By Jack Ryan and John Tamny
Legislators have been abuzz recently about institutional investors buying homes as an asset class and the damage which they worry may ensue. As usual, those who would like to prevent the free-flow of capital have it all wrong.
At relatively low monthly payments, car leasing programs make it possible for drivers to access higher-end vehicles that they wouldn’t normally be able to afford. And it’s not just the relative affordability of leasing versus buying that can make leasing so appealing. Since lessees don’t own the car, the increasingly complicated maintenance of the car is outsourced to the actual owner who is much more knowledgeable about it.
Some, conservatives focused on the importance of “ownership society” in particular, will say that the renter of a car seldom washes it. Yes, but the car rental company washes it much more frequently than does the family owner. And they check the tire pressure, the oil, the transmission and the electronics much more often as well. And if something is amiss, they have huge economies of scale in remedying the problem which the individual owner does not.
Unfortunately, there’s legislation in the House and Senate that would stop large institutions like Blackstone (Invitation Homes) from bringing economies of scale to housing. They want single-family homes to be sold only to families. We think they’re mistaken.
The expressed reason for the legislation is that deep-pocketed buyers from Wall Street are essentially pricing individual buyers out of the market. The thinking and the legislation are short-sighted. We have never seen sectors in a capitalist economy improved by limiting the capital that can go into them.
Lest anyone forget, home prices don’t always go up. In which case it’s a good thing that institutions are shifting some of the ownership risk to themselves, while at the same time bringing crucial liquidity to a market that has frozen up in the past. What all-too-many home owners would have given to have had institutions with cash in hand back in 2008 when buyers were scarce. As opposed to destabilizing the housing market, the profit-motivated arrival of private equity will make owning a home less subject to huge downturns, and more accessible to families as the risk of owning the asset comes down.
Only for the story to get better. Channeling the mantra of real estate agents, housing is all about location, location, and location. What this means for those eager to live in a home is that, as with automobile leasing, it will increasingly be true that institutions and others will offer families leasing opportunities in neighborhoods that in the past would have been in a location out of reach.
Some will reply that in the lease versus buy scenario, families will miss out on potential equity gains from home ownership. Potential equity gains relative to what? The S&P 500, for instance, has outperformed the housing market over all relevant timeframes ever since the two have been traced.
As Wall Street expands into housing, Americans will more and more be able to leave the work and costs associated with home ownership to others, and the mindshare too, all the while building up equity in stocks and bonds that require no maintenance, and that offer transaction costs that shrink by the day. As we discuss at length in our book Bringing Adam Smith Into the American Home, the genius of outsourcing doesn’t stop at the proverbial doorstep.
There’s nothing etched in stone about home ownership as the past and forever ideal, which is why it’s so valuable that private equity firms are helping to discover the future of housing. Just as stock markets do our worrying for us, private equity’s evolution has it willingly trying to take the burdens of home ownership off our plates.
Here’s hoping legislators get out of the way so that market forces make their way into the American home.
Jack Ryan is the founder and CEO of REX, a national real estate brokerage. John Tamny is president of the Parkview Institute, and editor of RealClearMarkets. Ryan and Tamny are co-authors of Bringing Adam Smith Into the American Home: A Case Against Home Ownership.
Republished from RealClear Markets
