President Trump just signed an executive order intended to reduce housing costs by imposing a government ban on private equity firms and institutional investors from participating in the single-family homes marketplace. Not only does this proposed overreach interfere with market forces that want to spur more investment in housing, and increase supply, but it will do little to improve housing affordability.
It is a perfect example of the adage: don’t just do something; stand there. Renters would be better off without this proposal.
At present, only 3% of all single-family homes are owned by institutional investors. Forcing those investors to sell, or blocking new ones from entering the market, would do little to lower prices. In fact, investment in housing helps increase supply. When you cut off investment, you get less construction and fewer homes. When supply falls, prices rise. It’s that simple.
Trump states, “People live in homes, not corporations.” True enough. But the main point of having investments in housing is so investors can rent them out, such that only “people live in [those investment] homes, not corporations.”
Moreover only “people” invest in investment firms, so why is government excluding whole groups of people from investing more in housing markets? Banning institutional investors or private equity firms from investing in housing makes as much sense as banning institutional investors or private equity firms from investing in stocks.
Consider this analogy from fractional, and often institutional, ownership of companies (ie, the stock market): If I want to invest in high tech, I could show up in Silicon Valley to buy an entire company, but the only problem is I don’t have a trillion dollars sitting around. Even if I could afford it, I do not want to buy all of a small firm.
Instead, stock markets allow millions of people like me to invest small amounts of money to own a small fraction of a company. I can buy just one share through my stockbroker or even through a mutual or index fund that holds small pieces of many companies. Private equity brings many investors and even the richest investor Elon Musk needed to use private equity when he led a team of investors to purchase Twitter.
Private equity and institutional investments are simply a set of tools and ownership structures that people use to expand investments. Private equity and institutional investments also make markets run more smoothly, and that is good for everyone.
The same holds true for real estate, and we should be encouraging more investment in the real estate industry not less.
Economists recognize that at present many zoning laws interfere with the supply of housing and that drives prices more than where they should be. Another set of problems arises with Mamdani-style price controls on housing that encourage landlords to invest less in their housing and sometimes even abandon their housing. But the solution is to reduce those government restrictions, not to reduce investments in housing.
I personally have benefited from private equity firms investing in housing on more than one occasion. When I moved to Hartford 18 years ago, I did not want to pony up a few hundred thousand dollars for a home when I was unsure where I wanted to live. Instead, I had the benefit of interacting with a Boston-based private equity firm that had gathered institutional money and built the tallest residential building in Connecticut. All I had to do was show up with one month’s rent deposit.
I was always grateful for that private equity firm, and at the beginning of each month I would write them a thank you card in the form of my rent. I, paying customer, benefited them and the private equity funded landlord who fronted all of the costs benefited me. Denying the idea that investments can be mutually beneficial for investors and consumers is entering Mamdani territory.
Would Trump retroactively apply this new ban on institutional investments to the residential projects he worked on in the past? I imagine that at least some, but more likely most, of Trump led real estate projects involved him lining up investors including institutional ones to pay for the costs up front and ideally get compensated with profits later. That’s the American way.
The people who live in apartments, multi-family, or single-family homes made possible by institutional investors and private equity real estate funds all benefit. Adam Smith’s invisible hand coordinated the investors, architects, builders, and workers spending years getting the property in great shape for me and all of my neighbors. We should not ban investments and institutional investing in real estate and instead be grateful for what they do.
