Institutional Investors In The Market For Single-Family Housing: Where Did They Come From, Where Did They Go?

Abstract

Since 2012 the U.S. market for single-family homes has experienced a large and unprecedented rise in rental purchases by institutional investors or ''Wall Street Landlords''. My paper causally attributes the entry of these financially unconstrained investors to an increase in expected excess returns that is driven by (i) declining long-term interest rates and (ii) tighter household funding constraints. After entry of these investors into a local market, house price and rents grow 2pp and 1.2pp  faster per year. The majority of faster house price growth can be accounted for by market timing and would likely also have occurred in the absence of institutional investors. Faster rental growth cannot be accounted for by market timing, suggesting that institutional investors use their size to extract markups in rental markets. I replicate this evidence in a stylized model of the residential housing market in which funding-constrained households bid against unconstrained investors.

Keywords: Household Finance, Asset Pricing, Real Estate, Housing, Institutional Investors

JEL Classification: D1, D14, R31