Senator Elizabeth Warren: “The solution to bringing down housing costs for families is clear. Step one: build more housing. And step two: loosen big investors’ grip on the market to make sure that it is families, not just private equity firms, that have an opportunity to buy a home.
Federal Reserve Chairman Jerome Powell should also think twice before jamming through overly aggressive rate hikes that are only going to make the housing crisis worse.”
July 25, 2022 - Washington, D.C. - Last week, during a Senate Committee on Banking, Housing, and Urban Affairs (BHUA) hearing, United States Senator Elizabeth Warren (D-Mass.) expressed concern 
about two key drivers of rising housing prices: an extreme housing supply shortage and the growing role of private equity firms and other institutional investors in the housing market. She also called out Federal Reserve Chairman Jerome Powell’s interest rate hikes for potentially exacerbating the housing crisis by making it more expensive to build new housing and for families to take out a mortgage.
In response to Senator Warren’s questions, Dr. Lawrence Yun, Chief Economist and Senior Vice President for Research at the National Association of Realtors, explained that higher interest rates are likely to increase rental costs for families while allowing large corporate investors like private equity firms to increase their purchases of homes. Peggy Bailey, Vice President for Housing Policy at the Center on Budget and Policy Priorities, noted that increased investor activity in the housing market could further increase rental prices and displace families of color.
Transcript: Priced Out: The State of Housing in America
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Thursday, July 21, 2022
Senator Elizabeth Warren: Thank you, Mr. Chairman.
Our country has faced an affordable housing crisis for decades now, and we have a shortage now – the estimates are as many as 6.8 million units that we need. Everyone needs housing, there’s just not enough to go around. It is a classic case of demand outstrips supply. So this is Econ 101, and that says we’re going to end up with higher prices. Indeed, this severe lack of supply has relentlessly pushed up the cost of rent for families, taking bigger and bigger bites out of budgets – as you identified – that are now doubly strained by rising prices on everything else from gasoline to groceries.
Rents are up nearly 6% more than they were just a year ago, and higher housing costs are one of the biggest overall drivers of inflation.
So to tackle rising costs, the Federal Reserve is raising interest rates at an aggressive pace. But we should be clear about the impact of the Fed’s rate hikes on the housing market.
Dr. Yun, the Fed claims its rate hikes will bring down prices for families by taming inflation. So, let me ask you – do you expect the Fed’s interest rate hikes will meaningfully bring down rental costs for families?
Dr. Lawrence Yun, Chief Economist and Senior Vice President for Research, National Association of REALTORS: The rental component in the Consumer Price Index comprises about 30% – including something a homeowner equivalency rent. Given that there will be fewer buying activity and more renters, rents will be rising, so, in fact, one can say at least the rental component with higher interest rates, it will be rising even faster.
Senator Warren: So the Fed’s actions on aggressive interest rate increases are likely to drive up the cost of rent.
Dr. Lawrence Yun: Yes -
Senator Warren: And as you say, that’s about 30% of the inflation calculation. So it’s not going to bring down rental costs, it’s not going to bring down the cost of food, or gas, or other necessities that have spiked because of Putin’s war in Ukraine, it’s not going to fix supply-chain kinks, it’s not going to stop corporate price gouging.
But by increasing borrowing costs, the Fed’s rate hikes will do two things: First, make it more expensive to build new housing – which dampens investment in construction and makes the housing shortage even worse. And second, make it more expensive for families to take out a mortgage and buy a home. The cost of a mortgage – as you’ve pointed out – has already doubled since last year.
So, Dr. Yun, people renting and buying homes are worse off when the Fed jacks up rates. But are there any participants in the housing market who are relatively better off under these conditions – like, big investors and private equity firms?
Dr. Yun: The multiple offers – intense multiple offers were prevalent throughout last year. Now the multiple offers are far less occurrence, which means that people who are still in the market are able to grab property with much easier access, and certainly, the corporate investors would be in that category.
Senator Warren: And corporate investors, I take it, are often buying for cash?
Dr. Yun: Cash buyers – which consequently makes it very difficult for the first-time buyer who needs to take out a mortgage to compete.
Senator Warren: Right. So private equity firms are buying in. They swoop up what little housing is available. They rent it out to families at a premium. In fact, in the first quarter of this year, investors purchased one out of every five homes that was sold – which is a national record.
Ms. Bailey, if private equity and other big investors buy more of the housing stock, what do you expect will be the impact on rent prices on the families that are living in those homes?
Peggy Bailey, Vice President for Housing Policy, Center on Budget and Policy Priorities: Thank you, Senator, for that question. I think that we can expect that rents will increase, putting more pressure on families’ incomes and having them have to stretch their already thin budgets even further. The other thing, though, that often gets missed is that that can also lead to gentrification of neighborhoods and displacement of families that live in those neighborhoods, which is also a challenge when equity firms purchase properties.
Senator Warren: Yes, thank you. You know, the solution to bringing down housing costs for families is clear. Step one: build more housing. And step two: loosen big investors’ grip on the market to make sure that it is families, not just private equity firms, that have an opportunity to buy a home.
There’s also a third step that the Federal Reserve Chairman Jerome Powell should take: think twice before jamming through overly aggressive rate hikes that are only going to make the housing crisis worse. Thank you very much for being with us today.
And thank you, Mr. Chairman, for holding this hearing.
Source: Senator Elizabeth Warren
