According to conservative estimates, private equity firms own one out of every twenty-six apartment listings in the United States, along with 1.6 housing units, 275,00 manufactured home lots, and nearly 240,000 single-family rental homes. What’s more, it’s not uncommon for firms to take advantage of rising foreclosure rates and an overall dip in home values to purchase even more property. The current state of affairs works well for banks short-term as they can offload foreclosed property without having to manage it for extended periods of time. Still, some wonder if private equity firms’ investment in the real estate industry will lead to rising foreclosure rates in the future.
It would seem, at face value, that there is no connection between private equity real estate investments and foreclosure rates as, after all, private equity firms purchase real estate to rent it out rather than resell it. However, a housing shortage in the United States is steadily pushing the cost of homes upward, as is a rise in the cost of construction materials used to build new homes. When private equity firms buy up real estate, it leaves low-income and middle-class homebuyers with few options, as many have to choose between renting a place at a time when rents continue to rise or buying a home that may cost more than is ideal.
Given the fact that mortgage payments are lower than rent in over forty states in the United States, it’s not surprising that many people opt to buy a home even if the payments are more than initially planned. However, those who opt to buy a home face a high risk of foreclosure in today’s economy. More than two million people have lost jobs each month since March 2022; what’s more, inflation continues to raise the cost of utilities, food, fuel, and other basic expenses. Foreclosures have been accelerating and those who purchased a house they struggled to pay for at the onset are at risk of losing their investment altogether. The homes they foreclose on are then frequently purchased by private equity firms, thus increasing corporate presence in the real estate market and steadily decreasing the number of homes available for buyers with a limited budget.
Private equity investment in the real estate market has always had an impact on aspiring home buyers by raising prices on multiple forms of real estate. It is usually the poor and middle-class that are most impacted by this form of investment, as individuals with a loan struggle to compete against a large firm with a cash offer. However, in today’s market, the outsize impact of private equity investment is being felt even more strongly than before. On one hand, it is helping to keep the real estate market afloat by continuing to invest in housing at a time when many buyers are waiting until the market improves. On the other hand, private equity firms make it difficult for many buyers to purchase housing well within their budget, which could lead to an acceleration of foreclosures in the future.