The ROAD to Letting Treasury Pick Winners and Losers in Investing
On March 2, Senators Tim Scott (R‑SC) and Elizabeth Warren (D‑Mass.) released the text of the 21st Century ROAD to Housing Act, a bill that includes most of the provisions in the Scott-Warren ROAD to Housing Act from last fall. By default, that means the new bill also includes most of the provisions from the 21st Century Housing Act, which easily passed in the House in February.
For the most part, the original ROAD to Housing Act and the 21st Century Housing Act serve to maintain the status quo in federal housing policy. The bills offered some potential improvements to a few government programs, but they did not radically change them. They also make it easier for local governments to use block grants on activities vaguely related to “housing,” and open the door to increased federal involvement in state and local zoning decisions, both negative changes.
Americans looking for major improvements from these bills will likely be disappointed because the bills largely tweak, maintain, and extend programs that have been around for decades.
On the other hand, the Senate bill contains a new provision that would make it more difficult for large institutional investors to buy single-family homes, a longtime progressive bogeyman that the Trump administration has been promoting. This provision is harmful because it reduces investment for political gain and sets a dangerous precedent by giving federal officials authority to direct people’s investment choices. Overall, it is difficult to see how the policies in this new bill will improve housing markets.
Corporations Are for People, Not Corporations
Section 901 of the bill lists several restrictions on institutional investors’ single-family home purchases, and the section’s heading—“Homes are For People, not Corporations”—is a sign of trouble. At the very least, it indicates that these provisions are more about politics than policy, and therefore more about style than substance. Congress will be able to claim they’ve implemented a ban against Wall Street firms, but that claim doesn’t stand up to scrutiny.
For starters, corporations are nothing more than legal entities set up by people, for people. Individuals own corporations, invest in them, and work at them. Corporations do not function without those individuals. When “the corporation” spends money, there is less for those individuals. When it earns money, there is more for those individuals. And, without satisfying customers on an ongoing basis, those individuals (i.e., everyone involved with the corporation) will eventually lose.
Denying this reality leads to nonsensical slogans such as ‘Homes are For People, Not Corporations.’ If a corporation invests in single-family homes, that investment will turn out poorly unless people are willing and able to buy or rent them. The same goes for any corporate investor, even if that company consists of a single individual who formed it to start a rental or renovation business. It would make no sense for “corporations” to buy homes for themselves or for their own advantage. Nor would it make sense for the people running corporations to buy these homes to the detriment of other people.
Just as the idea that “Wall Street” or “Big Business” is out to get people is outdated, misguided, and counterproductive, so is the notion that corporations are otherworldly forces that work against people. It should not be used to inform legislation, but that seems to be what Congress is doing with Section 901 of the 21st Century ROAD to Housing Act.
The “Ban” Is More of a Filter Than a Ban
The Senate’s press release touts the bill’s “ban” on institutional investor purchases, but the bill includes too many exemptions to legitimately call it a ban. Though these investment restrictions remain counterproductive, the details show that the ban is really more about style than substance.
For instance, Section 901 includes 11 distinct categories that exempt institutional investors from the “ban,” including exemptions for purchases from certain other investors and “build-to-rent” purchases. In other words, large investors can’t purchase single-family homes unless they purchase them from other investors (and meet certain conditions) or purchase them as part of a business to build homes for the purpose of renting them. Larger investors can also receive exemptions when, for example, they purchase homes under certain “renovate-to-rent” programs and certain programs designed to “boost homeownership.”
In fact, there are more exemptions outside of these specific carve-outs. For instance, the bill defines a “single-family home” as a structure with 2 or fewer dwellings, with each dwelling intended for occupancy by a single household. So, structures with 3 or 4 dwellings, which are typically included in the single-family home category in real estate markets, are exempted. Moreover, the bill defines single-family homes to exclude manufactured housing. (Interestingly, Section 301 of the bill amends the National Manufactured Housing Construction and Safety Standards Act of 1974 so that a “manufactured home” is no longer required to be built on a permanent chassis. So, this exemption has the potential to become even more meaningful.)
Too Much Discretion is Too Much Government Power
Section 901 of the bill also defines large institutional investors. Specifically, it defines them as “an investment fund, corporation, general or limited partnership, limited liability company, joint venture, association, or other for-profit entity” that has investment control (directly or indirectly) of “not less than 350 single-family homes in the aggregate.” The term investment control appears rather broad, but it also includes any entity that “owns or controls more than 25 percent of any class of equity interests of the entity that owns the single-family home, unless such entity is a passive investor.” (Emphasis added.) So, some types of investment in single-family homes are fine.
The more troubling provision in Section 901, though, is the one that gives the Treasury Secretary rulemaking authority to carry out these restrictions. That authority includes wide discretionary power, including the authority to regulate these single-family home purchases to “minimize market disruptions,” to mitigate “negative impacts on consumers and communities,” and to “further clarify the application of the terms ‘large institutional investor,’ ‘single-family home,’ and ‘excepted purchase.’”
Giving any agency of the federal government such discretion is unwise, particularly because fleeting political outcomes often dictate who leads these agencies. As a result, shifting political views can easily dictate specific transactions in markets. At best, this discretion adds a layer of uncertainty to markets; at worst, it can shut down specific activities on little more than the whim of one small group of unelected officials.
Conclusion
Many of the policies in the 21st Century ROAD to Housing Act come from the (very similar) ROAD to Housing Act and the 21st Century Housing Act. These policies mainly perpetuate the status quo in housing and increase federal involvement in local markets. Members of Congress should reject these policies, many of which have existed for decades and failed to deliver their promised benefits.
Of the handful of new provisions in the 21st Century ROAD to Housing Act, perhaps the most harmful is the so-called “ban” on large institutional investors’ single-family home purchases. This policy is based on an irrational fear of “corporations,” and it makes little sense to freeze any investors out of housing markets. Indeed, evidence suggests that institutional investors have helped improve local housing markets by (among other things) reducing vacancy rates, especially through reinvigorating distressed properties.
The way that the 21st Century ROAD to Housing Act implements this supposed ban makes matters even worse. The Act adds layers of complexity to housing finance markets by including a lengthy list of exemptions from the ban, suggesting the policy’s main goal is to score political points. Moreover, the Act gives the Treasury Secretary significant discretion to issue new regulations. This feature adds layers of uncertainty because future administrations will have the discretion to significantly alter the details of the ban, including which companies it applies to.
The federal government should not have this kind of authority at all, much less the discretion to dictate who can invest in which assets for vague and ill-defined reasons. The institutional ban sets a dangerous precedent, and it is incompatible with a system based on limited government. Congress should not restrict institutional investors’ ability to purchase single-family homes, nor give the executive branch the authority to do so.
This post was cross-posted from Norbert Michel’s Substack, Mind the Gap.