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Home/New Urbs/Preserve the American Dream by Reining in Wall Street

Preserve the American Dream by Reining in Wall Street

A rentership society would be disastrous for the middle class and antithetical to the promise of this country.

The cuckoo bird does not make its own nest. Instead, it lays its eggs in the nest of another bird and pushes the other bird’s eggs to their demise, leaving the unlucky bird to labor for the profit of the cuckoo species. With this kind of trickery, it is no wonder why some investment firms have earned the moniker of “cuckoo funds” for their practice of buying large swaths of houses and locking would-be first-time homeowners out of the market. The nickname comes by way of Ireland, where these funds snapped up 95 percent of new homes on the market in 2020. The same phenomenon is playing out in the United States, posing a significant challenge for those seeking to purchase a house.

Ryan Dezember of the Wall Street Journal, played the canary in the coal mine when he wrote a viral piece entitled “If You Sell a House These Days, the Buyer Might Be a Pension Fund.” Dezember details a rise in purchases of single-family homes by institutional investors who waste no time turning what once were vehicles of middle-class prosperity into rental units. He elaborates further in a piece in American Affairs, telling the story of one Middle Tennessee family looking to purchase its first house. The family puts up a bid of $203,000 for a home, only for real estate investment trust American Homes 4 Rent to snap up the property. While the mega-landlord’s offer is for the same amount of money, it can pay in all cash, a luxury that gives investment funds a leg up on almost every first-time homebuyer in the United States. The head of American Homes 4 Rent tells his investors that the middle-class family is a tenant that he can easily snare with sudden rent increases and other problems between renter and landlord. After all, he mentions, children hate to move.

If the family from American Affairs can’t seem to find a seller willing to take their money over Wall Street’s, then why not follow where the market leads and rent? A future where homeownership is reserved for the wealthy is antithetical to the promise of America. Homeownership is the primary, critical tool of the lower and middle classes for accruing wealth and ensuring higher living standards for the next generation. Working and middle class households rely on homeownership twice as much as upper-class ones, deriving about 45 percent of their net worth from their house. Furthermore, many immigrants still come to the United States to own a solid piece of a community as they seek to secure a better life for their children.

Pew research found that 91 percent of Americans hold that homeownership is either essential or important to achieving the American Dream. It is an integral part of the American psyche, with the vision of security and freedom through homeownership dating back to Jefferson, extending through the New Deal era and through the second Bush administration’s Ownership Society. However, homeownership in the United States tanked following the crisis of the late 2000s and early 2010s. This fall was due to Wall Street’s bundling of prime and subprime mortgages, leading to predatory lending and financial ruin for many working-class Americans looking to buy their own home. Now, Wall Street exploits the situation it and COVID-19 policies created by snapping up homes, putting them on the rental market, and posing a fundamental threat to the American Dream as we know it.

Through the cuckoo funds’ mass purchases of homes, they soothe the American public with tales of deep pockets and scalable business models that supposedly enable them to provide quality service to their tenants. However, a study from the Atlanta Fed found that large landlords file for eviction more often and over less rent owed. Wall Street’s deep pockets do not do much good, as shown in Alana Samuels’s piece in the Atlantic,“When Wall Street is Your Landlord.” The article details shocking mistreatment of tenants, including contracts penalizing tenants for calling maintenance staff to assist with tasks like insect control or a sink backup. Firms ignored calls to help with issues such as sewage backups or significant mold problems. They did so knowing that a court battle would be too lengthy and expensive for their tenants, so that they were unlikely to endure substantial damages.

Samuels’s story underscores how important the security and freedom of homeownership are, beyond the perception of ownership and the philosophy thereof. Between more evictions and fewer repairs, it is undesirable to have distant investment funds dominating rental markets. Even in the unlikely scenarios where cuckoo funds are either regulated or decide to forego short-term shareholder value for quality tenant service, every one of these tenants loses out on a long-term benefit of homeownership: wealth accumulation. Every family priced out of the market to own a home and forced into renting one from Wall Street is no longer contributing to its long-term financial security and that of future generations with the promise of appreciation in home value. The brazen mistreatment of tenants is mere salt in the wound compared to the damage that a rentership society would do to middle-class wealth accumulation.

But what if the problem isn’t as bad as I make it out to be? After all, Derek Thompson of the Atlantic keenly observes that institutional investors currently own a microscopic fraction of the United States’s single-family housing stock. However, as Slate’s Elena Botella points out, looking at the birds-eye view of institutional investor ownership ignores several vital factors. First, the trends. Compared to their microscopic market share, institutional investors bought 15 percent of all properties on sale this past year. Second, the cash advantage. Not only are institutional investors able in many cases to purchase homes solely with cash, as Dezember outlines; they can also borrow money at a much lower interest rate than the average first-time homeowning family. This gap in credit means that in some cases, an institutional investor can outbid a family by $20,000, with each bid costing its respective party equally. Third, location, location, location. Institutional investors target the exact houses that young middle and working-class people would buy in the precise areas where such people would find good jobs. Thus, while Wall Street is not currently everyone’s landlord, its stake is rapidly growing and is structurally advantaged in the worst market segment for those looking to be first-time homeowners and secure their own American Dream.

Conservative commentator Ben Shapiro seems to think all this isn’t so bad. But he is far too willing to allow the American Dream to wither and die as long as it means that the government has not intervened. In response to conservative outrage at these developments, Shapiro moralized about how investment funds merely buy homes from those willing to sell them, an exchange within the vaunted free market. In addition to missing the forest for the trees, Shapiro suggests the remedy to any problem here is to tighten the Federal Reserve’s monetary policy. But while a tighter monetary policy might slow down the investment funds’ purchase of homes, it would also negatively impact families looking for low interest on their mortgage loans. If American conservatism can conserve anything besides cutthroat capitalism, it must have a solution to this problem beyond snarky Tweets addressed to Jerome Powell. The consequences to the American Dream and the welfare of Americans are critical if it doesn’t.

What can society do to address this? In Ireland, home of the “cuckoo fund” moniker, the government has recently increased taxes from 1 to 2 percent to 10 percent on purchases of 10 or more residential dwellings. At the very least, this measure can offset the up-to-$20,000 advantage that low interest rates and cash purchases afford permanent capital over regular homebuyers. In effect, Ireland can hope that the tax increase will force the cuckoo to build his own nest. The impact of investment funds building housing instead of snapping up homes from would-be first-time homeowners would increase housing supply and drive down rents. An increase in supply would make areas more affordable for working-class people who do not yet have the means to purchase a home.

Also in Europe, Germany sets the most dramatic example. A 2007 law passed by Angela Merkel’s first government established requirements for real estate investment trusts (REITs). Among these regulations is a prohibition on REITs from owning residential property built before the signing of the law. Germany, however, is a country with abnormally low homeownership rates because of various structural disincentives such as high transaction taxes and a lack of tax deductions for mortgage payments. This, combined with its passage at the same time as the Great Recession, makes it difficult to discern the policy’s definite impact on homeownership.

The United States has additional solutions within reach that do not even require new legislation. For example: reforms within the Federal Housing Administration (FHA). Urban Institute vice president of housing finance policy Laurie Goodman tells Slate that sellers often turn down potential homebuyers with FHA loans due to long delays for paperwork. Goodman further details that this bureaucratic red tape often leads to Wall Street buying homes rather than individuals. An improvement in FHA loan-granting is a task that requires no grand expansion of spending or the administrative state; it could be undertaken in good conscience by a libertarian. While the FHA must, at risk of a 2008-esque catastrophe and the resulting upward transfer of wealth, give due diligence to make sure that its borrowers can pay back their loan, methods indeed exist to reduce wait time and frustration. Perhaps this involves hiring more personnel, streamlining existing procedures, or some mix of the two.

Unfortunately, the development of cuckoo funds taking over from homeowners is a fairly recent one, so the policies set in place to combat it are still unproven. However, the United States must address this problem by some means, lest wealth becomes a luxury only available to the upper class. As such, American conservatives must take steps to ward off the dangerous future of a rentership society. A debate must ensue over the form it takes, including proposals for aggressive taxes on permanent capital’s cuckoo funds, better FHA practices to give middle and working-class Americans a fighting chance, or some combination of both. Letting “the market” run its course will not preserve the American Dream and the middle class, but perhaps some policy entrepreneurialism can save them from being pushed out of the nest.

Ben Frogel writes from Westborough, Massachusetts, where he is helping to pass public banking legislation. This New Urbanism series is supported by the Richard H. Driehaus Foundation. Follow New Urbs on Twitter for a feed dedicated to TAC’s coverage of cities, urbanism, and place. 

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