Private equity is playing a larger role in the housing market. Why?
Because rapid increases in interest rates, that have increased faster than the residential real estate market has time to compensate for them with lower inflation adjusted housing prices, has made buying homes unaffordable for home buyers who rely on significant mortgage debt to buy a home (especially, but not only, first time home buyers). This has created increased demand for rental housing which private equity is filling by buying single family homes (it has been a major player in the apartment market for a long time).
But, local government limitations on new housing are still more important to tenants and prospective home owners. Private equity isn't moral, but neither are smaller landlords. The main difference is that private equity concentrates the profits more than ownership by smaller landlords (and is less likely to spend its profits locally). The proportion of landlord owners housing and rental prices are predominantly governed by market forces that affect both equally and are heavily influenced by local zoning and building codes.
How did we get in this mess?
For a long time interest rates were exceedingly low in order to stimulate the economy. Housing prices soared to adapt, but low interest rates made those higher prices affordable.
But, for a variety of reasons, nominal housing prices are sticky.
In the short run, listing prices, home value appraisals, and conventional wisdom about fair market value selling prices are based on historical sales prices which are necessarily retrospective and often include comparable sales that pre-date the rise in interest rates, but mortgage rates reduce buyer's ability to pay almost instantly.
In the long run, there are two factors.
One is that sellers can afford to sell heavily leveraged homes for less than their mortgages and also need enough left over after paying off their mortgage to have a down payment for their next home. And, mortgages are in nominal dollars, not a percentage of the home price. Leverage makes a small decrease in home values disproportionately erode the seller's equity, and most younger home owners have lots of mortgage debt.
Secondly, sellers are human and psychologically anchor on the price that they bought their home for. Selling at a loss feels like losing, and nobody wants to voluntarily be a loser.
If interest rates had increased more gradually, the fall in affordability caused by higher interest rates would have been more modest giving the housing market time to adjust, and allowing nominal housing prices to hold steady, while allowing inflation adjusted housing prices to fall.
But the economic models that decision makers like the Fed use to set interest rate policies give little or no weight to how fast interest rates change when they estimate the effect that this will have on the economy, because economic models are heavily influenced by equilibrium models even though they acknowledge that the economy is dynamic to a limited, but insufficient, extent.
In short, the main reason that private equity is playing a bigger role in the housing market is that the Fed has flawed economic models and isn't sensitive to the needs of younger middle class people in the housing market. Interest rates were too low in an objective sense. But increasing them so quickly did as much harm as it did good.
If private equity hadn't done it, smaller individual landlords would have, albeit, somewhat less rapidly and in smaller chunks per neighborhood spread out over many landlords in more neighborhoods. Private equity isn't new. It's been around for several decades as an important economic force. It's been around in the apartment market for almost as long. But, the reason we've seen the shift from smaller landlords to private equity is that the Fed created a huge imbalance in the single family home market, and private equity was able to respond more quickly to this sudden change (that created a sudden demand for rental housing which occupants couldn't afford to buy due to higher interest rates) than smaller landlords were.