> I'm not even sure renting homes in general is a good idea.

Let's review the situation here. 1) The large majority of the land in the area is zoned exclusively for single-family homes. 2) Some people don't have the money to buy, e.g. no down payment or bad credit.

Where are they supposed to live?

You can't deduct depreciation on an owner-occupied house to begin with. The premise is that you're trying to distinguish between landlords and people who have a second home for themselves. But they can just rent it to a friend who in turn lets them use it.

If they're buying multiple homes to rent out at market rates to the general public then they're just an ordinary landlord -- the thing that wouldn't be paying a tax on "second homes" by design.