Study: Wall Street’s movement in the domestic market has highs

Image: Dr. Steven Xiao
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Credit: UT Dallas

While neighborhoods with business owners tend to experience higher rental prices, they also see an increase in neighborhood quality and safety, according to a recent study by researchers at the University of Texas at Dallas. .

Dr. Umit Gurun, Dr. Steven Xiao, and PhD student in management science Serena Xiao from the Naveen Jindal School of Management examined the recent increase in institutional investment in the single-family home rental market and its implications for well-being tenants.

The study was published online March 18 in the The review of financial studies. Dr. Jiabin Wu of the University of Oregon is co-author of the article.

“Large-scale investment in single-family rental space has grown rapidly since we started this project,” said Dr. Steven Xiao, assistant professor of finance and managerial economics and corresponding author of the study. “The single-family rental market has gradually transformed from a traditional family business into a new class of investment asset that offers attractive and stable returns for institutional investors.”

The researchers aimed to provide an objective assessment of the impact of institutional landlords on rental markets using large-scale data and rigorous empirical analysis.

Institutional landlords have been criticized in the media for their business practices, and those criticisms are mostly based on interviews with tenants, Steven Xiao said.

The foreclosure crisis that occurred between 2008 and 2010 forced millions of people out of their homes, and private equity firms acquired many properties, turning them into rentals. By 2016, institutional investors had acquired more than 200,000 foreclosed homes.

The large number of foreclosures provided a rare opportunity for institutional investors to buy single-family homes at a discount and build their portfolios, Steven Xiao said.

While family investors historically continue to dominate the single-family rental market, activist groups have raised concerns that business owners will make these homes less affordable and provide housing of questionable quality.

Serena Xiao said policymakers have been reluctant to financially support the institutionalization of single-family rentals.

“We believe our results provide a more nuanced picture of the role of institutional owners,” she said. “On the one hand they have increased the cost of renting, but on the other hand the landlords seem to be playing a beneficial role in reducing crime and improving amenities.”

To study the impact of institutional landlords, the researchers created a model to formalize the mechanisms by which the creation of a large landlord through a merger could affect average rental prices and neighborhood safety.

The researchers then examined the causal effect of institutional ownership on rents and neighborhood quality using the three largest institutional single-family rental investor mergers from 2015 to 2017.

The three mergers created American Homes 4 Rent and Invitation Homes, the two largest single-family rental institutional investors in the United States. According to 2018 data, the two companies own more than 130,000 single-family homes in the United States, more than half of the institutional single-family rental market.

The analysis used real estate transaction data from Zillow’s Transactions and Appraisal Database and neighborhood rental prices from the Zillow Rent Index. Crime data comes from the LexisNexis Community Crime Map.

Effects on rental prices

The analysis found that rent prices increased in neighborhoods where the two merging companies owned properties, also known as overlapping neighborhoods, compared to non-overlapping neighborhoods.

In overlapping neighborhoods in which each of the merged companies acquired more than five properties after their merger, rents rose 0.51% more than in non-overlapping neighborhoods.

The researchers also found that properties owned by the merged owners charged higher rents than other single-family rental homes in the same neighborhood. Selling prices for homes in overlapping neighborhoods have also increased.

Serena Xiao said the rental market price is the joint result of demand and supply.

“When potential tenants notice the neighborhood safety improvements, they’ll be willing to pay higher rent for these homes,” she said. “However, the rent increases we see immediately after the completion of the merger are unlikely to be demand-driven, as it will take time both for the quality of the neighborhood to improve and for tenants to potentials notice these improvements.

“We think these immediate rent increases are more likely supply-driven – that is, the merged landlords raised the list price as soon as they gained pricing power through the increase in market share.

Impacts on quality, safety

To investigate the effect on amenity arrangements, the researchers looked at data on streetlight density, security guard hiring, and property-level rental listings.

After the completion of the mergers, overlapping neighborhoods in which the merged companies acquired more than five properties experienced a 5.23% decrease in crime the following year compared to non-overlapping neighborhoods. This includes a decrease in burglaries (3.03%), thefts (4.64%) and vandalism (3.43%).

The study found that the drop in crime rates was not due to a weakening of law enforcement or a shift in crime to neighboring areas. Rather, the results suggest that institutional landlords improve the quality of rental services by improving neighborhood safety. The hiring of private security guards has accelerated in overlapping areas and the density of public lighting has increased.

Landlord mergers also appear to reduce resident turnover, which stabilizes affected neighborhoods.

As well as informing policy makers, the research also has implications for consumers in the home market.

“Based on our research, our recommendation to potential buyers and tenants would be to pay attention to the density of homes in the neighborhood owned by the same owner,” said Gurun, accounting professor Ashbel Smith. “Institutional owners have more incentive to work on neighborhood amenities when they have more homes in the neighborhood, and their investments will benefit everyone who lives in the area.”

Steven Xiao said the institutional single-family rental business has continued to thrive during the COVID-19 pandemic, and institutional investors have continued to develop new strategies, such as building rental homes. Researchers plan to study various social and economic impacts of this trend.