Housing & Mortgage
Wall Street vs. Individual Homebuyers: Where It’s Most Competitive
The $36 trillion U.S. housing market is just another asset class for fund managers to chase
You don’t need a Ph.D. in housing economics to understand that a low supply of homes for sale is behind the astounding 20% rise in home prices over the past 12 months.
But in some markets it’s not just that there are a lot of households bidding against each other. In some cities, renters and potential trader-uppers are increasingly competing against investors.
Housing data firm CoreLogic reports that investors — ranging from Mom-and-Pops that own up to 10 rental properties, to the biggest of Wall Street players hoovering up thousands of homes — accounted for one in four purchases in the second quarter of 2021. At the start of the pandemic, investors accounted for fewer than one in seven home purchases.
Where you’re most likely to be bidding against investors
In Memphis and Atlanta, nearly one in three home purchases in the second quarter was made by an investor. Not only do investors mean more competition, they typically have deeper pockets. Investors often can shut down a bidding war by coming to the table with an all-cash offer.
In Memphis, the median home sale price is below $100,000. That may seem downright affordable against the backdrop of the recent national average sale price of $352,000. But for locals, the market seems to be running away from them. The average price per square foot in Memphis has increased 24% to nearly $90 in the past 12 months. For the record, wages in Memphis haven’t kept up. In the 12 months to April, average private-sector wages rose 5.5%.
In Atlanta, the median home price for sold homes is under $240,000 and the median monthly rent is $1,037. That’s a mismatch for cash-strapped first-time homebuyers. To land at a monthly mortgage payment near that median rent would require landing a house for less than $160,000 (assuming a 10% down payment).
According to CoreLogic, the top 10 places where investors have an overly large footprint also include the Texas markets of Beaumont, Brownsville, El Paso, Lubbock and McAllen, as well as Phoenix and Salt Lake City.
Homebuyers in the Hartford, Connecticut, area are the least likely to have to go up against investors, according to CoreLogic. Still, the average price per square foot in the Hartford market is up 16% over the past 12 months.
When might investor demand slow down?
Low bond yields are a big reason investors are descending on the single-family home market. You’re not the only one frustrated by the measly yield on the core bond fund in your 401(k) or IRA, or the infinitesimally small yield on most bank accounts.
Investors looking to earn a fairly steady income stream (be it your next-door neighbor who owns two rental properties, or Wall St. biggies, including BlackRock and Blackstone) have a ripe target in the housing market. None of the hottest investor markets in CoreLogic’s analysis are in high-priced areas. Instead, investors seem most eager to scoop up more moderately priced homes and then rent them out. You want to live in a home. Investors want to create a quasi-bond out of the same home, that at some point can also be unloaded at a profit.
While small investors have always been part of the residential home market, Wall Street first became a factor in the wake of the financial crisis, scooping up foreclosed homes at low prices (and without the significant cost of real estate brokerage fees in many cases because the homes were held by their lenders). That was a bet that paid off in both rising values for their underlying portfolio on top of rental income. What’s happening now is just a new chapter in investor demand.
CoreLogic notes it is not clear if investors are causing the run-up in prices, or are reacting to the rise in values by stepping up their investment.
Are investors really the reason housing is so expensive?
Zillow’s exit from the home-flipping business shows how hard it is for an institution to buy enough houses to scale a large business. But Wall Street and Corporate America are increasingly focused on housing because it’s a huge asset class — $36 trillion and rising in the U.S. — and fund managers need productive places to put an abundance of capital.
Big Money isn’t driving price increases nearly as much as a simple lack of housing supply is, especially on the West Coast and in other metro areas where new homebuilding in recent decades has badly lagged population and job growth. The current pace of new housing starts is lower than the pace in 1989, when the number of households in the U.S. was nearly 40% lower than it is today.
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