Over the past few months, there has been a lot of hype about Wall Street pushing up the housing market. I’ve seen dozens of headlines that no one can buy a home because a large institutional investor buys every home. I was skeptical and wanted to see if this was really true.
Let’s dig into the data and information to uncover the role of Wall Street in today’s fierce housing market and the long-term risks Wall Street poses to both homebuyers and short-term investors. To do this, I looked at some Redfin data. This shows that the share of homes purchased by investors is currently 15.9%. Contextually, this is still a bit below the pre-pandemic situation where investors were buying about 16.1% of all US homes.
Check the graph below with Redfin data. As you can see, the share of homes bought by investors is recovering from the sharp drop last spring, but is approaching what it was a few years ago.
Currently, it’s pretty difficult to measure an investor’s share, but I’ve looked at some reports from Redfin, John Burns Real Estate Consulting, and CoreLogic. These are all respected companies in the real estate industry. And although they all had different methodologies, they all showed similar patterns. Investor home purchases have not reached new heights since the pandemic. Investor home purchases peaked around 2013, according to some reports such as John Barnes.
This is a strong indication that investor activity has not led to higher home prices. Nothing has really changed when it comes to the percentage of homes that investors are buying. For all accounts, Wall Street investor activity is lower or, in the worst case, equal to that of smaller investors over the last decade.
If you want to focus on a large investor, it’s difficult to get recent data. However, a 2018 Core Logic survey estimates that only about 1% to 2% of all single-family home purchases were made by large investors, while about 18% were made by small investors. It has been.
Another data point suggests that Wall Street activity is not fueling this chaotic housing market as of today. Instead, the housing market is backed by fundamentals.
- Very low stock
- Increasing demand from millennials entering the era of home purchases
- Low interest rates
The current housing market is a function of these three factors, rather than the activity of institutional investors. But that may change soon. Although these institutional investors do not yet dominate the housing market, they have some significant advantages over regular homebuyers and small investors like me. And that’s what I’m worried about what will happen in the next few years.
Who are Wall Street Investors?
When jumping into this topic, let’s first define who these Wall Streets or institutional investors really are. The largest of all companies is Invitation Homes. Not surprisingly, this is a derivative of BlackRock, the world’s largest asset management company. Invitation Homes owns about 80,000 detached homes in 16 US markets, which is undoubtedly huge.
In fact, it’s so huge that it’s about 58% larger than one of its closest competitors, the American Homes 4 Rent. But with that in mind, there are about 16 million rental homes in the United States, of which Invitation Homes owns about 0.5%.
There are an estimated 80 million single-family homes in the United States, and Invitation Homes owns only one-tenth of that 1%. Again, these companies are big companies, but they don’t currently dominate the housing market.
However, companies like Invitation Homes have significant advantages over private investors and regular homebuyers. These advantages mean that you can beat almost everyone. Therefore, it probably only increases acquisitions.
Let’s break down the benefits they have for small investors.
Currently, interest rates on regular buyers are incredibly low, which is great. If you or I go out and look for a mortgage, you’ll probably get a fixed rate of about 3% or 3.5% in 30 years. It is close to the lowest value ever. On the other hand, Invitation Homes can borrow about 1.5% of money.
It may not sound like a lot, but it’s their bid for $ 10,000, $ 20,000, or perhaps $ 30,000 or more at home, and still the same amount you and I pay for a smaller loan. It means you can pay for the loan. In short, institutional investors can offer more to their homes and pay in the same way. This is a big advantage.
The second is a cash offer. Have you recently heard of someone losing a cash offer? Certainly there is. Well, not all of them come from institutional investors, but institutional investors can and will continue to make cash offers. This gives them a great advantage in winning good deals. If regular homebuyers have to wait weeks or months, they can be closed within a few days.
Data and research
The third advantage is data and research. BiggerPockets is working hard to provide as much data and research as possible to its members, who are almost all relatively small investors compared to these companies. However, these companies have a team of data scientists who build algorithms to predict which properties and markets will bring the best profits. Many people do not have access to it.
The fourth advantage is patience. These companies don’t need a place to live, they just want to pursue the highest profits. They can wait as long as they want to find a good deal. Regular homebuyers often do not have such luxury.
The fifth advantage is the efficiency of scale. I mentioned earlier that Invitation Homes has about 80,000 homes. They absolutely have multiple teams of maintenance personnel, leasing agents, real estate managers and more. They can use their purchasing power to procure materials cheaper and rehabilitate real estate cheaper. In general, the bigger you are, the more efficient you are, and that’s definitely the case with these companies.
Sixth, and perhaps the most worrisome of all these benefits, is market share in individual markets. Earlier, I mentioned that these companies do not dominate the housing market on a national scale, but they may dominate on a rural scale.
Invitation Homes reportedly purchased 90% of their inventory with a single zip code in the early 2010s. Again, it doesn’t move the entire housing market, but it essentially gives Invitation Homes a monopoly on housing in this local market. They can surpass ordinary homeowners who just want to find their primary home. And when those homeowners turn to renting, they are faced with the prospect of renting from a large company that owns most of the rental inventory in your area, which is more pricing power than renting. Is giving.
This can be truly out of control. We already have affordable prices in American real estate, and everyday Americans and private investors can’t afford to enter the market. If a large institutional investor begins to target a particular market, that market can really get out of control. They can start pricing in both the housing and rental markets in any region that has sufficient market share.
And let’s be clear: this is the business model they described. They are concentrated in certain types of markets such as Charlotte, Atlanta, Phoenix and Las Vegas. And if this trend continues, both home prices and rents should be expected to rise significantly in these markets over the next few years.
And their tactics seem to be working. All these benefits lead to powerful performance.Invitation house Have a portfolio For about $ 16 billion, we will collect about $ 1.9 billion in rent. This is almost exactly the ratio of rent to price of 1%. This means that their portfolio as a whole meets the 1% rule. This is becoming more and more difficult to find for small landlords and private investors.
Also, the types of homes these companies buy tend to be the same as those targeted by private investors. These companies have a structural advantage over individual investors because they can make more bids (often using cash) and refurbish at lower cost.
This blog post focuses primarily on Invitation Homes, which are much larger, but just an example. There are many other companies like this.
So what do you do about it? Should you just throw a towel and buy stock in these huge companies? no way! There are still good deals, and if you are diligent and do your research, you should be able to find them. As mentioned earlier, interest rates are low, and long-term supply constraints and vital trends could show a strong rise in the housing market over the next decade, even with temporary price declines. It shows that it is high. Remember, most importantly, you also have benefits.
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Benefits of small investors
You know your market better than any algorithm so far (This comes from a man who went to graduate school to study algorithms). You are more attentive to any personal transaction than any company. These companies are looking at macroeconomic trends so that they can find markets where they can buy hundreds, if not thousands, of homes. On the other hand, you can find and quarrel with one or two deals in your neighborhood.
You are more creative. If you’re just looking at a few deals at once, you can find the best way to add bedrooms, add value and generate better revenue. You can spend more time than any of these companies to ensure that each transaction makes a big profit. They make their operations as general as possible and do everything in exactly the same way-you can do the opposite. You may not be good at buying 200 units, but buying just one is certainly a good idea.
Finally, you can be a better landlord. Having all accounts tenanted in one of these company’s units can be a disastrous experience. On the other hand, you can provide your tenant with a great experience. By finding good tenants and building strong relationships based on mutual respect, you can reduce vacancy rates, reduce property wear and secure good tenants for years to come.
We should never panic. For individual homebuyers and small landlords, there are still benefits. Investing in real estate is the best way for everyday investors like you and me to achieve economic stability and independence, but the activities of these large companies are to be monitored. Both myself and you will continue to follow what is happening in this space!