With housing affordability at record lows, policymakers have targeted Wall Street in new legislation that would limit hedge funds’ ability to own residential real estate.

Democratic lawmakers in Congress have introduced the End Hedge Fund Control of American Homes Act of 2023—a bill requiring hedge funds and institutional investors to sell all the single-family homes they own over a 10-year period.

Failure to do so would result in stiff penalties, with the proceeds going toward down payment assistance for individual purchasers.

Wall Street has been buying up single-family homes since the 2008 financial crisis, beginning with distressed properties foreclosed on and gradually expanding into other markets.

It’s said that Wall Street-backed firms own a greater share of the housing stock in affordable cities where properties were purchased at rock-bottom prices.

The bill’s proponents say these institutional investors are why housing costs have spiraled out of control.

“You have created a situation where ordinary Americans aren’t bidding against other families; they’re bidding against the billionaires of America for these houses,” said Oregon Senator Jeff Merkley, who introduced the bill with Washington Rep. Adam Smith.

In the House of Representatives, Democrats introduced another bill that would force corporations owning more than 75 homes to pay an annual fee of $10,000 per property, with proceeds going toward down payment assistance.

With a divided Congress, experts say these bills probably won’t see the light of day anytime soon. But they’re enough to spark a conversation about whether Wall Street is taking away homeownership opportunities from the average American.

Wall Street: A real problem or convenient scapegoat?

Research on public attitudes toward Wall Street is crystal clear: Americans don’t trust big banks or hedge funds. For politicians, blaming Wall Street for America’s problems is low-hanging fruit that could score you brownie points among voters.

But does the research support their conclusions that Wall Street is skewing the housing market? Not quite.

According to Moody’s Analytics, institutional ownership of single-family homes is growing rapidly, but it’s still a tiny fraction of the overall market. Institutional investors are said to own about 3% of the single-family housing rental market.

For the vast majority of renters, Wall Street isn’t their landlord, mom-and-pop investors are.

“While it’s true that institutional investors are a player in the single-family rental marketplace, they’re not buying up all of the houses on the market,” according to Harty Realty Group, a Chicago-based real estate agency.

And although Wall Street-backed institutions have “deep pockets,” they’re not immune to market conditions. There’s no guarantee they’ll keep acquiring homes in perpetuity.

According to Moody’s, institutional investors reduced their holdings of single-family rentals every quarter in 2020. After a brief rebound in 2021, purchases have slowed again because of higher prices and financing costs.

Politicians scapegoating Wall Street face another problem: There’s no standard definition of “institutional investor” in the housing market. As the Urban Institute explains, researchers have wildly different variations for classifying these investors.

Do you have to own three homes simultaneously or more than 100? Do you have to be registered as an LLC or LLP? Nobody can agree.

As a result, the “institutional investor” category is viewed as a monolith when it’s really much more nuanced.

Housing supply remains the central issue

From surging home values to rising interest rates, the cost of buying a home has virtually doubled in two years. America has an affordability crisis, and institutional investors aren’t the biggest problem.

“The simplest explanation of why homes for sale now cost so much is that housing demand currently exceeds housing supply,” wrote Krystle Dodge for personal finance publication Expensivity.

According to Realtor.com, the cumulative shortage of single-family homes grew to 6.5 million units between 2012 and 2022. Would-be buyers are paying for the lack of construction as they compete for a dwindling share of housing inventory.

As Patrick Freeze of Bay Property Management Group explains, the problem of housing shortages goes back to 2008 when the financial crisis led to a sharp decline in new home builds.

Now, 15 years later, home building still hasn’t returned to pre-recession levels.