The Value Gap is a MarketWatch interview series with business leaders, academics, policymakers and activists on reducing racial and social inequalities.
People who want to buy homes increasingly have to compete with corporate owners who, armed with powerful tech tools, are pricing them out of markets and then renting back to them, according to a new report.
“Proptech,” short for property tech, is helping private-equity firms and venture capitalists exacerbate housing inequality, says a new report by TechEquity Collaborative, a member-based organization in the Bay Area whose mission is to inspire tech employees and companies to help address inequality.
Proptech includes property-management software, data trackers and algorithms that maximize profitability used by companies known as iBuyers, which allow for the buying and selling of homes online. Institutional investors are in turn using iBuyers like Redfin, Opendoor or Offerpad to scoop up single-family homes, outmaneuvering individual buyers because they’re privy to proprietary data and, in some cases, they can bid in cash, the report said.
The effects of all of this are most stark for communities of color, according to the report, which cites studies showing that corporate landlords are buying and renting out homes “concentrated in ZIP codes that average 40.2% Black, three times the national Black population of 13.4%.”
A Redfin spokeswoman said the company lists all its properties on the open market. “We want to give every buyer a fair shot to make an offer on the homes that we own,” she said. “Redfin has not made inside deals to sell homes directly to institutional investors and large single-family rental companies.”
An Opendoor spokeswoman said the “vast majority” of the homes it has bought were sold to individual buyers. “We are reinventing the traditional real estate transaction to be simple and certain for buyers and sellers across the country,” she said.
Offerpad didn’t immediately respond to a MarketWatch request for comment.
TechEquity Collaborative chief executive Catherine Bracy spoke with MarketWatch about the report, titled “Sold to the Highest Bidder: How Tech is Cashing In on the American Dream,” which shines a light on the growing problem and calls for more awareness and action.
“It’s depressing to me that decades after the civil-rights era, the racial wealth gap is worse,” Bracy said.
The interview has been edited for length and clarity.
Catherine Bracy is the CEO and co-founder of TechEquity Collaborative, a Bay Area-based nonprofit that works with the tech sector to help address inequality.
MarketWatch: How would you explain the problem in a sentence or two?
Bracy: The most fundamental element of the American dream, which is homeownership — with the white picket fence — is being pushed further and further out of reach for everybody. It’s being driven by economic forces coming from both Wall Street and Silicon Valley. Everybody has an interest in figuring out how to solve that problem.
MarketWatch: What is the public’s level of awareness of this issue?
Bracy: People have a high-level sense that something is really wrong here. Everyday people know that their housing costs are out of control. Rents are going up. Maybe three or four years ago, it was possible, but for people who want to buy a house there’s no longer an opportunity.
People on the ground know it’s happening. What’s been baffling to me is that regulators and the media have been slower to take a look at what’s going on here.
In the last couple of weeks, conversation about inflation has started to forefront housing more than it has. But mostly it has been about groceries and gas, without the attention that the cost of buying a house has been out of reach, when that’s a bigger driver of household budgets than gas or groceries.
I’m happy to see that starting to change, though [they may be] too late to the game.
MarketWatch: Will you talk a bit more about the tech piece of this? How is tech exacerbating the problem?
Bracy: The emerging proptech sector includes startups going up around residential housing, and also commercial real estate. This is a continuation of a much longer historical thread that even predates the recession. A lot of it is born out of the recession.
Now VC and entrepreneurs are seeing business opportunities based on what private equity has created. Potential homeowners are desperate; renters are behind the eight ball.
Venture capital is seeing opportunities to capitalize on that. We see business models taking advantage of the desperation around housing. People creating tools that help corporate landlords optimize their ability to buy property. It culminates in tech and VC seeing an opportunity.
An example on the homeownership side that we’re concerned about is rent-to-own models. Of course, rent-to-own has been around a long time. But innovative companies are putting a new sheen on that and targeting people who want to be homeowners. They’re new leasing models that promise to convert into homeownership, but are really predatory.
One of the most telling anecdotes in the report is a quote from a real-estate investor from 10 to 15 years ago, saying he didn’t see it as feasible to manage thousands of single-family properties at a time. [“How can you operate and create scale in that situation … I don’t know how anybody can monitor thousands of houses.”]
Now tech comes to the fore, creates the tools to automate management across thousands of properties. Now this guy is bullish on investing in single-family homes as rental properties. The technology has enabled private-equity investors to take over a larger share of single-family homes.
It’s not just that interest rates were low, or that HUD [the U.S. Department of Housing and Urban Development] created the programs. Tech provided the tools.
“‘Both regulators and companies themselves need to be looking at what they need to do. There could be potential harms they can’t anticipate or name today.’”
MarketWatch: How does all this affect communities of color?
Bracy: Private equity has targeted communities of color. Maybe not on purpose, but the ones with the most upside/potential for them are those communities that tend to be disproportionately Black and brown. They are putting homeownership further out of reach than 40 to 50 years ago. That’s really sobering.
We just had a panel looking at this issue in Atlanta. The Atlanta Regional Commission showed a slide that showed a one-to-one overlay between corporate ownership and individual ownership in the area.
This is harming Black families. It’s really scary to think about how we close the racial wealth gap without solving this problem of homeownership and role of corporate actors in exacerbating the pain.
MarketWatch: How did the Great Recession make way for all of this?
Bracy: There were programs coming out of HUD at the time. They were well-meaning, well-intentioned. The government wanted to get somebody to purchase these foreclosed properties and get someone in there so neighborhoods didn’t fall into blight. So government turned to private equity and created programs.
That was really the catalyst for private equity to enter this market. Obviously since then, other things have happened that made that a more enticing market for them.
It’s not clear to me that they would’ve turned to single-family ownership if the government didn’t create this program coming out of the recession. I don’t know that it would’ve been better for the government not to do this, though. It’s important to understand the historical context.
MarketWatch: It sounds like the government and tech have that in common: unintended consequences.
Bracy: That’s a really important point. What we have coming out of the Great Recession is the benefit of learning lessons. We know that tech, left to its own devices, doesn’t usually just benefit society if we aren’t vigilant about it. We have to be conscious about potential harms.
Both regulators and companies themselves need to be looking at what they need to do. There could be potential harms they can’t anticipate or name today. I’m almost certain that in 10 years we’ll be looking back and saying all this was avoidable.
MarketWatch: What are possible solutions? Who’s responsible? And is anyone working on solutions right now?
Bracy: On the corporate-ownership side, we really need to put some constraints on what’s possible there. I don’t know what the best financial lever is to make these single-family homes less attractive as an asset class.
How do you balance it all? How can individual families compete? Maybe helping them with down-payment assistance. Another part might be constraining the corporate and private-equity investors.
The racial wealth gap piece is a subcategory of this: How are we thinking about policies that make up for historical disparities? How do we pump wealth into Black communities?
The second piece, around tech, is about transparency and accountability. There’s a set of literature about how we regulate algorithms that can be applicable to the housing space.
If you’re a RTO company, is the data about how many people are converting from lease to ownership there? Are you tracking that, and how does that break down along racial lines?
They have to be conscious about what they’re doing, track it, make it public. Shining a light on it could create a more self-regulatory effect than we’ve seen so far.
Have these conversations internally. Create a consciousness. You’d be shocked at how many people who work at these proptech companies don’t know what redlining is. Maybe employees at those companies should speak up and say, “We should test this first.”
There’s not enough people sounding the alarm. The truth is we need a lot more people paying attention to this.
MarketWatch: The report mentions Atlanta as particularly affected by this issue. What other places around the nation are feeling the effects?
Bracy: It’s happening in the Bay Area, Los Angeles, New York — the coastal cities.
The thing we had going for us, though, in those places was a political environment that was open to creating solutions for people who would be most impacted. In California, there are housing bills that are trying to address these issues.
But other cities are in places where the political environment is hostile to renters in particular, like Phoenix and Austin. I worry about what that means for homelessness and safety in general.
In some places tech companies are starting to grow, it could be an issue. Some employees are leaving the Bay Area and going to places where they won’t protect people who will be driven out of their homes by the tech spike.
I don’t know how people think homelessness happens, but it’s going to start to look a lot worse.