Capping corporate ownership in single-family housing

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. The debate over institutional investors in single-family housing has dominated headlines, executive proclamations, and political talking points for months. But in early July, federal policy shifted from political rhetoric to statutory law when Congress passed the landmark 21st Century Road to Housing Act. Before pen was ever put to paper to make anything official, major portfolio owners had already begun pulling back on acquisitions in anticipation. But the final bill draws a firm line in the sand: a 350-home cap on large institutional investors. Yet key details, like the proposed 7-year mandatory home disposal rule, were cut from the final text. So what does this mean for housing stock, corporate strategies, and property data? To help us look past the headlines, I'm joined today by Russell McIntyre, Cotality's Public Policy and Industry Relations Principal. Let's put the data in context. Russell, thank you so much for joining me back on Data in Context.

Russell McIntyre: Yeah, thanks so much for having me back, Allie.

Allie Barefoot: Yeah, let's start kind of setting the stage here talking about the 21st Century Road to Housing Act. Months before this act actually officially became law, executive announcements were already targeting institutional buyers. But Cotality data shows that it was one particular announcement that got investors to kind of react. Can you talk a little bit about what made President Trump's January announcement different from previous efforts to curb institutional buying?

Russell McIntyre: Yeah, absolutely. So, a lot of the previous attempts to curb this home buying from institutional investors really started about 4 to 5 years ago, coming out of the pandemic. And you saw this at both the state and federal levels. So, at the state level, you saw some moderate success with what are called 'First Look' programs. These are policies that mandate, you know, when a home goes into foreclosure, individual owner-occupants or local non-profits are given like a 30 to 45-day window to bid on the property before it can be sold to an institutional investor. And these were somewhat effective locally, but large investors were still able to bypass these rules just by purchasing non-foreclosed homes directly off the MLS market or buying up larger portfolios. So, some limited success there. And then at the federal level, over the past several years, we saw several legislative attempts initiated by Congress, and they struggled for a variety of reasons. I think politically they were introduced in a divided Congress, which these days makes legislation much more difficult to pass. And these bills also usually focused on tax penalties as the mechanism to prevent investors from purchasing homes, which meant they just had to go through additional legislative hurdles—it made passage that much harder. This announcement was different in that it directly targeted the federal financial backing by restricting federal programs from insuring, guaranteeing, or securitizing any single-family home sales to large institutional investors. So, instead of facing a potential taxon the back end, investors have to face a lack of financing on the front end now. And that makes things difficult for them because they frequently rely on, you know, government-sponsored enterprises like Fannie Mae and Freddie Mac to bundle, securitize, guarantee their debt. So, restricting access to those programs immediately cuts off a source of cheap capital, and that raises their borrowing costs—because without these federal guarantees, they'll have to go to banks that'll have to absorb 100% of the risk, which means they'll charge institutional investors higher interest rates. And so, when those financing costs spike, profit margins shrink, and that makes it harder for these investors to really make those all-cash over-asking-price offers that they've been doing to beat out traditional buyers over the past few years. So, a little different from previous attempts.

Allie Barefoot: Yeah. And now that legislation has officially passed, one of the most debated elements in the draft stages was a mandatory 7-year disposal rule, which would have forced corporate landlords to sell off existing single-family portfolios after those 7 years had passed. But it was removed from the final bill. Can we talk a little bit more about that?Why was that 7-year disposal rule stripped, and where might we see it resurface?"

Russell McIntyre: Yeah, so this was a big talking point during debate on the bill. So, in short, the 7-year disposal rule was stripped out because there was just a lot of concerns that it could really freeze the construction of new rental housing. You know, as you mentioned, in the first draft of the bill, institutional investors who built or bought newly constructed single-family homes had to sell those properties to individual homebuyers within 7 years. But the foundational economic model of Build-to-Rent really relies on long-term ownership and property management to achieve profitability. Rental housing is very much a long game; it's never going to be a quick flip for investors. So, if you force them to have a mass sell-off within 7 years, it really destroys the asset's long-term value and makes rental housing as an investment less attractive for lenders. So, when this idea was first floated, you saw a lot of private equity and institutional investors start to rethink their funding for new housing projects. And eventually,Congress realized this—how problematic it could be—and they took it out of the final bill. As far as seeing it resurface, I don't think that's very likely at all. I think the industry pushback really made an impact on Capitol Hill, and I don't see them bringing up the issue again, especially during this Congress.And even in the next Congress starting in 2027, even if they have different leadership, I don't think they bring this back as an issue. I think they decide to focus on other areas of the housing ecosystem. But, you know, there's always a chance you could see some action at the state or local level, especially in metro areas where investors might have a larger share of the housing market.But again, the state lawmakers have been watching this conversation at the federal level play out, and the same economics still apply. So I do think this is fairly dead for now."

Allie Barefoot: Yeah, that makes sense. I mean, looking at that proposal from all different angles and basically just assuming that this is not the route that we want to take. And it makes sense, you know, you have to cut some things from the official law. But what did make it into the final bill was a section called Title X. And this restricts corporate ownership of single-family housing by implementing a strict 350-house cap on existing single-family inventory. Why was 350 that magic number?

Russell McIntyre: Right. So, a primary goal of this legislation was to target the multi-billion-dollar private equity firms and hedge funds without crushing the local 'mom-and-pop' landlords or more regional property managers. Really, in shorthand, to distinguish Wall Street investors from Main Street investors. And in the past, when researchers have been distinguishing between these two groups, they could draw the line anywhere from100 homes up to 1,000 homes. So, it's a pretty big range. So, to your question, this 350-unit threshold was actually kind of mathematically calibrated around the size of your average, large, master-planned subdivisions. Most single-family Build-to-Rent developments or single-phase community projects top out at somewhere between 150 and 300 homes—so 300's the large end. So, by drawing the line above that at 350, lawmakers ensured that a company could realistically develop or take over a single, large-scale neighborhood project, but they couldn't amass multiple neighborhoods or sweep up massive market share across full metro areas. So, setting the cap at 350 is a way to effectively exempt local operations that manage small portfolios and ensure they can still buy and renovate homes without triggering those big penalties.

Allie Barefoot: And let's kind of throw an example out here, because we've seen in places like Phoenix and Atlanta, Cotality data shows that some institutional buyers own over 1,000 properties. So what will this new cap mean for organizations that operate at this scale? You kind of touched on it there about acquiring neighborhoods of 300+ homes, but what about that large number?

Russell McIntyre: Right. So, at the moment, the law does not require a forced sell-off of existing portfolios. So, mega-landlords who own thousands of properties are legally permitted to keep, manage, and lease those existing homes they owned prior to the bill's enactment. They're just going to be prohibited from purchasing additional single-family homes on the open market starting in January of 2027. However, we are seeing a little bit of early data that indicates that institutional for-sale listings ticked up a little bit while this legislation was being debated in the first half of the year, with some of those larger firms strategically offloading some assets. You know, I think this is just an effort to move homes quickly, and a lot of these listings have featured deep price cuts, so I do think the law's already having an effect on larger investors. But then, secondly, because those large investors can no longer buy existing neighborhood homes, I think they're likely to reallocate a lot of their capital into new construction. So, I think I alluded to it earlier, but the Road to Housing law includes a clean statutory exemption for Build-to-Rent developments. So, that allows institutional investors to buy, build, and own single-family homes indefinitely as long as those homes are brand-new construction and specifically designed as rental communities. And this exemption was included as a way to incentivize WallStreet to add to the nation's housing supply rather than depleting it. And I think we might see that in the coming months. You know, as I mentioned, we're all ready seeing large investors start to offload assets. I would expect that those investors would take the funds generated from those sales and invest them into financing, building, and managing newly built communities from the ground up, rather than trying to purchase existing portfolios.

Allie Barefoot: Yeah, that's definitely going to be something to keep an eye on moving forward. And are there really any other provisions that were in the draft language for this bill that were taken out, but you expect to return in a different form, kind of?"

Russell McIntyre: Yeah, for sure. There are a ton of additional ideas floating around Congress that didn't make the final cut for one reason or another, but could easily come back—especially if the control ofCongress changes in the upcoming midterm elections. So, I can give you a couple. You know, first off, we've been talking about institutional investors, so starting there: there was one provision dropped from the bill which would have provided renters with a right of first refusal. In short, this requirement says that if an institutional investor landlord decides to sell a single-family home, the current tenant or affordable housing non-profit would have a 30 to45-day window to purchase that home before it gets listed on the open market, which kind of fits in with the larger narrative of reducing the supply of homes owned by large institutional investors. This was removed from the final version of the bill mainly due to operational concerns. You know, opponents were thinking it might create a bureaucratic kind of drag in the market, slow down transactions overall, make it more difficult to underwrite some of those long-term real estate loans. However, those are operational issues and, I think, theoretically could be worked out if this concept were to receive more attention in the next Congress. So, one issue to keep an eye on. Another issueI'd keep an eye on that was taken out of the final bill was a provision that would have provided direct down payment assistance to first-generation buyers—so specifically low-and-moderate-income, first-gen home buyers. And it was taken out really because some argued it could overstimulate demand and maybe further increase home prices. However, I think, you know, if we see individual buyers still struggling with high interest rates—maybe this time next year—I think this is something that could return. And again, the details would need to be worked out, and those details change depending on who controlsCongress next year. But another issue I could definitely see coming back up.

Allie Barefoot: Yeah. Russell, this has been super eye-opening so far, and I only have one more question here for you, and that's kind of looking ahead. The national housing shortfall, it does remain a massive headwind for a lot of home buyers. So do you expect market forces and private sector innovation to start closing that inventory gap, or will structural supply constraints keep it wide open for the foreseeable future?

Russell McIntyre: Yeah, you know, I'm optimistic that these reforms will slowly start to close that inventory gap, especially in certain metro areas that might be experiencing acute shortages of housing. However,I do think there's still a lot of work to be done nationwide. And I'll just close with I think one of the more impactful aspects of this legislation: I think is that the federal government is going to start providing a list of best practices and frameworks to help local governments enact zoning reforms, land-use reforms, that kind of thing. And that's really helpful because a lot of local governments currently lack the analytical capacity to evaluate how their zoning constraints housing production. I grew up in a very small town inNorth Carolina; I know our local government definitely didn't have the time, and a lot of times the capability, to do that kind of analysis. So, by the federal government coming in and providing those land-use frameworks and best practices, HUD can set some benchmarks and some standards that communities can use to assess themselves. And I think keeping a close eye on the adoption rate of those best practices will be great over the next year or two, because the more towns and counties that make use of those frameworks and actually enact reform, the faster we close that inventory gap. So, I am very optimistic. I think the more places that enact those zoning reforms, the better, and that is what's really going to move the needle on this housing shortfall.

Allie Barefoot: Yeah, you've given me a lot to think about here in this short period of time, Russell. Thank you so much for breaking down all of that legislation and, you know, because just understanding the bill from a more personal standpoint really, really helps. So thank you again, Russell, for sitting down with me and talking about this.

Russell McIntyre: Of course. Thanks for having me on,Allie.

Allie Barefoot: Thank you again to Russell McIntyre for joining me here on Data in Context, and thank you so much for listening. If you haven't already, go ahead and subscribe to Cotality's YouTube channel. And as always, if you want to find out more information, head on over tocotality.com.

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