Institutional buying keeps home prices high even in recession, new paper suggests

Institutional investors are one of the key forces behind stubbornly high home prices, according to a paper by the National Economic Research Associates (NERA).

Because the deep-pocketed investors tend to buy rental properties in bulk, they achieve economies of scale, reducing operating costs like maintenance and management.

NERA consultant Dick Oosthuizen suggested that such cost reductions had wide-ranging implications, including stabilizing home prices.

“The corporate-cost reduction for houses stabilized the housing market during the Great Recession shocks,” he wrote, adding that it “moderated the fall in house prices by 1.6 percentage points.”

Oosthuizen's findings stemmed from a model representing the rental market's trajectory through the recession.

He explained that lower operating costs encouraged institutional investors to buy more. With a larger market share and lower operating costs, they could charge lower rents, increasing rental demand.

As renters sought affordable places and institutional investors expanded holdings, total housing demand increased, putting a floor under falling home prices during the recession.

Without such cost reduction, Oosthuizen estimated that “house prices would have fallen by 1.64 percentage points more and the population would have had to live in fewer dwellings.”

“The Great Recession would have been deeper, and the welfare of owners and investors would have been lower.”

Lower operating costs

In 2015, institutional investors paid only 28% more than homeowners in annual operating costs, down from 44% in 2001, according to NBER data.

“The costs of renting fell due to an improvement in [digital] management technology,” wrote Oosthuizen, citing a 2019 paper on landlords' increasing tech utilization.

For example, renters can search and apply for properties through mobile apps, and even view homes on their own with a lockbox code instead of getting a key. Tenants can pay rent and submit maintenance requests with photos on the app.

These methods streamlined maintenance, management, and improvement, curbing operating costs for investors overseeing larger portfolios. Their rental market share grew from 17% in 2001 to 28% in 2018, the study found.

Broader implications

The impact of lower corporate operating costs varied across households. Oosthuizen said the majority are better off “due to a rise in the house price and a fall in the rental price,” estimating a total welfare gain of 0.29%.

“However, the welfare gains are concentrated among homeowners and mom-and-pop investors (0.4% and 0.6%, respectively) as they experience an immediate capital gain.”

Renters benefited from cheaper rents but faced higher future homebuying costs. Younger individual investors suffered welfare losses as the decline in rental income offsets home price appreciation.

Notably, the model found that the homeownership rate dropped by 3.7 percentage points after the recession as households shifted to renting.

These findings posited policy implications. “Financial regulations to curb the size of institutional investors might thus be suboptimal, conditional on competitive rental markets,” Oosthuizen noted.

His model also found homebuyer subsidies resulted in mixed effects and a 0.08% welfare loss overall. It prevented house prices from falling too far but amplified condo price drops and rental revenue losses.

“Policies to promote homeownership could be re-evaluated,” he said, adding that the rise of the corporate rental housing sector actually improved overall welfare during the Great Recession.