily properties, but it is impossible to determine whether the problem is systemic due to the lack of available data.
• Effect on homeownership. Large-scale acquisition of single-family homes by institutional investors has diminished the supply of housing available for home purchase, leading to higher housing prices and contributing to lower rates of owner-occupancy. Investor acquisition of manufactured home communities puts homeowners at risk of losing equity. Realtors estimate that for every $100 increase in lot rent, a manufactured home loses $10,000 in value.
• Short-term rentals. Some of the largest institutional investors have begun converting portions of their traditional rental housing into short-term rentals and partnering with large operators of short-term rentals. This is a growing trend that could put further pressure on housing affordability in tight markets.

3. It’s not the number of investor-owned units we should be worried about, it’s the institutional investor business model.

The most prominent state and federal policy proposals to counter investor acquisitions would prohibit or penalize ownership of more than a threshold number of homes by a single entity. We believe this misses the point. The problem isn’t the number of properties – there are housing authorities, community land trusts and responsible landlords that have large, geographically dispersed portfolios that are well-managed. The problem is that well-resourced entities with an edge over more responsible real estate buyers operate under a business model that maximizes short-term returns on investment in ways that harm renters and the local community.

Private equity firms typically seek to generate 15-25% annualized returns over a 4-6 year period. This is accomplished by targeting low-value housing, making cosmetic upgrades, maximizing rents, and minimizing maintenance costs. The higher profits inflate the asset value so the property can be sold at substantial profit or borrowed against. The proceeds are then paid out to investors or used to acquire other properties, and the process repeats itself, leaving renters and the local municipality to deal with housing instability and deteriorating property conditions. Policy solutions should be designed to either thwart this business model or at least ameliorate its harmful effects.

Recommendations

Drawing upon our review of the literature, we recommend several policies that Pennsylvania and its municipalities can implement to get a better understanding of the scale and impact of investor ownership and to confront the harms that the institutional investor business model can cause. Our recommendations fall into four categories:

• Increase Transparency – Use corporate filings and local rental registration programs to identify the actual, “beneficial” owners of our housing
• Regulate Institutional Ownership/Expand Tenant Protections – Pass one of the manufactured home community rent stabilization bills currently pending in the Pennsylvania Senate. Discourage predatory acquisitions of rental properties by restricting rent increases for a period of time following acquisition. Make institutional investor acquisitions of our housing stock less attractive by instituting strong tenant protections against rent gouging and unjust evictions. Require all owners of rental properties to designate a local responsible agent. Use the income valuation approach of tax assessment with respect to rental properties, even single-family homes, rather than the comparable sales method.
• Create Decommodified Housing – Develop creative financing tools for housing that is “socially owned” – that is, by public authorities, mission-driven nonprofits and residents. Leverage public land and assets for permanently affordable housing. Support tenant- and community-ownership through mechanisms such as right to purchase laws.
• Preservation Strategies – Create a statewide preservation notification law and database, to give municipalities and housing agencies the ability to purchase publicly-subsidized housing that is at risk of conversion to market rate. Pass the PA Home Preservation Program, which would make funding available to local entities to fund home repairs for homeowners.

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Definitions

Institutional investors – Professional investors that pool capital and invest on behalf of others, typically at much higher volumes than individual investors, and typically promising high, short-term rates of return. The two most common types of institutional investors are:

Private equity firms – Privately held companies that invest capital from retail investors with the promise of high, short-term returns on investment.

Real estate investment trusts (REITs) – Companies, usually publicly traded, in which investors purchase shares of real estate and receive dividends and favorable tax treatment. Publicly traded REITs are rated based on their returns, so like private equity, they seek to maximize return on investment.