Renowned entrepreneur, investor, and Shark Tank star Kevin O’Leary has a stern warning for policymakers: Don’t try to overregulate the housing market.

In an appearance on Fox Business this week, O’Leary voiced his displeasure over a recently proposed bill in Congress meant to kick Wall Street out of housing.

The bill, known as the End Hedge Fund Control of American Homes Act, is a “very bad idea,” O’Leary said. It’s “very bad policy when you try to manipulate markets or sources of capital.”

“I don't care if they're Democrats or Republicans, whoever they are, stay out of the markets. Let the markets be the markets,” he continued.

While the proposal is born out of a noble mission to improve housing affordability for ordinary Americans, O'Leary argues that its application could disrupt housing supply.

“To actually decide, well, I'm going to pick this source of funding over this one, is not what the government should be doing,” O’Leary explained.

The bill was introduced by the Democrats, who believe that institutional investors are buying up most of the housing stock in major urban centers and pricing average Americans out of homeownership.

If passed, the legislation would require hedge funds to sell all the single-family homes in their possession over 10 years or face stiff penalties.

In the House of Representatives, Democrats also introduced a proposal that would force corporations that own more than 75 homes to pay an annual fee of $10,000 per property.

The proceeds would go toward helping Americans with down payments.

With less than a year until the presidential election and a divided Congress, however, these bills are unlikely to become law anytime soon. So, “Mr Wonderful” may get his wish after all.

A closer look at the data also begs the question: Why are lawmakers singling out Wall Street?

The real scale of institutional ownership

There have been countless reports suggesting that institutional investors have scooped up a large number of single-family homes since the 2008 housing crisis.

But how much of the stock do institutional investors really own? Turns out, not a whole lot.

According to the Urban Institute, large institutional investors owned approximately 574,000 single-family homes as of June 2022. This represents about 3.8% of the current single-family home stock.

The Urban Institute defines institutional investors as entities that own at least 100 single-family homes. Although this definition may seem narrow, it captures the type of owners targeted by the Democrat-led bills.

Meanwhile, a recent report from Creditnews reveals that the largest share—more than 80%—of the single-family home stock is owned by mom-and-pop landlords.

Another study commissioned by MetLife Investment Management concluded that institutional investors could own up to 40% of U.S. single-family rental homes by 2030.

But the problem with this forecast is it doesn’t provide a clear definition of who constitutes an institutional investor. As Creditnews recently reported, there's no universally agreed upon definition of institutional investor in housing.

The forecast glosses over another crucial detail: Institutional investors—regardless of how you define them—aren’t immune to market conditions.

Jon Gray, chief operating officer of Blackstone, a $900 billion asset manager headquartered in New York, told CNBC in December 2022 that the firm planned to sell some of its residential properties due to market conditions.

“You will see some selling by us,” he said at the time.

Wall Street may not be the (only) problem

Research linking institutional investors to higher costs and declining homeownership rates for Americans is also muddied.

“The headlines claiming that institutional investors are making all-cash offers to outbid potential homeowners and taking away wealth-building opportunities from people of color with lower incomes are not necessarily untrue,” wrote Amalie Zinn, a researcher with the Urban Institute’s Housing Finance Policy Center.

“But our research suggests that despite being most often discussed in the headlines, mega investors may not be the ones to target in policies seeking to improve opportunity for first-time homebuyers,” she said.

In some cases, institutional investors actually improve unsafe or uninhabitable rental units, giving renters more cost-effective options.

And more options are what Americans really need to bring rent and homeownership costs down.

In fact, research from Freddie Mac shows the U.S. needs to increase housing supply by 3.8 million units to meet existing demand.

According to the National Low Income Housing Coalition, the demand for rental units is even higher—with an estimated shortage of 7.3 million such rental units nationwide.