I saw something the other day that I felt compelled to talk about. Somebody posted that they invest in some states and not in others because the population growth trends are much better in those states. In short, it is a rather simplistic view of the world and investing that tries to reduce the thought process behind geographic selection to one variable.
I’m sure this person has more variables behind their investment rationale, but it is common enough to think that it deserves to be challenged.
First, financial markets are incredibly complicated. Hundreds of forces affect them and drive pricing. That’s why I disdain the financial press so much—they always try to distill the day’s stock market fluctuations down to “a reason” because that makes for compelling stories.
But it just doesn’t jive with reality.
Unfortunately - since we are a species that craves order and reason - (more on this later) - the world and markets don’t want to give us that.
Now real estate on the surface seems less complicated by external, shadowy forces that we don’t understand. It’s easy to grasp that the stock market - with billions of participants per day in its constant fluctuations - might be subject to unknowable forces. But real estate? That little 8-unit you want to buy down the road?
What if I told you that forces behind the scenes are constantly working (one way or another) to dictate the ultimate pricing you’ll pay for it?
Most investors like things to be simple.
They want a single, clean-cut reason why prices go up, why markets boom, why rents increase. It makes investing feel predictable, logical, and—most importantly—controllable.
That’s why "population growth = strong real estate market" has become one of the most popular narratives. It’s easy to grasp. If more people move to an area, housing demand increases, rents rise, values rise, and investors win.
But here’s the problem—it’s not actually how real estate markets work.
If population growth alone dictated real estate values:
If you reduce real estate investing to population growth alone, you ignore the hidden, more powerful forces that shape markets and determine pricing.
I don’t want to say demographics and population don’t matter. They do. I am here to dispel simplistic narratives.
So, while population growth matters, it’s not the dominant force. In fact, some of the biggest pricing shifts in real estate happen with little correlation to population trends at all.
There are four forces—almost invisible to the average investor—that play a much bigger role:
Institutional Ownership & Wall Street’s Role in Housing
Government Policy & Tax Incentives That Shape Supply & Demand
Global Capital Flows & Foreign Investment
Interest Rates & the Debt-Driven Pricing Model
Each of these forces can override population growth trends and make or break an investment. And if you don’t understand them, you’re playing the real estate game blind.
I will add a bonus 5th force, so read to the end!
Institutional home ownership has been a hot-button issue - so it’s not like this hasn’t been discussed. But I doubt it’s been discussed how we will hammer the issue.
First of all, look at this chart above. There “seems” to be a concentration of institutional ownership in the Southeast—Florida, Georgia, Tennessee, etc. Arizona, too, by the way, has concentrated institutional ownership of single-family homes.
Why?
These areas tend to have a positive “fundamentals” story, and institutions will buy into that. I have heard and been involved in both sides of this discussion. The argument is that Wall Street owns a small share of the total housing stock, so it’s irrelevant. I actually aligned with that for a while, but in writing this report, I have had a “road to Damascus” conversion on the issue.
There’s a critical distinction here (let’s just take Atlanta as our target market). Wall Street owns 4.3% of the housing stock - sure - but they own 25% (!!!) of the SFH rental housing stock. (citation at bottom - #1)
In Phoenix, Arizona - the number is 15%! (citation at bottom - #2)
Also, owning 4.3% of the available housing supply in a market has a disproportionate effect. Why? Because not every home in that market is on the market for sale! In fact, measured by the Home Turnover Report,% of available homes turnover is only about 2.5% of available homes turnover in a given year (nationwide).
"This means institutions have an outsized impact on pricing. They can:
Outbid individual buyers with all-cash offers.
Accept lower yields because they have a longer investment horizon.
Move markets through sheer volume of capital.
They can also move pricing in markets (one way or the other) because when moving in bulk to acquire and when the total share of the housing stock is small - it can and does have a real impact. Imagine trying to buy your rental property, and you have to battle Blackstone for it. Good luck.
But also - imagine what will happen when this force reverses course. Because it will. In fact, Wall Street is now selling the homes it acquired during the COVID period. And just like they drove prices up on the way in, they'll impact pricing on the way out. The only question is—how much?
As a (primarily) blue-state investor, I easily see and understand the government's implications for real estate pricing. However, not everybody is aware of or understands just how much government policy influences the housing market.
Here’s the thing. Unlike other real estate asset types, housing is directly in the public interest. I mean it’s a socially and politically sensitive asset class to invest in. Business people can easily walk away or just pay more for office space. A restauranteur may dislike her rent rising, but she’s not going to start a political movement because of it.
Fortunately, and unfortunately, housing is subject to much bigger forces that drive policy. Nowhere is this more evident than on the West Coast (and Northeast), but it exists everywhere. Even in red states it happens. In researching Force 1, above, I came across articles in Arizona decrying the increased institutional ownership of homes. They were pushing for “homes only for Arizonans”. So don’t be fooled into thinking populist forces are not at work everywhere.
Thus - understanding policy is critically important.
Here’s a short hit list of the ways and forces behind this Force 2.
Housing is somewhat dictated by free market forces, but as I already pointed out, it sort of masquerades as a free market. It’s not entirely a free market. Understand that first.
Zoning Laws & Supply Constraints
Tax policy - the hidden hand directing capital flows
Mortgage & Lending Policy
Rent Control & Housing Market Distortions
All of these things distort housing, and the free flow of capital, which has all sorts of downstream ramifications. The government makes building really difficult; it decreases supply, which might affect pricing (and rents). The government makes building really easy. That may spur development, which may spur economic activity, but it also dumps a lot of supply on the market. But supply-constrained markets have higher rents - on average - when units do turn. (citation at bottom - #3)
Love this quote from The Times article footnoted above:
In short, critics of rent controls can draw upon plenty of real-world examples to justify their stance. In Argentina, president Javier Milei’s repeal of rent controls at the end of last year has resulted in a 195 per cent increase in rental housing availability in Buenos Aires, alongside a drop in rental prices.
Note - removing rent control dropped rental prices! Amazing. Who knew - policy has a huge slew of unintended consequences. Understand them.
As a West Coast investor, this is (again) a critical and important force behind pricing. I’ve often made the argument that West Coast markets benefit tremendously from a huge inflow of capital from China, India, and other Middle Eastern markets into the security of US property.
Said differently. Most U.S. investors focus purely on local factors—supply, demand, job growth. However, they often ignore the larger global capital forces shaping their markets. These investors aren’t just competing with local buyers. In many cities, they’re competing with international capital looking for a safe haven.
First, the United States is a “safe deposit box” for the world’s wealth. It provides an instant hedge against the insecurity of many wealthy individuals in their home countries. You should have heard some of the calls I field from various wealthy Latin American investors (where Marxism is always on the prowl) about the desire to relocate capital to the United States.
Here’s a real-world example. In 2017, Chinese investment in the United States peaked at $31 billion. China then cracked down hard on capital outflows, and US Luxury Real Estate saw an almost immediate slowdown. (citation at bottom - #4)
Texas and Florida have also received capital inflows from Latin American investors, who often have relationships and networks in those regions. This is also why, historically, a lot of Chinese and Indian money flowed into Seattle, San Francisco, and Los Angeles—existing affinities with those cities, networks, and understanding of those markets.
This force also happens to intersect with Force 2. Why? Vancouver, BC saw a huge price increase driven by foreign buyers. The Canadian government stepped in and imposed a 20% foreign buyer tax, causing a huge pullback in sales.
If foreign capital is flowing into your market, it acts as a built-in cushion against price declines—almost like a put option in finance, where downside risk is hedged by external demand. It has to be considered as a critically important part of the ecosystem.
If there is one single force that dictates real estate pricing above all else, it’s not population growth. It’s the cost of money. This Force is probably less of a surprise - real estate is, of course, driven a lot by interest rates.
After all, debt is the lifeblood of real estate. The vast majority of buyers, whether individual homeowners or institutional investors, use leverage to buy property. And when the cost of debt fluctuates, it directly impacts asset values, transaction volume, and investment behavior.
If you don’t understand how interest rates, lending policies, and capital markets affect real estate pricing, you don’t really understand real estate.
Let’s keep this simple.
Say you’re looking at a $500,000 house. At 3% interest rates, your mortgage payment (excluding taxes and insurance) is around $2,100/month.
Now take that same house at 7% interest rates—suddenly, that monthly payment jumps to $3,300/month.
That’s a 57% increase in the cost of ownership without the home’s price changing by a single dollar.
This is why interest rates impact home values more than anything else.
It’s not just about how many people want a house—it’s about how much house they can afford at a given interest rate.
People act like 2020-2021 home prices skyrocketed because of population growth. That’s nonsense. The real reason was that the Fed cut rates to near zero, mortgage lenders flooded the market with cheap credit, and buyers took advantage of the lowest financing costs in history.
When rates went from 3% to 7% in 2022-2023, demand cratered overnight.
It wasn’t because of a shift in population. It wasn’t because there were fewer homes available. It was because buyers suddenly couldn’t afford the same home at higher borrowing costs.
Real estate is not just about population growth, supply and demand, or job creation. It is, above all factors, a function of credit and capital markets.
When debt is cheap, values inflate.
When debt is expensive, markets slow or correct.
If you’re ignoring the cost of capital, you’re ignoring the most important real estate force of all.
If you really want to understand any market, understanding the zeitgeist of the moment is critical. Markets move for many reasons. Nothing is simple or binary. In fact, markets are incredibly complex. The premise of this piece is simply that assessing a market because of “population growth good” is a flawed premise, driven by a simplistic narrative that doesn’t hold up to reality.
The hardest force to grasp at the moment is the emotions that are gripping the economy. It is incredibly difficult to remove yourself from it. We are a social species. We are designed to move in sync. In Sapiens, the author Yuval Noah Harari makes the argument that homo-sapiens may have ultimately destroyed Neanderthal because of our collective capability to coalesce around a mythos. A faith. A creed. A belief.
(I'm enjoying HubSpot AI image creation if you can't tell. I believe the above fairly accurately depicts a coalition of early real estate investors discussing the incredible allure of the next valley, which is rumored to have an endless abundance of fruit and a tribe of Amazon women. Nobody, of course, disagrees. And everybody works out.)
If you think the prevailing moment and the psychology of it is any less a factor for investors today, you’re fooling yourself. Our greatest strength - the thing that, in theory, allowed us to outcompete and destroy other “versions” of humans in the distant, distant past is also our undoing. We are uniquely adapted to seize onto the common mood and prevailing ideas and ride with them.
I believe that much of the devastation in the Sunbelt right now is directly tied to the prevailing mood from 2020-2022. Investors convinced themselves that 'population growth = guaranteed success' and overlooked everything else. It wasn’t just the Sunbelt—this narrative took hold everywhere. But in high-growth, easy-building states, the thesis collapsed fastest.
Understand the moment. Understand where you are in the cycle. It is CRITICAL.
CITATIONS & SOURCES