Carrots and Sticks

In my book, The Affordable Housing Crisis: Causes and Cures, I examine the framework that has dominated government housing policies for the past one hundred years. No matter which party is in power, government housing policies have consistently used a combination of carrots and sticks. Carrots are used to incentivize actions desired by the government, while sticks are used to prohibit or mandate actions. In calling for Congress to outlaw corporate ownership of single-family homes, the Trump Administration follows that framework and shows that the more things change, the more they stay the same.

Federal Housing Finance Agency Director Bill Pulte applauded the move, saying that corporate investors “are actually buying homes at 20% to 30% less, in some cases, than some average Americans are.” This, he wants us to believe, is pricing “average Americans” out of the housing market.

I was a real estate investor for fifteen years and purchased nearly two dozen single-family homes. I purchased each property at a substantial discount—at least 30 percent—because the houses were “distressed” in one form or another. Some were in disrepair, and the owner could not afford to make the repairs. All needed to be updated. A few owners were facing foreclosure and needed to sell quickly. Many of the homes were uninhabitable. Regardless of the details, every owner was desperate to sell and offered a substantial discount.

The “average American” would not be interested in purchasing such properties. He would not want to invest the time and money necessary to rehabilitate the house. However, for me and other investors, these properties were an opportunity. I helped the owner escape a dire situation and hoped to profit from my risk and investment. Contrary to Trump’s claims, I was not a villain.

Real estate investors are not the cause of rising housing prices. Government policies are. As I document in my book, zoning, monetary policy, highway policies, and more have combined to drive up the cost of housing. Each of these policies has followed a carrot and stick approach. For example, it is estimated that zoning prohibits multi-family housing on 75 percent of the land in American cities. In the late 1990s and early 2000s, monetary policy was used to encourage home ownership among those with poor credit and insufficient financial resources. The result was the housing bubble of the 2000s, and ultimately the Great Recession later in that decade.

Banning institutional investors from owning single-family homes will be no more effective than the policies of the past one hundred years. Trump’s proposal is simply a variation on a theme that has proven to distort the market and create fresh problems.

The solution isn’t government intervention in the housing market. The solution is to abandon the carrots and stick framework and free housing producers. We should not ban institutional investors. We should ban government intervention.