scorecardDon't blame Wall Street for jacking up home prices, economist says
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Don't blame Wall Street for jacking up home prices, economist says

Matthew Fox   

Don't blame Wall Street for jacking up home prices, economist says
Investment2 min read
  • Wall Street isn't to blame for the non-stop rise in housing prices, according to Capital Economics.
  • The research firm said any legislation designed to block hedge funds from buying homes won't lower home prices.

The ongoing rise in home prices shouldn't be blamed on Wall Street, according to a Thursday note from Capital Economics.

The firm highlighted that the growing criticism of institutional investors buying up single-family homes is leading to potential legislation in Congress that would heavily tax hedge funds if they purchase investment properties.

The worry is that a surge in big investors buying up single-family homes is driving up prices, exacerbating a shortage in housing, and preventing younger people from becoming first-time home buyers.

But according to Capital Economics property economist Thomas Ryan, proposed legislation that would prevent Wall Street from buying up homes would do little to curb the record surge in home prices.

"We are skeptical about the effectiveness of such a policy in curbing house prices. That's because investor purchases make up only a small portion of all home sales," Ryan said.

Ryan highlighted that of the 425,000 homes that were sold in June 2022, investors only accounted for 12% of transactions. And most of those investor purchases were concentrated in small "Mom and Pop" investors who rent out a small number of properties close to their primary home.

Those small investors wouldn't be impacted by any legislation from Congress, which means the legislation would do very little to curb home prices.

"Even in 2021-2022, large institutions — defined by as those who have purchased more than 50 homes since 2001 — represented only one-third of all investor purchases, a proportion that has since slipped to 13%.

To be clear, that's 13% of the 12% of homes that were purchased by investors, not 13% of all homes sold.

Alternative investment giant Blackstone is one of the biggest institutional buyers of single-family rental homes. They own just over 60,000 homes, or about 0.06% of the 105 million single-family home market in the US. Blackstone says altogether, institutional investors own a collective 0.5% of the US housing market.

Those numbers, which are spread across countless regional housing markets, aren't big enough to have a sizable impact on US housing prices.

Instead, growing demand for homes from millennials and younger generations is driving the demand boom for homes, coupled with not enough homes being built in the decade after the housing market crash.

"With their small national market share, claims that large institutions inflate house prices seem exaggerated. In our view, lawmakers are looking for a new scapegoat to blame for unaffordable housing. Therefore, even if the bill passes — which is unlikely in itself given other political priorities – it won't do much to lower house prices," Ryan concluded.