The Other Side Of Hedge Funds And REITs Buying Huge Tranches Of Single-Family Homes

Clark County residents were shocked when an investment fund paid $98 million for 264 homes in metropolitan Las Vegas in one 24-hour period earlier this month. The move underscores the struggles homebuyers face in many metropolitan areas, where Wall Street-backed funds are buying large tracts of homes at breakneck speed. However, there is a brutal irony to this that many people may be missing: their own investment portfolios could be providing the capital.

A Challenge No Generation Of Homeowner Has Ever Faced

It's no stretch of the imagination to say that today's generation of homeowners are facing more challenges than their predecessors. In addition to sky-high prices, which many people are moving to Las Vegas to avoid, high interest rates and low availability are combining to exacerbate their troubles. This is especially true for first-time buyers. Now, the threat of Wall Street getting in on the action has made the market even more difficult.

The Las Vegas deal is a prime example. Invitation Homes, backed by cash from Wall Street, is making a portfolio swap consisting of 1,900 homes worth $650 million, with the Starwood Capital Group private equity fund. This represents an unprecedented threat to housing affordability and the ability of everyday buyers to compete in the market.

Competing with other buyers is one thing, but when the other buyers are funds that can swallow hundreds of homes in a day, the playing field isn't close to level. Imagine trying to scrape together a 5% down payment and making a contingent offer while competing against a hedge fund that can pay cash for every house on the block. No generation of homebuyers has ever faced this challenge.

Could an Entire Generation Be Permanently Locked Out Of Homeownership?

Wall Street's entry into this side of the housing market poses a threat to many Americans' hopes of ever owning their own homes. The ugly reality is that corporations are buying these homes as potential rental properties, presumably to be occupied by people permanently frozen out of the housing market. By some estimates, corporate interests and funds could own 40% of all the single-family homes in the U.S. by the year 2030.

That is bad news for millennials, Generation Z and anyone else looking to get a piece of what has always been an essential part of the American dream. The long-term implications for America's economy are frightening to contemplate. This could be the beginning of a generation of permanent renters, where homeownership is essentially impossible for anyone not in the top 5% or 10% percent of annual income earners.

A Legislative Fightback And An Even More Uncomfortable Reality

Complicating the issue even further is where most of the funds are concentrating their acquisitions — the more affordable neighborhoods where houses are cheapest. This is only shrinking the inventory of affordable housing, which makes the remainder even less affordable. It also leaves the funds that own these homes in a good position to profit as long-term landlords. Congressional Democrats are fighting back.

The proposed End Hedge Fund Control of American Homes Act of 2023 in the Senate would require hedge funds to sell all their single-family residences within 10 years and ban them from owning single-family homes altogether. Meanwhile, Congress is considering a bill that would require investors who own more than 75 homes to pay an annual surcharge of $10,000 per home. The future of the bill remains unclear, but one ironic truth is almost a certainty.

It's easy to kill these greedy funds on social media, and it may be wise to ban them from purchasing single-family homes because they have the advantage of endless cash. However, that money is coming from somewhere. The irony is that in many cases, the capital for these massive investments in single-family homes is coming from the 401(k)s, public pensions and individual retirement accounts (IRAs) of the same Americans who are locked out of the housing market.

Read Next:

• Investing in real estate just got a whole lot simpler. This Jeff Bezos-backed startup will allow you to become a landlord in just 10 minutes, and you only need $100.
• Passive income investments are one of the most trusted methods for riding out a recession, so it's no surprise that people are turning to this multifamily portfolio fund that's targeting an 8% cash yield. 
• Ken Griffin says Miami will take New York's place as the U.S. Financial Capital. Here's how you can invest in the city with as little as $500 before that happens.