The last post was my point about lack of supply being the reason why housing prices go up, not hoarding by investors from Wall Street or anywhere else. People with fewer housing dollars to spend are hit hardest by shortages in for sale and rental housing when prices surge with increased demand. Jason Mitchell of the Jason Mitchell group disagrees. His arguments and data are good; I still think he’s wrong. But here, he lays out his view as answers to my skeptical questions.

How would you describe the "Wall Street" connection to "the shortage of homes"? What's the simple story in terms of the players and what is the data that supports the view that prices have gone up because of these players and their actions?

Between Invitation Homes, Blackstone BX , and the major groups that are buying single-family homes, 1 in 3 houses in Texas were bought by a PE firm last year and Wall Street owns 1.2 million homes across the country. With that type of buying power in any market center, the shortage of homes is not just a product of supply and demand. These investors are looking for certain types of homes and taking inventory away from middle class Americans or first-time home buyers – the average buy box is a 1,400-2,300sqft., 3- or 4-bedroom single family home. Although this doesn’t affect high target markets like San Francisco, New York or Los Angeles, Americans are no longer able to buy a house in the submarkets where the average purchase price is $350-450k. When there are 1.2 million homes that are owned by Wall Street in today’s market center, institutional investors ultimately don’t care about the price of the home – they’re just trying to make yield on the rents because they can afford to pay cash for the homes. They have no intention of releasing these homes into the market center, which is adding to the housing shortage and creates a bigger problem. We can’t build our way out of the shortage of inventory.

I'm not convinced that these sorts of theories are true. Price is always a quantitative measure of supply and demand; when there is low supply, then prices go up and people with less money suffer the most, particularly if they can't find substitutes. How does Wall Street interference change that principle? Or does it?

When there’s low supply, prices go up, and people with less money are the ones who suffer. Wall Street is owning the market and the average American can’t compete. First time home buyers are typically VA, FHA, or low down payment borrowers – PE firms win because they’re able to make a cash offer. The problem escalates when institutional investors hoard that much inventory and set the bar for what they can charge in rent. Because they control rental pricing and therefore their cap rate, they are willing to pay higher prices for the homes since price isn’t necessarily reflective. They end up creating their own pricing increase, which negatively impacts middle class Americans’ ability to buy homes.

Finally, wouldn't you agree that in the case of a monopoly — for example, a big firm buying up lots of homes — the answer remains more housing? When I hear these kinds of claims, whether it’s stories about institutional buyers or foreign buyers, my response is the same: buying up supply only works if there is an underlying supply and demand imbalance, and if we increase the supply, we break the monopoly.

The bigger issue is that Wall Street owns the supply and is never going to sell the houses. The monopoly will not suddenly break if there’s an increase in supply when institutions can continue hoarding the supply. This past January, Invitation Homes announced they put aside $1.1 billion to buy more houses at a time where the average American is waiting to buy a home because rates are up and prices seem stagnant. Institutional investors keep turning single-family properties into rentals, and they’ll never be introduced to the market center. Builders can’t keep up because it takes time to get the permits and approvals required by the city. If a home construction company plans to build 200 single-family homes, it will likely take 2-3 years to complete that project – and that’s just 200 homes compared to the 1.2 million owned by Wall Street.

The other problem – and why we need to find a solution – is around stimulating the local economy. Houses owned by institutions are kept up to the minimum standards whereas homeowners will enhance the homes through kitchen renovations or landscaping because it’s where they live. Institutional buyers are not putting money into the economy unless it’s a necessity, like making sure the AC works or that the fridge is running.

The solution to a lot of these issues is increased taxes and regulations for institutions. For instance, if you own a certain amount of single-family homes in your portfolio, there needs to be an added tax to diminish purchasing power. But we should also consider solutions that benefit institutional buyers as well. Offering tax breaks to institutions that offer 10% of their portfolio a year to an end user will encourage them to release more inventory to the market because the benefits can offset capital gains taxes, for instance. But there is currently no regulation that encourages institutions to release homes.

Without regulation, middle class Americans who are qualified to buy are losing out in the marketplace because of institutions that can make cash offers. Those families have become perpetual renters, and since prices have gone up 30-40% over the past 3 years in some markets, they’ll never be able to buy, which creates a domino effect. Given inflation, saving money is becoming increasingly difficult and families are living paycheck to paycheck. Buying a house used to be the nest egg families relied on to send their kids to college or pay off debt. If there’s no home ownership with appreciation because middle class Americans are forced to be renters, there’s no avenue to save money. Institutions have hoarded so much inventory that most Americans will never be able to afford a home. Rents have also increased so much that some families cannot send their children to the same elementary school because they can’t afford to live in the same neighborhood, even as a renter. We must find long-term solutions to these problems because they’re only going to continue.