This room seems to have this on the brain constantly. I came across this paper, and thought some of you might appreciate actual analysis on this subject.
Paper here: https://felipebarbieri.com/files/Barbieri_Felipe_JMP.pdf
Key takeaways:
1) Institutional home ownership has increased significantly.
2) Positive impact: renters are better off. They can afford better housing for the same price.
3) Positive impact: investors that owned homes prior to concentration of institutional ownership made a lot of money
4) Negative impact: The welfare of the average new home buyer has decreased significantly
5) Negative impact: The welfare of the average landlord going forward has decreased noticeably.
Net / net: from a rational expectations standpoint, there should probably be fewer home buyers in this market compared to two decades ago. The payback period for owning a home is now longer than it was earlier, so, unless a family is ready to really put down roots, it is more likely than previously that the most rational decision for the marginal buyer is to rent as opposed to buy.
Policy implication: If the government wants to encourage individual home ownership (due to the nature of such behavior in encouraging personal savings), the government should discourage institutional home ownership.
Assuming that encouraging individual home ownership is good, from least intrusive to most:
1) Quit printing money. Rental real estate is a great inflation hedge. Reduce inflation, and institutional buyers slow down. We have seen this with higher interest rates, but, lower inflation expectations would be just as if not more powerful. This is the most important, and even the most free market of radical libertarians would agree with this.
2) Expand the homeowners exemption on state property taxes even more. This is a state-level action, so not as big of a hammer, and will impact states differently depending on the state's revenue strategy.
3) For FIT for homeowners, we should put mortgage interest deductions above the line, in addition to the standard deduction, with some sort of cap if claiming both. (putting interest on US manufactured vehicles has been discussed as being above the line, too. So, if you are going to break that barrier, then might as well do this).
4) Disincentivize FDI in the residential housing market. Lots of levers to do this. A large number of institutional buyers of residential real estate are foreign investors looking to inflation hedge and exchange rate hedge dollars that they own and do not want to convert to local currency.
5) Reduce incentives to domestic and foreign institutional buyers for residential housing. The nuclear option here is to reduce / cap / eliminate the mortgage deduction for non-home owners. That would be a very bad idea, and send real estate into a tailspin. However, you can do other things:
5a - Crack down on the difference in value of the structure vs the land. The lax depreciation guidelines of residential real estate, designed to help the individual home owner, are very beneficial to institutional buyers. There is a strait-forward way of doing this with replacement costs that are location agnostic.
5b - expand the useful life of depreciable real estate assets for institutional buyers. No reason that individual home owners and institutional buyers have to have the same depreciation schedule.
5c - Eliminate 1031 exchange for institutional buyers - this is my preferred path forward. Would have a significant impact with low impact on individual owners or homeowners.
Almost zero chance Trump does any of this, for obvious reasons. Hoping Vance and/or DeSantis might look at this at the federal level someday. Abbott seems open to the idea of addressing some of this at the state level.
Paper here: https://felipebarbieri.com/files/Barbieri_Felipe_JMP.pdf
Key takeaways:
1) Institutional home ownership has increased significantly.
2) Positive impact: renters are better off. They can afford better housing for the same price.
3) Positive impact: investors that owned homes prior to concentration of institutional ownership made a lot of money
4) Negative impact: The welfare of the average new home buyer has decreased significantly
5) Negative impact: The welfare of the average landlord going forward has decreased noticeably.
Net / net: from a rational expectations standpoint, there should probably be fewer home buyers in this market compared to two decades ago. The payback period for owning a home is now longer than it was earlier, so, unless a family is ready to really put down roots, it is more likely than previously that the most rational decision for the marginal buyer is to rent as opposed to buy.
Policy implication: If the government wants to encourage individual home ownership (due to the nature of such behavior in encouraging personal savings), the government should discourage institutional home ownership.
Assuming that encouraging individual home ownership is good, from least intrusive to most:
1) Quit printing money. Rental real estate is a great inflation hedge. Reduce inflation, and institutional buyers slow down. We have seen this with higher interest rates, but, lower inflation expectations would be just as if not more powerful. This is the most important, and even the most free market of radical libertarians would agree with this.
2) Expand the homeowners exemption on state property taxes even more. This is a state-level action, so not as big of a hammer, and will impact states differently depending on the state's revenue strategy.
3) For FIT for homeowners, we should put mortgage interest deductions above the line, in addition to the standard deduction, with some sort of cap if claiming both. (putting interest on US manufactured vehicles has been discussed as being above the line, too. So, if you are going to break that barrier, then might as well do this).
4) Disincentivize FDI in the residential housing market. Lots of levers to do this. A large number of institutional buyers of residential real estate are foreign investors looking to inflation hedge and exchange rate hedge dollars that they own and do not want to convert to local currency.
5) Reduce incentives to domestic and foreign institutional buyers for residential housing. The nuclear option here is to reduce / cap / eliminate the mortgage deduction for non-home owners. That would be a very bad idea, and send real estate into a tailspin. However, you can do other things:
5a - Crack down on the difference in value of the structure vs the land. The lax depreciation guidelines of residential real estate, designed to help the individual home owner, are very beneficial to institutional buyers. There is a strait-forward way of doing this with replacement costs that are location agnostic.
5b - expand the useful life of depreciable real estate assets for institutional buyers. No reason that individual home owners and institutional buyers have to have the same depreciation schedule.
5c - Eliminate 1031 exchange for institutional buyers - this is my preferred path forward. Would have a significant impact with low impact on individual owners or homeowners.
Almost zero chance Trump does any of this, for obvious reasons. Hoping Vance and/or DeSantis might look at this at the federal level someday. Abbott seems open to the idea of addressing some of this at the state level.