Massachusetts is losing residents. As detailed in a recent Globe article, Census Bureau data finds that the commonwealth has lost more than 110,000 residents since the beginning of the pandemic in 2020. A staggering number, but not surprising considering the Bay State’s steep cost of living.
The combination of exorbitant housing price increases and new remote work opportunities has residents of high-cost states like California, New York, and Massachusetts fleeing for more affordable locations like Florida and New Hampshire.
Some state leaders have promoted solutions like slashing red tape for new building permits to increase housing supply or re-implementing rent control to limit rent hikes, but other contours of the housing affordability issue have gone largely undebated. That includes the increasing rate of corporate ownership of single-family homes and other types of housing.
Increasing Corporate Ownership
As home prices and rent have continued to skyrocket in the last few decades – and especially in recent years – homes have increasingly become an attractive option for investors. This includes large private equity investors like Blackrock and the proliferation of LLCs for home ownership, oftentimes divisions of larger companies.
While few residences were bought by large investors prior to 2000, after the Great Recession many investors entered the market to take advantage of cheaper foreclosed homes they could turn into rental properties. The practice continued to grow in the wake of the pandemic, as investors saw opportunity in rapidly growing housing values. Many smaller unincorporated landlords decided to sell after missing out on rents and slow to materialize relief funds during the federal eviction moratorium.
One Pew report found that 17 percent of all homes sold in Massachusetts in 2021 – a total of 11,027 – were bought by investors. That’s lower than the national average of 24 percent, which has risen nine percentage points since 2015, but is still considerable. Over 6,600 of those were single family homes bought by business entities, a rate double what it was a decade ago.
The rates of single-family homes owned by investors was highest in the town of Barnstable, with over 60 percent rented out by investors. Springfield has also been a popular location for larger investors operating as LLCs.
Outside Massachusetts, investors and corporate entities are most likely to buy new properties in low-income neighborhoods and emerging markets. One study found that in the area encompassing the Twin Cities, corporate investors were statistically more likely to buy up properties in impoverished areas, namely Northeast Minneapolis, which has a poverty rate of 42 percent and 31 percent of homes are owned by investors.
Other locations that attracted high numbers of corporate investors were Arizona, Nevada, Texas, Georgia, and North Carolina.
Is Concern Warranted?
While not drawing the same attention as the general debate around housing affordability in the state, an increase in corporate ownership of housing has some experts worried about the potential consequences of such a shift. One study found a link between LLC ownership and housing stock that is in disrepair. When ownership changes from an unincorporated owner to an LLC, the properties in question experience more rapid deterioration than would be expected if ownership had not changed.
To some extent this makes sense; an LLC, by definition, provides a better shield for landlords, limits investor liability, and reallocates risk. An LLC structure can also obscure who the primary owner of the property is and limit exposure to potential fines for housing code violations. LLCs are also more likely to have multiple owners, more properties, and the resources to handle legal disputes with tenants. Unincorporated owners are far more likely to live in the property they are renting out – over 25 percent do. In this way, one might expect an unincorporated owner to be more responsive and cognizant of liability and the property’s needs in a way an LLC might not be.
A localized study by the Federal Reserve Bank of Georgia found that in Fulton County, Georgia, larger corporate owners with 15 or more properties were 8 percent more likely to evict tenants. Other studies have had similar findings.
As previously mentioned, real estate investors have a penchant for buying cheaper homes in low-income neighborhoods, which may account for some of the disparities in evictions. In a report on home purchases in the fourth quarter of 2021, a plurality of all homes sold to investors — 37 percent – were considered low-price. Thirty-two percent were mid-priced homes and 31 percent were high priced.
These types of purchases have led to some concern, as the types of houses that are most within reach of first-time buyers are less expensive homes in lower-income neighborhoods. When corporate entities start competing with first-time home buyers, it could push prices up and prevent some would-be home buyers from entering the market.
Alternatively, corporate ownership has also led to renovations of properties and reinvestment. Some experts have suggested that the entrance of private equity into the single-family housing market could increase the supply and diversity of existing rental units and create stability in the rental market, though renovations and redevelopment may also lead to rent increases in the short term.
With already limited housing stock, likely 108,157 homes short of meeting demand in the state, it’s important to consider any potential impact corporate real estate investors may be having on affordability.
The Underlying Issue
While it’s true that corporate and other business entities are scooping up a higher percentage of single- family properties than in decades past, and there may be some legitimate concerns in that regard, it simply isn’t the whole picture.
The primary driver of rising housing costs in Massachusetts is supply; if homes aren’t being built at a rate that runs equal to or ahead of population growth and demand, housing prices will see natural increases. This is the quintessential housing problem in Massachusetts and New England generally, where new housing growth has been stagnant for decades.
When the state saw large increases in residential development from the 1960’s to the 1980’s, with double the current rate of housing permits being granted, local pushback generated new zoning restrictions and regulatory red tape. These zoning laws often restrict the construction of multifamily housing and increase minimum lot sizes for developers.
Fast forward to the current day and those policies have proven costly. Less multifamily housing and larger lot sizes for single-family homes have created a dearth of new housing, as much of the available land has been inefficiently allocated. That, in combination with the pace of residents seeking homes, has contributed greatly to the current housing environment and crisis.
In this regard, corporate ownership affecting the demand curve can’t possibly account for most of the huge increases in the cost of living in the state, as the trends that led to the current situation predate increases in corporate ownership. Also, as previously mentioned, Massachusetts has both a significantly lower rate of corporate ownership of single family homes compared to the average state and has also seen some of the country’s largest increases in the cost of living and homes. If corporate ownership of housing was truly responsible for a significant share of increases in home values, we would expect to see higher rates of corporate ownership, otherwise it simply doesn’t have the necessary explanatory power.
Additionally, if housing was being built at 1980s levels in Massachusetts, corporate ownership would account for a much smaller percentage of the housing market. The lack of new housing creates the circumstances under which corporate ownership could have any significant effect.
Where to Go from Here
If state leaders are serious about tackling the affordability crisis roiling Massachusetts and causing thousands of residents to leave every year, every possible contour of the issue that might lead to lower costs must be considered. While corporate entities, especially those with more than 100 properties, are less likely to own homes than smaller investors and individuals, they can still create upward pressure on housing costs. But the best solution to making housing more affordable in the Bay State is enacting policies that allow and create incentives to build more housing. Until supply meets demand, housing costs will continue to rise.
The legislature and Governor Healy should continue to build on Governor Baker’s success in reforming zoning and mandating that municipalities allow for multifamily housing by MBTA facilities. While promoting bottom up reform is typically the best practice, a loud minority of entrenched interests often deters local leaders from addressing housing and affordability even when those policies are generally popular with the public. In light of this, it may be time for the legislature to take a more hands-on approach to zoning and regulatory reform.
Legislators should also be leery of further regulating landlords, especially when it comes to increasing their liability for the actions of their tenants. Those regulations have been found to create a host of unintended consequences that reinforce community decline and undermine the affordability of housing.
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About the Author
Aidan Enright is Pioneer’s economic research associate, responsible for analyzing data and developing reports on the state’s business climate and economic opportunity. Prior to working at Pioneer, he worked as a tutor and mentor in a Providence city school and was an intern for a U.S. Senator and the RI Department of Administration. Aidan earned a Bachelor of Arts in Political Science and Economics with a concentration in U.S. national politics from the College of Wooster.