Making housing work for Americans

One method under discussion to address excessive financialization is to limit the ability of large institutional investors to purchase single-family housing. This proposal is politically popular across party lines because it appeals to the basic American sensibility that housing should be a place for families to live and thrive, more so than it should be an investible commodity for corporations. Many people are aware of the dark adage “You will own nothing and be happy,” and the specter of large firms buying housing in order to rent it (called “build-to-rent”) only serves to confirm this prediction in the minds of the public.

Yet, proposals to ban large institutional investors from buying single-family homes to convert to rentals would have limited effect, because only a very small percentage — less than 3% — of investment properties are owned by large institutional investors (i.e., investors who own hundreds or thousands of properties). Rather, about 80% of investment properties are owned by smaller mom-and-pop investors who own fewer than 10 properties. This means that any proposals seeking to limit the excessive financialization of housing would need to include smaller investors, not just large investors. 

However, doing so would be more politically difficult since opposition to such a policy would now come from a much larger group. Additionally, large investors often buy distressed “unsellable” properties that they refurbish and then rent or sell because they can bear the risk that others cannot. This is especially beneficial for cleaning up blighted neighborhoods.

As such, in place of an outright ban on investor activity, one might recommend a 60- or 90-day grace period on home sales, during which only an individual or a family, not investors, may purchase the property. Another proposal is to remove the capital gains tax for those selling their home to a first-time home buyer. These proposals may be more politically palatable than outright investor bans, though they still represent a significant challenge to the status quo and still manage to send the right message.

Another piece of the puzzle is mortgages. The United States is one of the only countries in the world that has a 30-year mortgage; nearly all other countries have maximum mortgage terms of 20 years or less. The 30-year mortgage never has, and likely could not exist in the free market; it was created via government backing in an attempt to increase homeownership rates. But the scientific evidence is scant that the 30-year mortgage actually increased homeownership. In fact, the evidence shows that the 30-year mortgage, and aggressive mortgage credit expansion policy in general, enables people to buy more expensive homes rather than increase homeownership rates. 

There’s also a dramatic wealth-harming effect; for a $400,000 house at current interest rates, the homeowner would save a staggering $300,000 in interest payments with a 15-year mortgage versus a 30-year mortgage. Imagine how much economic activity that $300,000 might create, then multiply it over millions of families. This reality suggests that policymakers should consider ways to increase the share of 15-year mortgages if we want to increase the wealth of American families.

Making housing better for Americans by reducing financialization and improving the wealth-building potential of mortgages, would likely be broadly supported by Americans on both sides of the political spectrum. But it would require strong effort to get politicians and policymakers on board.