Hawaii Real Estate
Hawaii Real Estate
Housing Empire
Wall Street investors have been quietly acquiring thousands of homes. In this eye-opening episode of the Hawaii Real Estate podcast, we explore how large institutional investors are transforming the housing market for property owners, managers, renters, and buyers. Packed with insider insights and surprising revelations, this episode sheds light on shadowy market dynamics that could impact your next move—don’t miss it, this is the episode that your colleagues will be talking about.
Hawaiʻi Real Estate
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Introduction
E komo mai. Welcome to the Hawaiʻi Real Estate podcast. I’m Jason Korta, staff attorney for the Hawaiʻi Association of Realtors®.
In today’s episode, we discuss the affect that large institutional investors can have on Hawaiʻi’s real estate market.
But first, as always, we begin with Hawaiʻi’s most recent real estate data. Here is our Hawaiʻi Real Data Report.
Real Data Report
U.S. Economy and Mortgage Rates
Something weird happened. The Federal Reserve cut interest rates last week by a quarter point, and mortgage rates rose.
With federal interest rates lower, banks can borrow money more cheaply. Usually, lower federal rates coincide with lower mortgage rates. Why not this time?
Mortgage rates are like that stubborn grandparent humming along in their classic heavy red Buick, blasting the only radio station the car can receive: the 10-year treasury yield. That yield is not simply shaped by federal interest rates but by investor hopes, fears, and expectations about the economy tomorrow. Right now, those expectations are filled with inflation worries, and so the yield is being driven up, along with mortgage rates.
But wasn’t inflation falling? Isn’t that in part why the Fed. cut interest rates? Why is the Buick’s radio blasting inflation fear now?
Enter the political wildcard: Donald Trump. As president-elect, he has promised sweeping inflationary policies—tariffs, tax cuts, and aggressive government spending. When Trump won the election, the market’s reaction was swift and unsentimental: mortgage rates, which had started to dip earlier this year, jumped.
The lesson? Mortgage rates aren’t about today’s reality but tomorrow’s story. And, for now, the story is that new tariffs, increased government spending, and tax cuts will lead to inflation, which the Fed. will have to combat by raising interest rates, which will make mortgage lending more expensive. The banks are pricing in the costs of tomorrow, today.
City and County of Honolulu
The City and County of Honolulu’s housing market, though still vibrant, shows early signs of concern as buyers weigh its allure against the recent uncertain stakes of borrowing. Last year, the median listing price for a home in the city and county was around $794,000; today, it hovers closer to $707,000.
And it’s not just price. Homes in the city and county are staying on the market for longer, a median 68 days, compared to last year’s 54 days.
Homebuyers are weighing the city’s iconic appeal against its cooling momentum.
Hawaiʻi County
While Honolulu tends to follow the rules, the Big Island does its own thing. That market has a renegade streak.
The median listing price for a home there is down from last month, slipping just over one percent to $646,821. But year over-year, it’s a different story—a 4.3% rise.
For the buyer with a keen eye, this market holds a distinct appeal. The Big Island offers more land, fewer crowds, and prices that still feel like a bargain.
Homes on the Big Island take about 86 days to sell, a figure unchanged from last month, but up for the year.
Kauaʻi County
Perched on the edge of the island chain, Kauaʻi is in a class of its own. The median listing price there, a staggering $1,468,750, proclaims, in the loudest voice that all manner and charm will allow, that Kauaʻi is where class comes to nest.
And while the rest of the country worries about interest rates, Kauaʻi remains serene, unbothered, an oasis.
Kauaʻi’s appeal is built on scarcity. Zoning restrictions, dramatic geography, and a strong preservationist streak keep inventory low. Buyers from around the world know that owning on Kauaʻi means becoming part of a legacy of unparalleled beauty and serene exclusivity—a place where timeless charm meets elevated living, promising not just a home, but a lifestyle untouched by time.
Kauaʻi isn’t about how many days a home sits on the market; it’s about who can afford to wait. Buyers on Kauaʻi are less concerned with fluctuating economic currents. They’re playing a different game entirely, one defined by exclusivity, isolation, and a sense of place that transcends earthly limits.
Maui County
Maui’s real estate market has always straddled two worlds—the luxury allure of resort life and the steady hum of local living. This year, though, its market is tilting noticeably, with its median listing price settling around $1.2 million, a 2% dip from last month and a more sizeable 12% drop from last year. To the mainland investor or second-home dreamer, these numbers might seem like an invitation—but Maui doesn’t sell at discount.
While some potential buyers waver, concerned over the island’s rising insurance premiums and other costs, Maui’s market remains resilient. The appeal of Maui’s breathtaking coastline, lush rainforests, and ancient mountaintops don’t fade easily from the mind. Maui understands its value, and it plays the long game. Its median listing period is up from last year by over 60%.
Closing Thoughts
As we monitor Hawaiʻi’s real estate landscape, the recent increases in mortgage rates and economic shifts will likely have a lasting impact on buyer behavior and property values. While each county demonstrates distinct trends, Hawaiʻi’s real estate remains uniquely appealing.
Focus Piece: The Secret New Housing Empire
Prologue
Do you remember the early 2000s housing market? Back then, it seemed like everyone was flipping homes, taking out second mortgages, and watching their home’s value rocket to the stratosphere.
Low Interest Rates
The mania, at least initially, was fueled by rock-bottom interest rates.
Federal Reserve Chairman Alan Greenspan worried that the recent dot-com bust would drag the broader economy into recession. So he did what central bankers do best: he reached for the lever that controlled interest rates and pulled it—hard.
The Federal Reserve dropped the target federal funds rate, the rate at which banks borrow money from the federal government, to nearly zero, and held it there. It was like giving out free gasoline at the Indy 500.
Banks, flush with cheap money, accelerated the lending machine by unleashing low-interest mortgage offers like water over Niagara Falls. Suddenly, everyone could afford to play in the housing market.
Exotic Mortgages
Enticed by the cheaper loans made available by low interest rates, individual buyers dove headfirst into the market.
Borrowers with good credit scooped up the first homes. As home prices continued to climb, banks needed different customers to buy their mortgages. Like the degenerate gambler at the table who just scored big, banks began taking risker bets to keep that mortgage money flowing.
They began selling exotic mortgages, like adjustable rate mortgages, to borrowers with poor credit histories. Adjustable rate mortgages typically offer a low, introductory, teaser-rate mortgage for usually two years. A mortgage with an initial interest rate of 6%, for instance, would after two years jump to 11%.
Many of the borrowers who purchased adjustable rate mortgages knew that they could afford the teaser rate and figured that, well, when the rate jumped in two years, their home value would have increased enough for them to refinance.
During 2003 and 2004, about one-third of all mortgage applications were for adjustable-rate mortgages. Ben Bernanke, a Princeton economist and the man who succeeded Alan Greenspan as Fed. Chairman, argued that it was the sale of these exotic mortgages that accounted for most of the rise in housing prices during the housing boom.
And boy did the banks offer some exotic mortgages. At probably the nadir of mortgage product standards, banks sold “interest-only negative-amortizing adjustable-rate mortgages,” which is just a fancy way of saying that banks were dropping big bags of cash on homeowners and letting them decide each month how much they wanted to pay back.
Unpaid amounts would be added to the principal, of course, but who cared? Home values continued to rise. Whatever amount was added to the principal could be paid off with a new mortgage!
Some of the less scrupulous or decerning mortgage originators wouldn’t even require mortgage applicants to document their income, employment, or assets. Of course mortgages made without supporting documentation were more likely to be fraudulent, but, again, who cared? If homeowners didn’t have the income or assets necessary to make good on their loans, then they could just take out another mortgage against their home’s rapidly rising value, and use those new loans funds to pay off their prior loans.
You’d think that this would concern mortgage originators. Banks and mortgage originators are supposed to understand the mortgages that they offer and be concerned about getting paid back. Why weren’t they concerned about selling more and more exotic mortgages to less and less qualified buyers?
To answer that question, imagine a small, sun-soaked office in Southern California during the early 2000s. Inside, a mortgage broker named Danny sits behind a cluttered desk, his tie loosened and shirt sleeves rolled up. The phone never stops ringing. Outside, a line of eager homebuyers wraps around the block—teachers and construction workers, and then agricultural laborers, domestic workers, and exotic dancers—all dreaming of owning a piece of the American Dream.
Danny works at Long Beach Savings, one of the first firms to adopt the “originate-and-sell” model for turning out mortgages. His job is simple: originate as many mortgages as he can.
Unlike the old days, when a banker might scrutinize every financial detail of a borrower’s life, Danny doesn’t bother with such formalities. Credit scores teetering on the edge of disaster? No problem. Income statements that look like creative writing exercises? It’s all good. After all, Danny’s firm isn’t planning to hold onto these mortgages. Before the ink is dry, they’ll sell them off to some Wall Street firm—that’s the “originate-and-sell” model.
It was a revolutionary shift from the old-fashioned way of banking. In the past, a bank would make a mortgage loan and keep it on its books, shouldering the risk if the borrower defaulted. That created a natural incentive to lend responsibly. But in the originate-and-sell world, that incentive evaporated.
When you're not the one left holding the bag, why worry about the mess inside?
Mortgage origination basically become a Ponzi scheme. Artificially high and rising home prices justified new mortgages, which covered prior bad loans. The cycle would continue and continue, as long as home prices continued to rise.
But the air in the housing bubble began to leak.
The first leak was the resetting of adjustable rate mortgages. During the 2005 mortgage-offering bonanza, thousands of adjustable rate mortgages were sold to subprime borrowers. That first wave of adjustable rate mortgages were due to reset in 2007 to about twice their introductory rate.
Many couldn’t afford this near doubling of their mortgage payment. They would default unless their home values rose fast enough to refinance.
Unfortunately, the second leak in the housing bubble was slowing home appreciation—not falling appreciation, mind you, but slowing appreciation. The homes were still climbing in value, just not at their prior blistering pace. That was a real problem for homebuyers who couldn’t afford their mortgage payments unless their homes appreciated fast enough to allow them to refinance their prior loans.
There were warning signs that many homeowners couldn’t afford their loans unless their homes rose in value fast enough to refinance. One study conducted around the first wave of home foreclosures showed that homeowners whose homes only appreciated one to five percent since 2000 were four times more likely to default on their home loans than homeowners whose homes had appreciated during that same period by 10 more percent or more.
Perhaps the most glaring evidence that homebuyers would default on their home loans, however, was the rising rate of late credit card payments. It didn’t make sense for anyone with rising equity in their home to have runaway credit card debt. If you had equity in your home, you would refinance, and use the proceeds from the refinance to payoff the high-interest credit card debt before it drowned you. Rising credit card delinquencies showed that borrowers had already tapped all the equity available in their homes. It was an early and sure sign that they would default on their mortgages.
These twin leaks in the housing bubble—the resetting of adjustable rate mortgages and the slowing home-price appreciation—caused a massive rise in foreclosures.
Subdivisions that had gone up only a few years earlier, complete with cul-de-sacs, granite countertops, and swimming pools were emptied and abandoned. Entire neighborhoods in particularly hard-hit areas were mutated into row-upon-row of boarded-up houses and burnt grass.
Ultimately, the 2007-08 financial crisis and ensuing housing collapse forced about 3.8 million homes into foreclosure.
Foreclosures
You’d think that the banks and mortgage servicers that now owned these foreclosed homes would be desperate to offload them as quickly as possible. Every day that they owned them, they incurred property taxes and maintenance costs. Holding millions of properties, especially during the Great Recession when liquidity was low, was just a bad business decision.
But foreclosed properties are difficult to sell. They present at auction like crime scenes. Beat, tattered, and striped, they need renovation and repair to restore their value and avoid selling at a massive loss.
Banks don’t want to involve themselves in multiple, unique, and geographic disparate repair and renovation projects. They’re too time consuming and expensive. Plus, banks don’t have the necessary expertise or connections to contractors to make the necessary repairs and renovations efficiently. So the foreclosed homes enter the market “as is.”
Those who purchase them must be willing to invest into them. That often presents an opportunity for a motivated buyer who is willing to jump through the legal hoops and endure the uncertainties involved in purchasing a foreclosed property. They can acquire an undervalued asset and live in a neighborhood that could have otherwise been beyond their means, or they can flip the property to another purchaser for profit.
But what if there are no are no individuals to buy the foreclosed properties? Remember, again, these foreclosures entered the market during the greatest financial disaster since the Great Depression. Mortgage lending standards were tightening. The average FICO score in 2007 was 719. By comparison, since 2012, the average FICO score hasn’t fallen below 750. Homebuyers who would have otherwise qualified for a mortgage to purchase a home were frozen out of the market.
But banks couldn’t just let the foreclosed properties sit vacant. Vacant properties lose value, especially if they are in a neighborhood overrun by other vacant homes. Holding the homes would devalue an already radically devalued asset while simultaneously incurring costs at a time when the bank had to be most vigilant about guarding its fragile balance sheet.
They needed buyers. Individual buyers couldn’t pony up the cash, but another group of buyers could: Big Money.
Big Money
Large institutional investors smelled an opportunity. Millions of homes were entering foreclosure at the same time. Those homes could be purchased, at a massive discount, and they could be purchased efficiently in bulk.
Private Bonds
Like any good investor, though, they wouldn’t put up their own money to purchase the homes. Instead, they sold an ingenious financial instrument, modeled off the mortgage-backed bond that led to the foreclosures in the first place, and used the money they received from investors in those bonds to purchase the homes that they would then manage and rent out to those who needed a place to live.
The financial instrument was called a “rent-backed security.” It made them rich. Here’s how it worked.
The investors knew that they wanted to purchase foreclosed homes in bulk to manage as residential tenancies. Those residential tenancies would produce rent income for the investors, which they could package into a bond and sell to other investors. The proceeds from the bond would allow the investors to purchase more foreclosed homes.
Of course not all foreclosed properties are the same. Some are in well-maintained areas that are more likely to attract stable renters; others might include properties in economic fragile neighborhoods or older buildings that demand more maintenance.
And not all renters are the same. Some have stable jobs and longer histories of reliable payments, making them “lower risk.” Other renters, by contrast, such as those who face precarious employment, lack credit histories, or struggle with monthly expenses, might be seen as riskier. Analysts look at tenant demographics, rent payment histories, employment rates, and even regional economic conditions to assess which properties and renter groups could present greater risk.
To account for this varying risk, rental-backed securities were sliced into levels, just like the mortgage-backed bonds before them. The lowest level contained the riskiest leases: those in the areas with higher vacancy rates or homes in need of costly repairs, for instance, or those rented to tenants with dubious credit histories. Owners of this lowest level of the bond would receive the bond’s highest rate of return but would also be the first to not get paid if the bond’s total rental income was insufficient to pay off all its bondholders.
A second level would also be created of slightly less risky leases. Owners of this second level of the bond would receive a lower rate of return on their investment than those who owned the first level but would only not be paid if all the owners of the first level weren’t paid. It was a safer investment.
Additional levels would be created in like fashion. Each level up would produce a lower rate of return but would be protected until all the lower level investors weren’t paid.
OK, now put yourself in the mind of an investment fund manager who decides to invest their clients’ funds in one of those lower levels, the risky levels that pay high returns. You’d look terrific reporting returns on their investment equal to the amount paid by the lower levels of the rent-backed securities, but you’re terrified that your capital providers won’t receive any return on their investment because you’re terrified that the tenants
Expected to generate income for the risky tranche that you intend to purchase—er—invest in will fall behind on their rental payments—and you have no idea how you might explain to your clients why you just tossed their cash into a money pit. So you’d like to buy some insurance on your investment.
You can forget calling up GEICO or Progressive—last I checked, they don’t exactly offer policies for investments backed by ‘promises to pay rent.’ Lucky for you, though, Wall Street has cooked up its own special insurance for situations just like this.
It’s called a “credit default swap,” and it was first used to insure loans that banks made to the corporate clients.
Imagine a colossal corporation—a behemoth with skyscrapers bearing its name—siding up to its bank. The corporation has a grand vision, a daring acquisition or an ambitious leap into an emerging market, and they need a hefty loan to make it happen.
The bankers, suits crisp and smiles fixed, nod along as the corporation lays out its plans. But behind their suits, the bankers are sweating. The numbers outlaid by the corporation don’t look good. The company’s debt is piling up, the venture is shaky at best, and the global economy is sending out distress flares. Granting this loan feels like handing a lit match to a pyromaniac sitting on am impossibly high stack of U.S. currency.
Yet turning down the titan isn’t an option. Say “no,” and you open the door for rival banks to swoop in and take an important client. It’s like refusing the Mafia a favor—you just don’t do it if you know what’s good for you.
So what’s a bank to do? Enter the credit default swap, the financial world’s black magic.
Your bank agrees to make the loan, but quickly after the funds are disbursed, in hushed shadows, it secretly buys insurance on the corporation making good on its word and paying off the loan—that’s a credit default swap. Under its terms, your bank pays a premium to the entity that sold it to you, and in exchange, the entity that sold it to you promises to make your whole if your corporate client doesn’t repay its debt.
And this is all off the books.
After being used to insure corporate bonds, credit default swaps were used to insure investments in the lower levels of subprime mortgage bonds—to disastrous effect. Now, they’re being used to insure investments in the lower levels of rent backed securities.
For those who love the thrill of the riskiest investments but hate actually losing money, I give you the credit default swap. Investors can hedge their investments on those leases that are the less likely to generate rental income by buying insurance on their investment. If the rental payments keep rolling in, they rake in the big returns; but if defaults happens, then the credit-default swap provider pays out, and the investor gets their cash anyway.
America, baby!
As you might imagine, this double-layered setup creates a powerful lure for investors of every type. The conservative investors buy up the safe tranches, happy with their modest but relatively safe returns. The middle-of-the-road investors go for the medium-risk slice, comfortable with some exposure but not too much. And the risk-hungry, degenerate speculators pile into the bottom levels, drawn by peak returns, and knowing that a safety net is available in the form credit default swap if their mania dissipates and they seek a safer return.
Rent-backed securities are ginning up revenue like the mortgage-backed securities issued during the housing boom. Large institutional investors were amassing a tremendous war chest to purchase foreclosed properties.
And then the federal government stepped in to make it even easier for large institutional investors to purchase foreclosed properties.
Government Bonds
The Federal Housing Finance Agency created the REO-to-Rental Initiative program in 2012 to allow prequalified investors to purchase residential properties owned by Fannie Mae, on the condition that, once purchased, the investor would rent out the property for a certain period of time. It was a seemingly innocuous program designed to sell off the glut of foreclosed properties owned by Fannie Mae during a truly terrible time.
But the investors that qualified for aid under the program were not your mom-and-pop landlords. They were large institutional investors, like Invitation Homes and Blackstone, the rising owners of a growing residential empire.
The government wasn’t just allowing them to buy foreclosed homes—they were practically subsidizing it. Fannie Mae wrote Invitation Homes a check for a cool billion dollars—billion with a “b,” as in “Bob”—like some proud parent sending their kid off with a hefty allowance.
By 2018, though, the Federal Housing Finance Agency decided they’d maybe been a little too generous. They shut down the REO-to-Rental program, concluding that Invitation Homes and its peers didn’t exactly need government cash to buy up more real estate. Ooops.
But it was too late. Of course. By that time Invitation Homes, Blackstone, and other large institutional investors had already successfully leveraged public and private bonds to build a new rental empire.
Just when it seemed the federal funds and might start slowing, another unlikely force stepped up to keep Wall Street’s rental empire booming: the very law that was supposed to rein it in—Dodd Frank.
Dodd-Frank
Dodd-Frank was supposed to be Wall Street’s leash, the government’s answer to a financial system that had destroyed itself. The law promised to stop banks from making the same reckless bets that triggered the last financial crisis by introducing a mountain of regulations aimed at keeping the financial titans in check. It was complex, tough, and about as suffocating as tethering your senior prom corsage to your stern-faced father. In an unexpected twist, however, a tweak to Dodd-Frank created a new tool to turbocharge Wall Street’s transformation of foreclosed properties into high-yield rental cash cows.
Remember that many of the properties that the large institutional investors purchased during this period to rent out were foreclosed properties and that foreclosed properties are often purchased “as is” because they frequently present at auction requiring substantial repair or renovation.
Many of the properties that large institutional investors purchased to rent out would need to be renovated or repaired. Fortunately for the large institutional investors that owned many of them, someone had the bright idea in 2014 to incentivize “investment in existing properties”—like recently-purchased foreclosures. Essentially, banks got a green light to hand out cheap capital to anyone promising to fix up residential properties for tenants.
Cue the floodgates.
The new rule meant banks practically begged to lend money for “residential improvements.” Between 2015 and 2016 alone, investment in residential upgrades spiked by 44%. By 2019, just four years after the change to Dodd-Frank, Wall Street was throwing more cash into revamping homes than ever before.
If you’ve been seeing more ads for “luxury” rentals with granite countertops, now you know why. Dodd-Frank’s update made high-end remodeling more accessible, and Wall Street landlords weren’t about to skimp on fancy finishes if those finishes meant that Wall Street could charge premium rents.
The government essentially became the silent investor, helping Wall Street secure low-cost loans to give their rental properties a glam up.
How could the mom-and-pop properties compete? A 2024 report by the Government Accountability Office confirms that they just couldn’t. According to the report, in the year after purchasing a property, an individual invests, on average, $6,300 in renovations. By contrast, that same GAO report cited a study showing that, in the cases that it surveyed, large institutional investors had invested—in that first year of purchasing a property—a whopping $15,000-$39,000 in renovations. Mom-and-pop operations couldn’t compete.
Boom in Property Management
Property management wasn’t always Wall Street’s game. Once upon a time, the field was populated by mom-and-pop landlords, folks managing a handful of properties, taking midnight calls about leaking sinks and clogged toilets.
Large institutional investor success in generating income from the residential rental market created buzz around the Wall Street water cooler about property management, fueling greater demand for the rent-backed securities that supported it.
Builders, pension funds, and commercial real estate investors scrambled to stake their claim in this new property management gold rush, lured by the promise of steady, profitable returns—a siren call in an era of rock-bottom interest rates.
But by the early 2010s, foreclosed properties for purchase had dried up. Large institutional investors could no longer purchase foreclosed homes in bulk. To expand, large institutional investors would have to find a way to identify and purchase undervalued properties one-by-one.
Big Tech.
Enter technological advancement. Rapid technological advancements in cloud and mobile computing, couple with nascent artificial intelligence, allowed large institutional investors to: quickly identify undervalued homes; automatically place bids on auctioned properties; improve those homes; and rent out and manage those homes for long-term gain.
Finding and Buying Homes
An industry representative interviewed by the U.S. Government Accountability Office cited the “more limited opportunities to purchase foreclosed homes” as the reason why the overwhelming purchases of single family homes by institutional investors are now made through local multiple listing services.
But to make those purchases, they first have to identify them.
Imagine a room on the 36th floor of a glass-wrapped high-rise, a citadel overlooking the city below. Inside, a team of investment analysts is hunched over monitors, their screens flickering with maps, numbers, and blinking alerts. This isn’t some Wall Street trading floor, but it’s close enough. They aren’t searching for the next big stock—they’re hunting for homes. Not just any homes, but the undervalued, overlooked, and underpriced gems hidden in plain sight.
Proprietary software developed in 2012 assists their search. The software scans thousands of neighborhoods, analyzing every conceivable variable: job growth, income levels, housing supply, even the local zoning regulations. It’s looking for areas with comparatively high job and median income growth, but an already limited housing supply and strict zoning regulations that make building additional housing an absolute nightmare. It then highlights “strike zones”—neighborhoods on a map where the data suggest homes can be bought for cheap and rented out at premium. The analysts call it “high-yield mining.”
Improving Homes
And as for the actual properties within these zones? That’s the next layer of tech-fueled detective work. From their air-conditioned towers, investment firms deploy inspectors who scour the chosen neighborhoods on foot, snapping photos, jotting down notes, and uploading data to a central server. The inspectors’ findings are uploaded instantly, where they get fed into algorithms back at headquarters. Within hours, analysts are looking at “rehab maps” detailing the estimated cost, timeline, and ROI for every cracked window and scuffed floorboard.
It’s not just about picking the right houses; it’s about picking them by the dozen, by the hundred, creating an efficient operation that takes full advantage of economies of scale. Fixing up these homes is practically an assembly line, where economies of scale let investors deploy the same contractors, the same materials, and even the same paint colors across an entire neighborhood, or community.
In the end, what you get isn’t just a single rental unit but an entire rental system. And as they place the last pin on their maps, the analysts sit back and smile. They’ve turned property selection into something closer to bond trading than house hunting.
Managing Homes
The vast majority of homes purchased by large institutional investors are in our country’s 20 largest metropolitan statistical areas. Concentrating housing portfolios in particular geographic regions allows large institutional investors to more efficiently manage their properties.
Managing single-family homes is particularly labor intensive. By nature, they are more geographically disparate than their multi-family cousins, and present the greatest challenges for efficient management.
Owning of single family rental homes across the country would require the owners to hire property managers for each property, or nearly every property, and so large institutional investors in single-family homes has, until very recently, been largely concentrated to our country’s 20 largest metropolitan statistical areas.
But technology may soon allow the institutional investor to expand deeper into the country.
Speaking to CNBC’s Squawk Box in early 2012 Warren Buffet commented, “If I had a way of buying a couple hundred thousand single family homes, and I had a way of managing them (the management is an enormous, it’s really a problem, because they’re like one-by-one, they’re not apartment houses—so, but I would load up on them.” Blackstone and Invitation Homes must have been listening. About this time, they heavily deployed technological devices to manage many multiples of single-family homes and other housing units.
Invitation Homes, for instance, now offers 3-D viewing of its properties on its website. There’s less of a need now for a property manager to be actually physically present on a property to show it to a potential renter because some would be tenants are satisfied with the 3-D viewing.
When a would-be tenant is not satisfied with touring a property virtually, new technology allows them to access the property without a property manager’s assistance. The would-be-tenant can schedule a viewing of the property on the landlord’s website, and the company can grant access to the property by transmitting a code to the would-be-tenant at the time of the showing that unlocks a box containing a key to the property.
Companies can also more efficiently manage a single-family home by storing and analyzing the increasingly large amounts of data that they receive from their tenants and prospective tenants. Big data can show, for instance, how long it takes for tenants with similar characteristics to move out of similar units. Landlords can use this data to reduce management friction points, like tenants bumping into each other.
Combined with new technology, like artificial intelligence, big data can help large institutional investors more intelligently set rents and fees. New rent optimization technology, like Invitation Homes’s proprietary “Acquisition IQ” helps set rents and fees at levels that will yield the best returns for the investor.
Some small landlords try gain the same advantage by pooling their pricing, offering, and other competitive-sensitive and nonpublic data on certain shared rent-optimization platforms, like the popular RealPage revenue management platform, but because these smaller landlords are competitors, their pooling of competitive, nonpublic data to inform their pricing decisions presents real antitrust concerns.
Our next podcast will look into the potential antitrust liability that small landlords might encounter by using RealPage or similar revenue management platforms. Suffice it to say for now, though, the U.S. Department of Justice and eight states have recently sued RealPage in federal court for, as they allege, facilitating anticompetitive information exchange[s] between landlords and use this shared information to algorithmically coordinate rental prices.
What’s important to know for now, though, is that the mom-and-pop landlords, who use RealPage or similar revenue management software to help them offer lease terms to potential tenants, might be at risk; but the large institutional landlords, that rely exclusively on their own big data to do this very same thing, they’re safe. Again, the large institutional investor gains the benefit without paying the price.
Consequences
Fewer Homes to Sell
In Hawaiʻi, a quiet transformation is underway. A family is setting their sights on a home—somewhere in Waipahu or Kapolei, close to where they grew up. They’ve saved and planned, but when they enter the market, they’re quickly edged out, not by another family, but by a large, Wall-Street-backed institutional investor with vast resources and an entirely different agenda.
John Coates, a professor of law and economics at Harvard Law School, describes surging private equity investments in markets across the country, resulting in larger and larger portions of the U.S. economy being owned and controlled by Wall Street. In an interview he gave to Harvard Business School in 2023, he noted that, “Private equity controls somewhere between 15 and 20 percent of the entire U.S. economy[.]”Let me repeat that: a few, very small firms, very small private equity firms, control between 15 and 20 percent of the U.S. economy. And they’re no longer limited to flipping individual companies. “One of the underappreciated aspects of private equity over the last 20 years has been that it’s spread from the conventional kind of company private equity bought atypically was a manufacturer doing something relatively straightforward and the goal was to streamline operations, cut costs. Over the past 20 years, private equity has moved increasingly into new sectors, umm, many of them in the service businesses . . . .”
Private equity is buying homes, but not buying housing—they’re buying revenue streams. Once they buy a home and convert it to a rent-producing property, they package the right to receive future rents from the property into a bond, which they sell to Wall Street investors to generate capital and buy more homes to convert to rental units.
Don’t for a moment think that Hawaiʻi is immune. In recent years, large institutional investors, like The Blackstone Group, have made significant inroads into Hawaiʻi's residential real estate market. These private equity firms have acquired prominent properties, including Kapolei Lofts and Kapilina Beach Homes, accumulating a portfolio of thousands of rental units.
Each time a large institutional investor purchases a home to convert to a rental unit, one less home is available on the market to purchase—unless, of course, new home construction outpaces investor acquisition.
But bad news on that front. Beginning in 2006, the construction of new homes declined sharply. Freddie Mae estimated that, in 2020, the U.S. had 3.8 million fewer homes than it needed to house its population. So, as large institutional investors purchase homes, the inventory of available homes to purchase declines.
With fewer homes available to purchase, people are driven to the rental market, driving rents higher. Rents are also driven higher by improvements that large institutional landlords made to their rental properties, which demand rent premiums, and by the rent-backed bonds that the large institutional investors sold to leverage their purchase of their rental properties, but which must be paid back with interest.
Because rents are higher, fewer people will be able to save for a down payment to secure a mortgage. It’s a vicious cycle that reduces the amount of properties available for sale and the ability of people to purchase the properties that remain.
Wall Street’s Ethics and Terms
When Wall Street moved into the rental market, it didn’t just bring money—it brought its playbook. And in that playbook, standardization is king.
The idea is simple: create efficiencies, minimize costs, and maximize returns. But what does that mean for the millions of renters now living in homes owned by these large institutional investors? It means that what used to be a fragmented industry, made up of local landlords with their own quirks and rules, is now increasingly shaped by a handful of corporate giants who can set the terms of the game.
The shift starts with property management practices. Mom-and-pop landlords might make repairs themselves or hire local contractors they trust, but for institutional investors, everything is standardized, down to the color of the paint on the walls. Repairs are handled by national vendors. Tenant interactions are routed through call centers, not face-to-face conversations. Late fees, rent increases, and lease terms are generated by algorithms, optimized to squeeze out maximum profit with minimum friction. In a market now dominated by a few big players, these practices don’t just affect their properties—they start setting the bar for everyone else.
But the influence doesn’t stop there. When one of these institutional players decides on a “best practice”—say, charging for maintenance requests or adding service fees for online payments—it doesn’t take long for competitors to follow suit. Small landlords, scrambling to keep up, start mirroring these standards to remain competitive. Over time, what was once an exception becomes the new rule. And with Wall Street’s deep pockets and ability to lobby, these standards aren’t just business choices; they have the power to influence local regulations and reshape the way that property is rented, purchased, and sold.
The government has a difficult time regulating or governing the conduct of certain service-based industries that are particularly difficult to evaluate. Think of medicine, for instance, where we rely on doctors to be socialized by medical schools to get a patient’s informed consent and to “do not harm” to do their patients, even if that doctor’s bottom line. By and large, those norms aren’t written down, we rely on the medical schools to teach those principles to our doctors and the American Medical Association, a nonprofit association, to police them.
Now imagine your doctor reporting to Blackstone. Would the medical professional change if Wall Street set the rules?
For now, at least in Hawaiʻi, the practices for buying, selling, managing, and leasing residential property is heavily influenced by professional and ethical standards set by the Hawaiʻi Association of REALTORS® and the National Association of Residential Property Managers. But if large institutional investors are allowed to occupy a larger and larger space within the housing market—and I see little evidence that Wall Street is bad at earning money or dominating a market—how will those rules laid down by nonprofit organizations for conducting real estate transactions be changed by mainline—by mainland—Wall Street investors?
When will we hit the tipping point? How much of the real estate market must large institutional investors owner before the professional and ethical standards laid down by nonprofit organizations are determined by nonprofit corporations by profit-driven private equity firms?
Won’t ever happen?
CoreLogic reports that each year about 300,000 homes switch from owner occupied to investment owned. As of 2021, large institutional investors and nonindividual investors owned 27% of all rental housing, up 9% since 2001. More recently, in June 2024, Core Logic reports that large institutional investors purchased nearly one-quarter of all single-family homes.
We already know that large institutional investors own hundreds of residential units in Hawaiʻi. So when’s the tipping point—when will Wall Street’s influence be so large that their contract terms and profit incentives drive what’s acceptable practice in Hawaiʻi’s real estate market?
Outro
And that’s our episode. We’re off next month for the holidays. Join us after the holidays, on January 15th, for our next episode on revenue management software and algorithmic-based price fixing.
A hui hou!
