Texas faces a housing affordability challenge arising primarily from inflation, interest rate policy, steady population growth, and a decline in housing construction. Claims that institutional investors are behind this affordability challenge are not supported by the evidence.
Housing affordability has become a major issue in Americans’ lives. A September 2024 Pew Research survey found that 69 percent of Americans were concerned about housing costs—up from 61 percent in April 2023, and just below the 74 percent of Americans concerned about the price of food and consumer goods.
And they have good reasons for this concern. An increasing number of households are housing cost burdened, meaning more than 30 percent of their income is spent on housing, a threshold that is considered the limit before a household risks not being able to satisfy other needs.
As homeownership is becoming out of reach for more Americans, some fear that the American Dream is itself in peril.
With the situation becoming drastic in several parts of the country, including in Texas, policymakers and Americans in general have tried to identify the source of the issue.
In the past few years, real estate or housing “investors” or “institutional investors” have repeatedly made the news as they were buying single-home units in parallel to the cost of housing increasing. This has caused some observers and policymakers to leap to the conclusion that institutional investors are responsible for the dramatic housing price increases in the last few years. Senator Jeff Merkley of Oregon, for example, has stated that “The housing in our neighborhoods should be homes for people, not profit centers for Wall Street. Yet, in every corner of the country, giant financial corporations are buying up housing and driving up both rents and home prices.”
From the outset, it is necessary to make clear what group we are talking about. But the reality of the headlines did the opposite. The culprit the critics went after was “Wall Street” or “institutional investors.” What is an “institutional investor”? The Financial Industry Regulatory Authority defines “institutional investors” as “professional investors who pool together capital—sometimes referred to as Wall Street’s ‘smart money’—and invest on behalf of others, typically at much higher volumes than retail investors. [They] include pension funds, mutual funds, hedge funds, banks, insurance companies, endowment funds and other big investors.”
Depending on sources and reports, how large a group an institutional investor is varies, but it generally comes down to owning more than 1,000 units. Why is this important? Because institutional investors are not the only actors in the real estate or housing investing market. Mom-and-pop investors (generally defined as owning 1 to 9 properties), mid-sized investors (10 to 99), and large investors (100 to 999) are buying houses for the purpose of investment, too. How much of a share of the investor-buyers do institutional investors represent? A very small one.
Not only do institutional investors play a minor role size-wise in the housing investing market, but they also bring several benefits to the market, including offering rental options to those who cannot afford to buy or renovating houses that can then be put back on the market.
With a particular focus on the state of Texas, this paper reviews research on housing affordability, the actual importance of institutional investors in the housing investing market, as well as the rarely discussed benefits they bring. Most importantly, it looks at the several factors that led to the housing affordability crisis that we now face. A perfect storm—decrease in unit construction and increase in construction costs, historically low mortgage rates followed by prohibitively high ones, high inflation, a global pandemic, natural population growth, massive migration to Texas, and a work-from-home boom—led to a shortage in supply and marked increases in prices. Blaming institutional investors is short-sighted and greatly exaggerates their significance; in the fourth quarter of 2023, investors owning at least 1,000 houses accounted for 0.4 percent of house purchases nationwide—4 out of every 1,000. As we identify the real problem as a supply one, this paper makes the following recommendations to actually help ease the housing affordability crisis.
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