How Wall Street Benefits from the Housing Shortage

• Several investment firms profited as the pandemic drove home prices higher.
• An influx of home supply is a "possible headwind" to company performance, one firm said in August.
• The firms' outlook butts heads with the White House, which aims to solve the affordability crisis with millions of new homes.

Home affordability is under historic pressure. That's the way some investment firms want to keep things.

The story of the pandemic-era housing market is one of widespread shortages. Demand for homes ballooned at the start of the crisis as Americans scooped up houses at breakneck speed. But it only took a few months for the buying spree to run up against shortages. Decades of underbuilding left the US with a deficit of roughly 6.8 million homes, according to the National Association of Realtors, and inventory quickly hit all-time lows. 

That mismatch between home demand and nationwide supply has driven prices sharply higher just as millions of millennials look to buy their first houses. But where fading affordability is hurting first-time buyers, it's been a tremendous boon for investment firms.

Wall Street firms have been flipping homes for profit since the Great Recession

Wall Street has increasingly expanded its presence in the US housing market over the past decade, Insider's Alex Nicoll and Daniel Geiger reported. Investment firms began snapping up homes after the financial crisis, betting the market's collapse would help them flip properties for profit once demand rebounded. Others turned homes into rental properties for steady returns.

While the Great Recession sparked Wall Street's interest in housing, the pandemic took it up a notch. Investors bought a record $48.5 billion worth of homes in the second quarter alone, real estate data firm Redfin said in July. That's up 15% from the first quarter and more than twice the amount seen just one year prior.

The S&P CoreLogic US home price index rose 5.2% during the same quarter, marking the fastest house inflation since at least 1987 and rivaling the price growth typically seen over an entire year.

Taken together, the data signals firms including Blackstone, Invitation Homes, and American Homes 4 Rent benefitted massively from the rally in home prices. But don't take our word for it: Look at what they're telling their investors in regulatory filings.

Invitation Homes said in a February regulatory filing it could be "adversely affected" by a rebound in home construction or high residential vacancy rates, as both could lift home supply and "reduce occupancy and rental rates." In a separate filing, the company said it prefers operating in markets that "exhibit constrained levels of new home construction." That means more construction would be good for homebuyers — and bad for business.

Invitation Homes isn't alone in wanting to avoid an influx of new homes. The single-family rental business "is booming" thanks to "exceptional demand trends and low supply of available homes," Tricon CEO Gary Berman said in an August earnings call. Company management is still keeping an eye on "possible headwinds" such as "the impact of new for-sale housing supply," according to Tricon's second-quarter report.

And American Homes 4 Rent said in May that the shortage of single-family homes and rentals gave the company "the pricing power that you're seeing now." That's another way of saying they can raise prices with little impact on sales.

Invitation Homes and American Homes 4 Sale did not respond to requests for comment. Tricon told Insider it's "committed to increasing the number of accessible, high-quality housing options." To meet "extraordinary demand," the company is purchasing existing homes, buying new homes directly from builders, and developing its own build-to-rent communities, Tricon added.

To be sure, institutional investors only own about 2% of all single-family homes in the US, or roughly 300,000 properties, John Burns research director Rick Palacios told CNN in August.

Still, the financial industry's move into housing is relatively young. Institutional owners of single-family rentals achieved considerable scale in the past decade, Jonathan Woloshin, real estate and lodging analyst at UBS, said in a Tuesday note. Firms' purchasing of homes on the open market and collaboration with builders on rental properties shows just how quickly their influence is growing, he added.

Wall Street vs the YIMBYs

The firms' outlooks contrast with a range of efforts looking to solve the housing crisis. President Joe Biden unveiled a collection of regulatory changes last week that aim to build 100,000 new homes over the next three years. Biden's $3.5 trillion infrastructure proposal also includes funding for the construction of 2 million homes, though the legislation faces a steep road to Congressional approval.

At the state level, California is on the brink of passing a hugely significant zoning change. A bill that's already won lawmakers' approval plans to permit the construction of two-unit buildings on lots previously zoned for single-family homes. The shift would allow for denser residential construction and could bring a spate of affordable housing options onto the market.

If signed by Gov. Gavin Newsom, the legislation would mark a critical victory for the pro-housing YIMBYs, a group of activists known for their "yes in my backyard" mantra. The group was borne out of opposition to the NIMBY — "not in my backyard" — movement of the 20th century, which saw Americans balk at housing expansion in hopes of protecting property values.

With Wall Street now playing a bigger role in the housing market, the NIMBY movement has a new champion. But the Biden administration, California lawmakers, and housing activists are gearing up for a fight.