How to fix America’s broken housing market

The 2010s were a period of extreme change in the American housing market. At the start of the decade, new landlords entered the market, as millions of foreclosed homes were converted to single-family rentals in the wake of the 2008 financial crisis. At the end of the decade, the pandemic spiked housing prices and then rents.

In between, new technologies enabled the purchase and management of housing from afar, while new investors sought increasing returns from the US housing market – an area of our economy where supply has lagged behind demand and where weak tenant protections make rental housing an attractive investment. This is America’s housing market today.

At the Nowak Metro Finance Lab at Drexel University, we have launched an independent workstream devoted to understanding the new aspects of the US housing market. These new investors, landlords and technologies have changed how Americans buy, sell and experience housing and are changing America’s neighbourhoods. There are other changes afoot, too: from ongoing gentrification and displacement to fiscal challenges that may imperil the delivery of city services.

Our first report, published in September 2022, focused on investor purchases in three representative mid-sized American cities. We found investor activity was concentrated in neighbourhoods with higher rates of mortgage application denials, larger non-white populations, higher vacancy rates and lower sale prices.

These investors range from large-scale institutional entities to smaller “mom-and-pop” landlords who own only a few properties. These investor purchases in the housing market are making the buying process more difficult, crowding out first-time and first-generation homeowners. At the same time, finding out who owns corporate entities is often tricky, making it all the more difficult to understand the tangled web of landlords.

Our most recent report looks at investor purchases of off-market housing. Everyone who has spent time in an American city has seen those “We Buy Houses” signs. On local telephone poles and billboards, they offer “quick cash now” for homes in “any condition.” Many homeowners today are experiencing incessant texts, calls, mailers and door hangers offering to buy their houses. Our new report, “We Buy Houses: You Lose Out,” looks at the relationship between these investors on home prices in Philadelphia – a microcosm of the larger US housing market.

The report examines homes purchased on and off the Multiple Listing Service (MLS), the platform real estate agents use to list homes “on the market.” It found that homes bought by investors without first being listed on the MLS were acquired for 51% less, on average, than homes sold to individuals after being listed. This huge discount applied even when we accounted for differences in property condition, location and amenities. Across Philadelphia, that adds up to approximately $100 million lost by sellers per year over the last five years.

The geography of these purchases was also very unequal across the city, with most home sales taking place from owner-occupants to owner-occupants via the MLS. However, in parts of North Philadelphia and West Philadelphia, which are historically marginalized neighbourhoods with lower incomes, larger non-white populations and lower house values, off-MLS sales to investors were more common. In a small subset of neighbourhoods, these were the most common transaction type.

States and localities – in places as diverse as Atlanta, Illinois, Texas, Philadelphia and Arkansas – have begun to regulate this type of activity, a strong indicator that this is a nationwide problem.

Our reports have called for a suite of policy solutions to help homeowners, homebuyers and tenants. These include new financial mechanisms to make home-buying easier for first-time and first-generation buyers. We need better tenant protections and data disclosure around the ownership of housing. Wholesalers must be subject to greater legal scrutiny, with new rules around disclosure, licensure and taxation.

Indeed, investor purchases, wholesale property transactions and other informal housing transactions are symptoms of a larger problem, which is America’s broken housing system.

In the last 30 years, little has been done to innovate around affordable housing production, financing or preservation. Renters have higher cost burdens and it appears like many will permanently be locked out of homeownership. The racial homeownership gap has barely budged in 50 years. States and cities have tinkered around the edges with solutions but have little to show for it.

The week following our most recent report, we released a third piece calling for creating a national commission on solving the US housing crisis. This commission would be composed of public officials from the federal, state and local levels, financiers, developers, advocates and a broad range of other interested parties.

The commission would be tasked with examining fundamental questions about the nature and scope of the US housing crisis and how it impacts all parts of the US political economy. It would develop a solutions bank for innovative housing practices that could be easily deployed across states and localities. At the same time, it would point towards new directions of housing policy and finance at the federal, state, and local levels. The need for a housing commission is clear; the time for a housing commission is now.

Together, these three pieces lay out what we know about the state of the housing market and there is more that we are working on at our Lab. The next 10 years will be crucial for housing in America. States nationwide are looking at easing supply restrictions, such as restrictive zoning. But the rise of parasitic capital in the housing market means that increasing supply is only one part of the puzzle. All levels of the US government need to work towards advancing equity and fairness in the US housing market, from combatting exploitative investors to providing wealth-building opportunities.