In a recent , I noted that there is a bill sponsored by Senator Jeff Merkley of Oregon and several other Democrats which makes one single demand – that large single-family investors must divest essentially all of their homes by selling them to families and not to other landlords. On its face, this calls for mass evictions, and to the extent that it doesn’t lead to mass evictions, it would only be through machinations by the corporate owners meant to limit the damage demanded by the bill.
How Would Mass Divestment Play Out?
Merkley estimates that the bill would affect 700,000 families, who are disproportionately vulnerable families, such as minorities and single mothers. This market is growing over time. Merkley cites a claim that 40% of rental homes would be owned by large landlords by 2030, which would put the number of households affected at something like 5 million.
It’s sort of a rhetorical irony. He cites the inflated number because he wants you to fear for the 5 million poor souls who might suffer the crushing repression of living in a home provided by a corporate organization. But, if the number was accurate and the bill would pass in 2030, creating 5 million evictions, it would be an absolute mess.
If 40% of rental homes were forced into divestiture, all of the outcomes I describe below would be catastrophic with shades of 2008.
I hesitate to even write about it because, for instance, one change they might make to the bill would be to take out the requirement that the homes be sold to families. Then, in theory, the sales wouldn’t require evictions. I suppose they could even try to require the sales to be made to small-scale landlords, who would be required to keep the existing tenants in place. If that happened quickly, it might lead to a two-tiered market where these homes might sell at a significantly lower price than other homes. If it is spread out over 10 years, it would probably mostly just lead to a transition where small-scale landlords buy these 700,000 homes, and approximately 700,000 other homes that might have been purchased by investors will instead go to homeowners. There will be a small amount of price/rent compression, so home prices will be slightly lower, and rents will be slightly higher. And the rent level will settle at the level that would stop nearly 700,000 renter households from forming.
I suppose that change would mostly just prevent 700,000 families from moving into a home rather than forcing 700,000 to move out of one, which is somewhat less tragic. But if that led to more support for the bill and it passed, it would still be a tragedy. I don’t want to introduce bargaining chips for tragedies.
Eliminating something approaching 15 million mortgaged buyers in 2008 led to an average of about 25% excess rent inflation (though it’s highly regressive and much deeper in homes that tend to be rented). At this point, it appears that 25% was enough to trigger large-scale investor purchases of new homes. So, the initial shock from losing 700,000 rental homes might require 1% or 2% of rent inflation to keep home prices and new construction level if there are enough small-scale investors to soak it up. Then, the question is, since rentals would be limited to small-scale landlords and apartments, how much would annual new home construction be affected and how much perennial rent inflation would occur?
I’m using broad numbers here. Maybe the higher rents would attract some new investment. From 2006 to 2012, maybe about 5 million single-family homes transitioned to rentals – most purchased by small-scale investors. Over that period, rent yields increased by about 50%. Most of the increased yield came from declining prices. (And, in neighborhoods most likely to transition to rentals, prices fell much more deeply, and so yields rose much more than 50%.)
Yields started to decline after 2012. At first, that was due to large-scale investors finally coming in and setting a price floor. So, roughly 25% of the increase in yields might have been the switch from owner-occupier price levels to investor price levels, and an additional 25% of the increase was due to panicked conditions and market frictions. The set of small-scale investors just isn’t large enough to suddenly increase market share at that scale.
So, maybe we can broadly estimate that a 1% rent increase will lead to 200,000 new investors if it is drawn out slowly enough to avoid panic. So 200,000 homes would be purchased by new investors and 500,000 households wouldn’t form.
By about 2015, the net buyers were homeowners, and homes transitioned back out of the rental market. Homeowners were starting to buy up homes, and since homes were too cheap for builders to compete with, from that point forward, rents have increased by 3% or 4% a year, on average, and on average, somewhere in the ballpark of a half million renter households haven’t formed each year, relative to pre-2008 trends. Since 2016, we have added about 11 million owner-occupied homes and about 2 million renter-occupied homes. That’s about 4 million renter units short of the typical owner/renter ratio.
7 Phases
Figure 1 compares real home prices and homeownership rates over time. I see 7 phases here.
Phase 1 – 1994-2000 Huge gains in homeownership with moderate increases in home prices. Price inflation mostly occurred in the Closed Access cities (stagnant coastal centers that approve the least housing).
Phase 2 – 2000-2004 Small gain in homeownership with significant price appreciation, mostly occurring in the Closed Access cities and the Contagion cities (cities in the sand states that were overwhelmed by incoming housing refugees from the Closed Access cities).
Phase 3 – 2005-2006 The high-point of the subprime boom and the CDO boom. Stable homeownership and the transition from rising to falling home prices.
Phase 4 – 2007-2012 A collapse in prices and homeownership rates, first triggered by deeply recessionary Federal Reserve policy, followed up by a reversal of most of the post-New Deal progress in mortgage access. The collapse was so sharp and the size of the small-scale landlord market was so limited that prices fell, first, from the owner-occupier price level to the investor price level and then kept falling. It was a market in disarray.
Figure 1
Phase 5 – 2012-2015 The entry of large-scale investors added price support. Homeownership continued to drop, but prices moved back up to the level that investors can justify in a stable equilibrium.
Phase 6 – 2015-2022 The shock of 15 million borrowers being locked out of mortgage markets had played out. Now, homeownership and prices both rose slowly as new owner-occupiers started to reclaim the stock of single-family homes. The stock of homes was stagnant because prices were still too low to induce new construction, so homeowner demand mostly led to rising rents rather than rising construction. The homeownership rate increased because homeowners were reclaiming homes out of the stagnant housing stock. There was no renter household formation at that time.
Phase 7 – 2022-present A moderate, temporary boom in apartment completions, followed by the rise of a new market of single-family homes built for large investors, finally started to accumulate enough new supply to slow down rent inflation. The number of homeowner households continued to rise moderately (at the slow rate allowed by the tight mortgage access), and now there are enough new homes that renter household formation could also slowly start to accumulate again.
An important point to keep in mind is that from 2008 to 2015, the homeownership rate declined because households lost access to mortgage funding and there were few new homeowner households formed. From 2016 to 2022, the rise in the homeownership rate owed itself to a lack of renter households more than to a rise in homeownership.
The question, going forward, if this bill passes, would be: How many new renter households can be served only by growth in small-scale investors and apartments.
Sticky Downward Housing Demand
Housing norms can change. The excess rents on low-tier homes now are all land rents that are paid because some families have strong preferences against displacement. But, over time, without mortgage access or large-scale landlords, poorer families will get used to returning to norms like having kids share bedrooms. Connections to local endowments will very slowly loosen over time, so children will move away from the area where they had family and where their parents had jobs. After a couple of generations, expectations about how much local crime is acceptable or what amenities are acceptable to a given family through generations will slowly change. Families with below average incomes will slowly accept the norm of having a more household members (or fewer children) in poorly maintained units in neighborhoods with few amenities.
So, I think that eventually, even if we outlaw large-scale landlords, rents will go back to taking a normal portion of family incomes. It will take decades. But, I think it might eventually happen. I suppose it depends on how big the housing deficit is each year. Maybe if a deficit remains, those land rents will never completely erode. That will be the way the housing market equilibrates – the balance between families downgrading and changes in land rents. And it will be mediated by the willingness of families to give up on things.
If we don’t outlaw large-scale landlords, I think they will start to add hundreds of thousands of new single-family units annually. Because of the new supply, those land rents will decline over a couple of decades.
If, by some miracle, we also return to 20th century lending norms, those land rents might recede in as soon as a single decade. In the case of either new large-scale single-family rentals or new mortgage-funded owners, the normalization back down to a normal level of spending on housing would be because families have the choice of upgrading, rather than being forced to give up amenities and endowments that their parents and grandparents took for granted.
Of course, without zoning reform, the Closed Access cities will continue to operate on the displacement vs. poverty equilibrium.
A Pure Form of Prejudice and Malice
In the previous , I wrote:
It would be fascinating to see one of these senators asked, “Why are you sponsoring a bill whose single stated objective is to arbitrarily evict 700,000 families from their homes, many of whom are from vulnerable and historically underserved communities?” That’s the bill. The plain text of it, in its entirety. I’d love to hear that one of these senators might be reasoned out of sponsoring this bill. I doubt they would even be able to accept the reality of the question. I’m not able to imagine what mental gymnastics they would use to avoid coming to terms with it, but I’m sure the logic would involve a complete denial that living in a home owned by a corporation benefits anyone at all.
When I shared the link on BlueSky, the feedback generally took the form of that. Repliers accused me of demagoguing or lying. The malice intended by the bill was satisfying enough to them that they couldn’t or wouldn’t believe its plain and clear requirement. Forcing landlords to sell all their homes to families that are able to buy them will necessarily require the current tenants to leave, whether they want to or not. When, for instance, landlords choose to sell homes because of a new rent control law, leading to the same outcome, nobody has any difficulty calling those evictions.
As I noted in the previous , this is just a pure expression of prejudice. There is “Us” and there is “The Other”. “We” have good intentions. No good can come of “The Other”. Evictions are only evictions when “The Other” has agency about creating them, because “The Other” is selfish while “We” have good intentions.
This is one reason I really worry about these bills. Since they are pure expressions of prejudice, it is difficult to reason their supporters out of them.
Debates about who should be able to buy homes are pure expressions of prejudice, but they are constructed on a framework of textbook conceptual economics. They are motivating, satisfying, and unfalsifiable.
Start with a basic supply and demand model. There are x-number of buyers and y-number of sellers. Adding an additional buyer will raise the market price. An axiom of all economic reasoning.
Building on that axiom, a pure expression of prejudice simply divides that demand into “The Other” and “Us”. Foreigners, private equity, Wall Street, families with characteristics that don’t match the existing neighbors, short-term rentals, etc. are all illegitimate buyers. They are “The Other” and when they buy homes, they are taking homes away from “Us”.
The model is empirically axiomatic. Nobody can deny that this is the case. So, this isn’t really an economic argument. There is no information in those claims except for the sorting of demand into good and bad. It is a pure expression of prejudice.
So, we can’t deny the hypothetic case. It’s textbook economics. And, we can’t deny the empirical case. There are foreigners, private equity, Wall Street interests, families with different characteristics, and short-term rental investors. They buy homes. People see them buy homes. Every time they buy a home it is, undeniably, an example of “The Other” taking that home away from “Us”.
Of course, there is a logical problem here. The actual demand for living in a home, which the tenants represent, does not go away when the corporation is forced to sell the home they currently live in. Its proponents must either prevent themselves from including the renters in their imagination of the consequences of the bill, or they must imagine that the horrors of living in a home owned by a corporation are worse than eviction.
Of course, while supporters of this bill try to hide their malice under second-order effects, there are others who announce their malice explicitly, such as immigrant opponents. They can rely on the basic economics – evicting (and worse) 700,000 immigrants would lower demand for housing.
So, clearly there are worse things than dissembling. Straightforward cruelty is worse, even if it is more honest. I just wish it wasn’t so hard to collect a plurality of support for a broad generosity of spirit. YIMBY is a secular, spiritual movement in that sense. “You are not the other. You are here now. You are us.”
I suppose you could say that the urban renewal and highway programs were a “You’re not here anymore to bother us.” movement.
White flight was “You are here now. We are leaving.”
The NIMBY decades have been “We were here first. This is ours.”
And now YIMBY is a recognition of the need for broad access on the most possible margins.
Of course, it is not easy to gather a plurality of support, because YIMBY outcomes are not free of conflict. But, like democracy itself, it beats the alternatives, and we have now seen the alternatives.