Ah, home-ownership: The American Dream, right?
A man named James Truslow Adams first coined the term “American Dream” in 1931 with the release of his book, The Epic of America. He had originally titled the tome, The American Dream, where he defined it as a “dream of a better, richer and happier life for all our citizens of every rank.”
Over time, home-ownership became the representation of this dream because owning one’s home led to stability, community involvement, and wealth accumulation. It was the perfect symbol of growth and achievement.
But is home-ownership only an American dream? Isn’t the dream more universal ? And isn’t it the basis for, well, everything?
Go back as far as time, and what do we see— A struggle for land, ownership, and agency.
At the end of the day, our desire for a home is a primal need. We all experience it; we all empathize with it. In a way, home is agency. Home is the right to be.
Hell, even Odysseus only wanted one thing- to go home.
Today, there is no denying that home-ownership is linked to better social and economic outcomes for it’s inhabitants.
When we look at the overall net worth and wealth accumulation for renters vs. home owners, the difference is enormous. A couple years ago, I wrote a post titled, On Big Corporate Homeowners, and in it I noted, according to NAHB, the median homeowner net worth in 2019 was $255,000 whereas renter median net worth was just $6,000.1
But economics aren’t the only thing that matters. Agency, remember?
A home owner has a freedom over their property that a renter doesn’t. A freedom of action— They can change things, grow things, cut things down, renovate things… To a certain degree, they can choose to be louder, smoke, bbq, have pets/not have pets; the list is endless.
They also have the freedom to better control their spending. As we age and reduce our working hours, it becomes more important to be able to control our finances. Even removing the wealth-accumulation factor, a home owner has more control over their outgoing expenses than a renter because, over time, the money that has gone into ownership falls off their month-to-month outgoing cash flow. A renter will never see this benefit. Renters are beholden to a system of forever paying both the homeowner’s initial financial stake and the profit required to cover their risk.
Many people put in a lot of work, time, and money, to become home-owners. They have skin in the game. So, often, they take care of things, invest. This leads to a sense of pride and accomplishment. It inspires people to keep their homes nice, their neighborhoods nice, invest in their community, both socially and economically— home-ownership inspires people to care.
Yes, home-ownership is work, it is true. Enter REITs:
REITs were first born after Eisenhower signed the Cigar Bill (Cigar Excise Tax Extension of 1960). Buried within the legislative language, the bill allowed for corporations to create a new investment vehicle for real estate- the real estate investment trust.. The original idea behind these REITs was to allow individual investors to own a slice of a large commercial real estate project that they otherwise couldn’t have afforded on their own. Basically, it was an early form of crowdfunding for the little guy to get his feet into the big boy shoes.
And here’s the kicker- In addition to allowing small investors to get their feet into the big game, these investment vehicles offered an incredible tax incentive by avoiding double taxation.
Normally, companies must first pay taxes on their annual profits. Then, after they pay out dividends to their shareholders, those shareholders pay taxes on that money too– creating what’s sometimes called a “double tax”. Since real estate isn’t liquid, owners of REITs don’t have to pay out a tax on the profit which eliminates the first corporate tax. Instead, only the final distribution is taxed to the shareholders. This created a powerful corporate incentive to invest in REITs as a means to reduce their tax bill.
Now, it turns out I can’t talk about REITs without mentioning Sam Zell.2
Sam’s parents were immigrants from Poland, having fled just before the Nazi invasion. They eventually made their way to Chicago, where his father set up a wholesale jewelry shop and started investing in real estate. Sam showed entrepreneurial spirit at an early age. He learned the power of sales and basic supply and demand principles while he was in high school. First, he started selling classmates prom photos. Then, it was Playboy Magazines, which he was able to sell at a 200% markup. By the time he was in college, he’d landed a job managing a 15-unit apartment building. This was his entry point to building what would later became a real estate empire.
Now, during the 1960’s, the private real estate industry was robust, making REITs slow to take off. Then, according to Sam , around 1989 the savings and loan industry went broke. This drastically changed the private sector because the capital was no longer there to support private investments. Where was the capital going to come from? You guessed it- REITs. Sam started working with Merrill Lynch to create the modern era of what is now the REIT industry. By 1993, he’d helped to create the National Association of Real Estate Investment Trusts, who’s mission was to protect REIT law and legislation.
But remember, REITs were created to be a vehicle for commercial property and for a long time, they were used as intended- to crowdfund for massively expensive commercial endeavors.
Then, in 2008, the Great Financial Crisis changed everything. Banks and investment firms were left holding the bag on thousands of homes. Rather than sell them at a loss, some firms got savvy and pivoted—REITs provided a way for institutions to hold and buy single-family homes at a speculative rock-bottom price. A new specialized single-family REIT was created.
Modern technology played a huge role too- it dissolved the complexity of corporate landlording, making it far more attractive. With the foundation for corporate investment laid, REITs have continued to grow at an unprecedented rate.
According to research from HUD:
Between 2011 and 2017, these investors purchased more than 200,000 single-family homes at a total cost of $36 billion.3 Investor purchases surged again during the COVID-19 pandemic: in the first quarter of 2022, investor purchases of single- family homes averaged 28 percent per month, compared with 19 percent the previous year and the average of 16 per- cent between 2017 and 2019.4 This rate is much higher in certain areas of the country, reaching up to 67 percent in Lincoln County, Mississippi; 63 percent in Van Buren County, Iowa; and 52 per- cent in Tarrant County, Texas, in 2021.5 Large portfolio investors (those holding more than 100 properties) drove this growth. 3
How might REITs and corporate ownership affect the future?
I cannot dispute that the cost of homeownership is already out of reach for many. Additionally, the competition for purchasing a home is still fierce, despite high interest rates. This is abnormal.
From a population standpoint, supply of housing is mostly fine. Our housing “shortage” stems from a problem with demand– partly due to housing purchased as investment. As I’ve noted in the past, this is due to several things: a rise in millionaires, a rise in overseas investors, Airbnb investors, REITs, more flippers, more ma-an-pa investors, etc.
Nevertheless, supposedly, the United States is currently “short” between 4.5 and 7.2 million homes.
And from what I can tell, here are recent estimates on how many homes are owned under some of the investment umbrellas (I am sure there is some overlap between some of these as well, so the combined total is probably inflated):
- Airbnb: over 7,000,000 (globally) and roughly 2,500,000 (US)
- Second family homes: 7,500,000 homes (US)
- Institutionally owned homes (owners of 100+ homes): 700,000 (US)
- REITs: 575,000 (US, in 2022)
- Flipped homes: 240,000-400,000 (US, per year)
- Vacant homes: 15,000,000 (US, per year)– note the term vacant is way to vague to be of much help…
- COMBINED US TOTAL (not including vacant): 11,515,000
This isn’t to say corporate investment is the only reason housing prices are out of control… But as everyone argues about why and how this came to be, it left an open space for a new narrative to be created; a narrative I don’t care for.
The new narrative is this: Free yourself from the smothering confines home-ownership! You don’t want to own real estate; everything about it is a pain in the ass. Be smarter, savvier. If you want exposure to real estate, buy REITs.
As I noted on my post, Cascade of Convenience,
Today, everyone and their mom is talking about how instead of buying actual real estate, we should all just buy REITs on Wall Street. Landlording is fraught with friction and the new narrative is that REITs are the answer. In fact, these same shills are trying to convince people that owning their own home is too inconvenient and a bad investment. Instead of buying a house (and especially instead of investing in one), a better idea is to own shares of a REIT. Some magical fairy will take care of all the headaches… *we promise you a free lunch*… Please note that their argument contradicts itself (*housing is a bad investment but you know what you should buy— real estate investment trusts full of housing*).
The rise in technology and wealthy remote workers seems to have added fuel to the notion that renting is better. But this is incredibly naive. Stocks aren’t infallible. Additionally, most people aren’t part of the wealthy-remote-tech-worker group. Will they still be shouting about the benefits of renting after they lose their cushy jobs? Or after a severe and long-winded stock-market shock? Or would they be glad for buying a home and having some semblance of financial stability to bolster them through tough times?
There are large economic risks to putting all this real estate on the stock market… In a way, I see REITs as being hardly any different from the CDOs that created the Great Recession in the first place. These are opaque bundles of properties, just as they were in the mortgage industry. When we put them on the stock market, they are traded in similar fashion as swapped mortgages of the past…
As the overall share of home-ownership shifts, what is to happen when the share of corporate ownership overcomes that of individual ownership? And what do communities look like when actual humans don’t have any skin in the game?
I’d say the writing is on the wall: “This probably isn’t going to end well.” Risks range from more severe stock market crashes to mass financial abuse and, potentially… worse.
Remember, home and our desire to control our surroundings is primal. Could corporate home-ownership be the final straw in our era of big corporate take-over? Will it cause an uprising? I hope I’m wrong to even ask these questions, but looking to history, it doesn’t seem far-fetched to imagine.
Andre Cooper wrote an article titled, Maybe Treating Housing as an Investment was a Colossal, Society-Shattering Mistake. In it, he likened home-ownership to a pyramid scheme. But I wonder: So long as humans are tethered to home-ownership, housing can hardly be called a pyramid scheme- because the value is more than monetary… But if people become wholly un-tethered, could it all fall apart as such? (either way- looking at the figures, I can hardly argue with Andre’s title.)
Life rides on the back of a swaying pendulum. For a while, big tech convinced everyone they’d make everything better for us; they’d make everything more convenient and make our lives happier— *You will own nothing and you’ll be happy*. But magic is only trickery. And convenience isn’t the sole contributor to a happy well lived-life. Unless, of course, you give us our soma ;D
Thanks for reading,
HouseRat Zero
- You can see more detailed data on homeownership and wealth here or in this NPR interview. ↩︎
- While I’m going to put a little fire under REITs, I don’t mean Sam any disrespect (he passed away in 2023). The dude seemed amazing. And honestly, I wish I could have a Sam Zell in my own life. To learn more, listen to his interview with Tim Ferriss and Peter Attia here. I wonder what he thought about SFH REITs…. who knows- maybe he’d say to play the game or get played ↩︎
- https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html ↩︎
- The Rise of the Single-Family REIT by Edison Yu ↩︎