Hedge funds may soon be banned from owning single-family homes

The bulk purchase of single-family homes by corporate owners—who then turn them into rentals—has come under increased scrutiny in recent years. Legislators have gradually been responding with bills to rein in and in some cases ban private equity, real estate investment trusts and hedge funds from purchasing single-family homes.

According to Next City, the most prominent of these bills was introduced in December 2023: the End Hedge Fund Control of American Homes Act, introduced in the Senate by Oregon Sen. Jeff Merkley with companion legislation introduced in the House by Rep. Adam Smith.

The bill, which has been referred to committee but has yet to receive a vote, would effectively ban hedge funds from owning any single-family homes within 10 years of its passage.

The Merkley/Smith bill as written would force large corporate owners to divest from their current holdings of single-family homes over 10 years. An applicable entity that manages investor funds, is a fiduciary of the funds, and purchases new homes would be taxed half the cost of each additional home. Entities that fail to divest homes they own in excess of the 50-home cap would be taxed $50,000 for each excess home. And hedge funds, specifically, would pay that fine if they own any homes at all (with 10 years to divest of them).

The taxes would go toward a new housing trust fund for downpayment assistance for aspiring homeowners.

The legislation defines a "hedge fund" as any taxpayer with $50 million or more of assets under management. There are exemptions for nonprofits or any organization that primarily builds or rehabilitates single-family housing.

Merkley told Next City/Shelterforce that he first learned about the issue from constituents who were being outbid for starter homes for their families by deep-pocketed investors who were willing to buy the homes sight unseen.

"I started to hear the vignettes of people competing with all-cash, no-inspection offers in Oregon," Merkley says. "And three years ago or so I started seeing the stats of the large number of homes that were being purchased."

While the overall ownership of single-family homes by private equity remains relatively small, a 2022 report by MetLife estimated that by 2030, 7.6 million single-family rental homes in the United States—more than 40 percent—could be owned by corporate investors. According to a November report from the Private Equity Stakeholder Project (PESP) the estimate of 1.6 million housing units owned by private equity is "likely a dramatic underestimate due to a lack of transparency in ownership records."

The issue was the subject of a much-publicized Congressional hearing in 2022. And on March 7 President Biden released a policy announcement on housing ahead of his State of the Union address that mentioned private equity's influence on housing, saying, "Corporate landlords and private equity firms across the country have been accused of illegal information sharing, price fixing, and inflating rents," a reference not only to rent gouging but to ongoing litigation against RealPage, a data analytics company providing research to landlords, for coordinating rents among customers.

Private equity firms generally purchase houses with the goal of quickly turning a profit and then selling them. According to the November report by the Private Equity Stakeholder Project, private equity firms generally seek to turn a 15 percent return to investors within a 3- to 5-year period, and they accomplish this by cutting costs, including "deferring maintenance, skirting regulations, and imposing unnecessary fees on tenants."

A 2022 report from Drexel University found that between 2020 and 2021, 19 percent of sales of single-family homes in Richmond, Virginia, went to investors (a broad category that includes individual house flippers and private equity giants), and a quarter of the homes purchased in the same time period in Jacksonville, Florida, and Philadelphia were bought by investors.

The bill is one of several pieces of legislation introduced in recent years in an attempt to address private equity purchases of housing, although the other bills are all at the state or local level.

Among them is a North Carolina bill that would ban any single entity from owning more than 100 homes in counties that have above 150,000 residents. Every home owned above 100 would result in a daily fine of up to $100. In its report, PESP referred to the bill, which was referred to committee over a year ago but has never received a vote, as "one of the most stringent regulations of corporate landlords ever attempted by any state government."

A bill in Minnesota, HF685, would ban corporate entities from converting single-family homes into rentals. Introduced in January 2023, the bill hasn't received a vote but has been picking up support: it has 18 authors as of this writing.

Minnesota has been particularly impacted by private equity landlords. In 2022, Next City covered a group of tenants in single-family homes in Minnesota putting their rent in escrow rather than paying their private equity landlord, Pretium Partners, which was failing to provide needed repairs. Pretium was the subject of a lawsuit by the state's attorney general, Keith Ellison.

The Merkley/Smith legislation caps ownership for all pooled investment funds at 50 single-family homes. Merkley told Next City/Shelterforce the number was "arbitrary" but chosen so that large hedge funds don't form smaller companies to evade detection.

"We didn't want the large billion-dollar hedge funds to create the same board of officers and create a smaller hedge fund," he says.

Private equity owners of single-family homes have continually argued that they are creating supply in the rental market, particularly for growing families who would feel cramped in a small apartment. Merkley says the legislation negates that argument, because it requires private equity landlords to sell off their properties to new homeowners.

"That's a completely bogus argument," he says. "You're taking a family out of the rental market when they become the owner of this home." He says that allowing aspiring homeowners to buy homes is "systematically reducing the demand for rental housing."

Merkley had a front-row seat to the beginning of this crisis. He entered Congress in 2009, during the financial crisis and mortgage crisis, when the federal government had acquired hundreds of thousands of single-family homes with predatory mortgages that it needed to get rid of. After the financial crisis, the Obama administration began selling off hundreds of thousands of the single-family homes that it had foreclosed on. Rather than selling them to homeowners, they sold them to hedge funds and private equity with massive discounts. Merkley says that he was pushing the Obama administration at the time to make the homes available to Americans who had been victims of the subprime mortgage crisis.

The Obama administration, Merkley says, responded that they didn't have time to build capacity for a discounted homeownership program before the buildings started to deteriorate.

"I do understand the arguments the administration was making … they were also worried about pipes freezing, they were worried about houses being broken into, they were worried about houses being stripped of their copper," Merkley says.

But he says that whatever the Obama administration's limitations, "That process of selling off houses in these large bulk sales that only large hedge funds can buy them really set this in motion."

Hedge funds and private equity firms make money off these homes with or without renters—the buildings appreciate in value, and that appreciation is not subject to taxation until a sale.

Merkley then joined the banking committee, where he worked on regulating subprime mortgages. "We made them illegal, they were turning the dream of homeownership into a nightmare," Merkley says. (This is not exactly true, but the Dodd-Frank Wall Street Reform and Consumer Protection Act did put greater guardrails on subprime mortgages, putting them under the purview of the Consumer Financial Protection Bureau. Merkley, along with Sen. Amy Klobuchar, contributed to language in the bill that prohibited mortgage lenders and brokers from receiving financial incentives to offer high-risk loans.)

The Merkley/Smith bill also does not address private equity ownership in the multifamily housing market, where it owns a larger share of the market. Since multifamily units are mostly rentals already, private equity does not have the same effect on overall supply. But corporate consolidation of housing can lead to higher rents. Merkley says he doesn't have a plan for multifamily yet.

"I don't feel I understand that multifamily issue well enough to propose a specific strategy on it," he says.

The End Hedge Fund Control of American Homes Act doesn't have a strong solution for one of the largest impediments to regulating corporate ownership: tracking who owns what. Many rental properties are owned by shell LLCs, making ownership hard to discern. The bill sets up a reporting requirement around acquisitions, and issues a $20,000 fine for not reporting. But it doesn't create a mechanism for uncovering who owns the units, nor does it establish a new database of rental ownership.

In an email statement to Next City/Shelterforce, Merkley's office said, "LLC transparency is a key piece of the puzzle to ensuring houses in our communities are homes for families, not profit centers for Wall Street" and that the senator is "exploring the most effective transparency and reporting strategy for tracking future acquisitions."

"It's tough to really hold somebody accountable when you don't really know what the true ownership is," says Chris Noble, policy director at the Private Equity Stakeholder Project. The group has endorsed the legislation, saying it addresses the "root cause" of corporate housing consolidation.

Noble says any mechanism to track housing ownership would need to be as "robust" as the tax portion of the bill for the legislation to work. PESP has advocated for a national landlord registry. "There has to be some way to track what everybody has because a lot of times it is an LLC that is owned by something else that is ultimately owned by a real estate investment trust or something like that," he says.

This story was co-published in collaboration with Shelterforce, the only independent, non-academic publication covering the worlds of affordable housing, community development and housing justice.