How real estate investors affect the housing shortage

Real estate has seen a lot of volatility in the past few years. Home prices have increased; Mortgage rates have fluctuated significantly. And while the severe commodity squeeze is starting to ease, the supply of homes for sale is still below what a balanced market needs.

Many factors have influenced this unusual market, of course. But it is institutional real estate investment that is particularly vulnerable to the housing shortage. In the year According to a 2022 report by the National Association of Realtors (NAR), institutional investors bought 13.2 percent of all properties sold in 2021. Perhaps more concerning is that they bought those homes for 26 percent less than the national average price at the time.

These large investment companies are exacerbating the housing shortage by buying and renting out affordable properties, giving individuals and families, especially first-time home buyers, a chance to get themselves on the housing ladder.

What are Institutional Investors in Real Estate?

Institutional investors typically seek to invest in large companies (ie, institutions) that will ultimately generate profits. You can invest millions or even billions at a time.

When it comes to real estate, these companies buy a lot of properties. An institutional investor can buy 100 or more houses in a city, creating a portfolio of properties that can be rented out to tenants at a profit. This takes those homes off the market for homebuyers, lowering the already low supply.

How investors influence housing stock

Because of their large size and deep pockets, institutional investors can have a significant impact on furniture at the local and national level. This is especially true in growth areas, where companies can move in and get “bulk deals” on inexpensive homes. While that may be good for business, it’s bad for aspiring homeowners: The number of homes these companies can buy significantly reduces the supply in a given area, especially for affordable starter homes, making it harder for regular buyers to compete. .

Even worse, many investment companies prepare financial offers to buy houses and are willing to accept them. This makes them more attractive to sellers than individual buyers, as there is no financial risk and no need to worry about appraisals, repairs or upgrades.

Because of their financial strength, institutional investors “can often lose money on a property for a few years, eventually increasing the rent enough to increase the rent,” says Denis Shirshikov, chief content officer at Awning, a San Francisco-based real estate technology firm. Company and broker.

Even people who don’t want to buy a home can feel the squeeze in housing stock because of these investors. For example, when fewer people can afford to buy a home, more people rent, which can drive up rents.

Which markets are most affected?

While institutional investors are putting pressure on housing supply across the country, the hardest hit areas are mostly in the south. According to the NR report, the top five regions with the highest share of institutional and investor buying are:

State The share of home sales that went to institutional investors
Texas 28%
Georgia 19%
Oklahoma 18%
Alabama 18%
Mississippi 17%

The next five states, Florida, Missouri, North Carolina, Ohio and Utah, all ranked sixth at 16 percent. Some areas are particularly affected. For example, in Lincoln County, Mississippi, more than 60 percent of homes were sold to institutional investors. In Charlotte, North Carolina, a hot and growing real estate market, corporate investors were responsible for 32 percent of home purchases in the fourth quarter of 2021.

Some fear that institutional investors in these markets are creating a long-term yield shortage. “When the hedge funds came in and bought a lot of single-family properties, those homes disappeared,” said Doug Green, owner of Philadelphia-based Signature Properties. “And if they do decide to sell, it will be to another large facility, which means they’ll never be back in the market for the typical home buyer.”

What can home buyers do?

Although there is still hope for home hunters. Even though you’re in a market where institutional investors have taken a lot of inventory, here are a few things you can do to improve your chances of buying a home.

  • Make the offer sweet. Cash offers are part of what makes corporate home buyers so attractive to sellers. While not all cash offers are accessible to most people, companies like Ribbon and Nook will help you fund all cash offers, helping your offer to be seen by more people. You can also reduce the financial risk sellers face by offering a larger down payment – there are many down payment assistance programs available to increase your down payment.
  • Shine a light on emergency situations. Make it easy for a seller to say yes by reducing the number of conditions you place on the purchase. Leaving some unexpected situations like home control can be dangerous, but if it helps you compete, it can be done without burning out. Being flexible in other ways, such as letting the seller decide the closing time, can also help.
  • Expand your horizons. If you’re looking in a tough city, you may want to consider options in a more expensive housing market. Finding success in buying outside of your initial search zone will give you the opportunity to build equity – and finally be able to trade for a home in the area you want.

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