Amid meteoric increases in home prices, President Joe Biden has rolled out several proposals that aim to make home buying easier, especially for first-time and first-generation homebuyers who have no existing home equity of their own or family members to fall back on.
But keeping homes out of the hands of Wall Street investors could be a heavy lift.
The White House has taken note of the fact that institutional investors are crowding out families in certain markets, saying in a statement last month, “Large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes.”
Nearly one in four single-family homes across the country was bought by an investor.
To give would-be owner-occupants a leg up in the competition, the Department of Housing and Urban Development said last month it would give families and nonprofit organizations a longer window of time to bid on foreclosed FHA-insured or HUD-owned properties that come up for sale before offering the properties to investors, and would work on “expanding and creating exclusivity periods” during which investors would be unable to put in offers for these homes.
Since the Great Recession, when investors scooped up foreclosed homes by the thousands, their participation in the housing market has varied slightly from year to year but tended to remain in a range of between roughly 15 percent and 17 percent. Beginning in 2021, though, economists have observed a remarkable increase. The investor share of home purchases hovered around 19 percent for the first three months of the year, then started climbing in earnest. As of June, the most recent month for which data is available, real estate data firm CoreLogic found that 24.3 percent — nearly one in four — purchases of single-family homes across the country were made by investors.
Frank Nothaft, chief economist at CoreLogic, said there are a few factors propelling this increase: Even as mortgage rates are creeping up from historic lows, the capital debt market remains awash in easy money. “Large institutional investors just tap the capital markets directly,” he said. The sunsetting of eviction moratoriums in many jurisdictions has emboldened investors as well, he added.
Laurie Goodman, vice president for housing finance policy and the founder of the Housing Finance Policy Center at the Urban Institute, said large investors’ impact varies depending on the market. “Their impact is outsized in some neighborhoods,” she added.
The main problem, she said, is a dearth of supply — a condition that predates the pandemic by years. According to the National Association of Realtors, under-building over the past two decades has created a housing supply shortage of between 5.5 million and 6.8 million homes.
The challenge isn’t just how many homes investors are buying today, but what types of homes. Wall Street is effectively competing for the same inventory as most first-time homebuyers: Starter homes that are being sold at a modest discount compared with surrounding properties, usually because they need a certain amount of renovation or repair.
“They tend to buy a certain kind of home,” Goodman said, noting that many target properties in need of repairs or renovations. “They’ve got a couple of advantages over homeowners in terms of homes that need repair… and renovation financing is cumbersome for individuals.” As such, she said, one policy solution that could help home seekers would be if financing to undertake big renovations were easier to obtain.
Geography matters, as well: Investors target fast-growing areas with relatively low housing prices — for instance, over the past decade, investor interest in California has cooled markedly as property prices have skyrocketed. Much of the out-migration from expensive housing markets like California have given buyers the ability to purchase new homes in cheaper locations outright, which means first-time and first-generation homebuyers are also competing with a growing number of non-institutional cash buyers, as well.
“The gap between the pending sales index and the level implied by the mortgage applications data suggests that [the] proportion of cash buyers remains elevated,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a recent research note.
The houses investors are buying also tend to be detached, single-family homes — the category of housing that far and away has seen the greatest jump in demand since the pandemic struck.
“During the pandemic, there has been a clear preference for families to have more living space in the interior of their home, in part because they’re using it as an office and may be using it as a school, too,” Northaft said. “There was more demand for living space and more desire for social distancing from neighbors, and both of those are attributes you’re more likely to get from a single-family property, especially a single-family detached house, and that’s shown up materially both in the purchase market as well as the rental market.” Much of this demand shift appears to be coming at the expense of large, multi-family high-rise buildings set in urban cores, he said.
“In some markets where there are a lot of large institutional investors buying, they’re going to be targeting that lower median price home — that’s exactly the kind of home a first-time homebuyer will be looking to purchase,” Northaft said. “In some cases, they may be competing with a large institutional investor who may be offering all cash.”