The 21st Century ROAD to Housing Act Is a Circular Road

A few days ago, Congressional leaders acted in both Houses with uncommonly large majorities to pass the 21st Century ROAD to Housing Act (the “Act”). After a bit of theatrics from the Trump administration, the legislation likely will become law without the President’s signature. Demonstrating their honed skill for self-congratulations and enormous exaggeration, members of the House and Senate lauded the bill:

• “I have fought to increase the supply of housing, cut red tape, increase capital, and make local rules and zoning more competitive. We have achieved that by strengthening community banks, preventing institutional investors from outcompeting American families for homes, and modernizing building codes. This is a true bicameral, bipartisan product that demonstrates what can happen when both chambers work together to deliver real solutions.” — French Hill (R), Chairman of the House Financial Services Committee
• “Congress is paving a path back to homeownership for American families who have been locked out for far too long. This transformational legislation will help address the housing affordability problem, reduce regulations so builders can build, limit institutional investing in the housing market, and bring the American Dream back into reach for millions of young and working families.” — Mike Johnson (R), Speaker of the House
• “This legislation will help increase housing supply and lower costs for families across the country.” — Maxine Waters (D), Ranking Member of the House Financial Services Committee

Hyperbole, at best.

Reality After the Thunderous Political Grand-Standing

The grandstanding has subsided. With the din of back-slapping now just a fading hum, candor can be heard, even from our rarely candid President. While indulging in a favorite past-time (criticizing Senator Elizabeth Warren), the President stumbled into honest assessment, ascribing to the Act “minor importance”. Mainstream media have begun to acknowledge that the Act addresses housing creation and cost only at the fringes of the market.

Any action to improve housing affordability can be useful. We at Shovel To Keys are critical of and pessimistic about the Act nonetheless because it achieves so little beyond lifting the political pressure on Congress to address core affordability issues and pushing those issues to the background for the foreseeable future. Our summary below, which is based on a more detailed summary by the Bipartisan Policy Center, illustrates how the Act touches only upon minor and non-controversial housing finance and construction topics and fortunately does little to impede institutional investment in housing:

• Numerous adjustments to housing and environmental regulations (e.g., number of stairways in new apartment buildings, environmental review of infill housing, temperature sensors in federally assisted housing) that could minimally reduce the cost of or time to construct multi-family or manufactured housing, but the adjustments depend on regulatory action by the Department of Housing and Urban Development, which has been gutted by the Trump administration.
• Small increases in financing assistance for very low cost housing (e.g., expanding availability of mortgages under $100,000, grants and loans for repair of badly deteriorated homes, allow HUD to delegate certain authority to states and localities), but very few homes can be purchased with such a small loan and the number of badly deteriorated homes that can be renovated is also extremely small.
• A small grant program to local governments for reforms (e.g., streamlined permitting, density bonuses, and zoning changes) that demonstrate meaningful increases in housing supply, but these reforms will require local political will and take years to implement.
• Reduce a strength requirement for manufactured housing that addressed structural integrity for houses that are moved, but manufactured housing is a small portion of the U.S. housing stock primarily in rural areas, and the impact of the strength requirement is uncertain, at best. This provision of the Act likely was a product of lobbying by the manufacturers.
• Fund HUD review of modular housing construction standards, which again depends on administrative action at the under-staffed HUD.
• Fund a program to increase awareness of a Veterans’ home loan program that already is very well-known.
• Banking regulation changes to ease the burdens on small community banks and credit unions.
• Prevents the Federal Reserve from creating a digital currency, which was not on the Bank’s agenda anyway and has nothing at all to do with housing.

The Publicity Focus

Finally, Section 1001 of the ROAD Act purports to tackle the egregious acquisition and ownership of single-family housing by large institutional investors:

• No person or entity already owning 350 or more single-family homes (one or two dwelling units) may purchase additional single-family homes UNLESS the purchase falls within one of the exceptions.

• The exceptions include:

  • Newly constructed or renovated homes that are to be sold, not rented.
  • Newly constructed homes to be rented (yes, the exceptions allow an investor to build for sale or rent).
  • Renovated homes to be rented, so long as the renovation cost exceeds 15% of the price paid by the investor for the home.
  • Homes purchased or built for a rent-to-own program or a credit-boosting program that gives the tenant an opportunity to purchase the home.
  • Homes purchased from another large investor that owned the home before the Act or purchased the home under one of these exceptions
  • Homes purchased within two years of the Act from another investor not covered by the Act.
  • Homes in 55+ age-restricted communities.

---

Spread the word about our writing.

The ROAD Act Minimally Restricts Institutional Investors, and Everyone Should Be Glad

To everyone genuinely aware of the reasons for affordability constraints in housing, the exceptions are a welcome huge hole in the prohibition against the purchase of homes by large investors. The exception chasm is welcome because:

• In the aftermath of the Great Financial Crisis, the large investors rescued and rehabilitated thousands of foreclosed homes that otherwise would not have been habitable or available. Only these large investors had the capital to acquire, renovate, and market the homes.

• Despite the aggressive purchase by investors of foreclosures from 2009 through roughly 2015, institutions own a sliver of the single-family home inventory in the United States:

  • According to Bank of America, institutional investors own 0.35% of all single-family homes and roughly 3.0% of single-family rentals, and the Progressive Policy Institute found that landlords holding 100 or more homes own 0.7% of all single-family homes in the United States.
  • Even in markets that have attracted a disproportionate amount of investor attention, those investors hold less than 5% of the single-family home inventory.
  • Institutional investors have nearly abandoned the strategy of purchasing existing homes because the cost of existing homes and interest rates have upended the investment appeal of such purchases. Blackstone (which owns two major single-family rental platforms — Tricon Residential and Invitation Homes) is a net seller of single-family homes.

• In markets where single-family home rental can be profitable (because sufficient demand exists), the large investors add to the supply of housing, which housing advocates, think-tanks, government agencies, and even investment banks claim loudly and often is necessary to reduce the cost of housing. Without these investors, housing supply would increase more slowly or not at all since investors by definition are the source of capital to acquire the land, build the homes, and hold the homes for rental.

The Challenge of Housing Affordability Remains Undiminished

In a few months when mid-term Congressional campaigns are most active, we will hear candidates from both parties claim victory in the battle against unaffordable housing. Likely all candidates will tell voters that the ROAD Act defeated the scourge of institutional investors and made way for “ordinary Americans” to purchase a home. The plain language of the Act fortunately tells a much different story.

Supply may be a source (but not the only source) of high housing cost, but the Act will do little, if anything, to increase supply or lower the cost of renting or owning a home. As Shovel To Keys has said more than once, the driver of housing supply and of the type of housing constructed is profit. Builders will build only what they can sell at an acceptable profit margin. Housing will become more affordable when the housing that buyers and renters want and can afford matches the housing that builders can profitably construct and rent or sell.

With the pressure on Congress abated by the ROAD Act, all interested participants in the housing market must look away from Washington for solutions to the imbalance between demand and supply. Federal legislation never was the solution because housing is local, but now federal attention likely will not return to the topic for a long time. In all likelihood, less federal attention is a feature, not a bug.

1

The Constitution provides that legislation becomes law if not vetoed within ten days. Article I, Section 7.