The Impact of Investors on Single-Family Homes

Thu, 08/01/2019 - 8:58am

Last year the number of home sales bought by investors was at a two-decade high. Interestingly, this growth was not from large institutional investors according to CoreLogic, but by small investors getting into the real estate investment game purchasing starter homes.

We are in a new era of investors being a bigger player in the US housing market. As we enter 121st month of an expansion, it’s reasonable to project we may be nearing the end before we have some type of economic correction. Normally investors begin to pull back their activity but instead, we see they are buying 1 in 5 starter homes.

 

Here is an investor snapshot provided by CoreLogic:

·         By the end of 2018, the investment rate in the U.S. housing market reached 11.3% – the highest rate since CoreLogic started tracking these data in 1999. 

·         Smaller investors are responsible for increasing investor homebuying activity. This is in sharp contrast to the rise in large institutional investors in the years following the recession. These so-called “mom-and-pop” investors grew from 48% of all investor-purchased homes in 2013 to more than 60% in 2018.

·         Large investors – those who purchased more than 101 homes – nearly doubled their activity between 2000 and 2013 but have pulled back since the foreclosure crisis and now sit at 15.8% of purchases. 

·         Real estate investment heads east. Investor homebuying rates vary sharply across the country, with the highest rates east of the Mississippi River and the lowest rates to its west. Each of the top 10 metros with the highest investor purchase rates is in the eastern half of the country, with Detroit, Philadelphia and Memphis, Tennessee leading the pack at 27%, 23.3%, and 19.7%, respectively. Just two of the top 10 are western markets, with Des Moines, Iowa and Oklahoma City, Oklahoma at 18.7% and 17.2%, respectively.

·         The five markets with the least amount of investor activity are all west of the Rockies, including Ventura, California, Boise, Idaho, Oakland, California, San Jose, California and Sacramento, California at 4.8%, 4.8%, 5.1%, 5.2% and 5.3%, respectively.

·         Not surprisingly, Investors are attracted to high-rent markets.

·         Markets that witnessed an increase in the share of active investors also experienced a similar increase in how fast homes were selling. Does this mean investors snapped up supply that would have otherwise been bought by owner-occupiers? Maybe, but the evidence isn’t conclusive because there’s a possible chicken-or-egg relationship between the two. While an uptick in investors into a market perhaps increases competition and lowers supply relative to demand, the opposite is also possible: markets with tightening supply could draw investors as they perceive markets with a dwindling supply to be safer bets than those with more plentiful supply.

 

As investors continue to purchase more properties, home prices increase. In May, the median price of existing homes was $277,700, up 4.8% from a year earlier, the National Associations of Realtors reported. For single-family homes, the median price was $280,200, up 4.6%. NPR recently reported, “The pool of smaller, affordable starter houses is low. And increasingly, first-time homebuyers are competing with investors who are buying up these homes. Investors tend to buy cheap homes with the goal of renovating them and putting them back on the market at a higher price, or renting them out.”

At the National Association of Real Estate Editors Conference in Austin, TX, Ralph McLaughlin of CoreLogic explained that Investors are targeting the starter homes. CoreLogic cannot determine from the analysis they did if Investors are in fact displacing first-time homebuyers as many news outlets are reporting. Investors may be taking the homes that the first-time homebuyer wouldn’t actually buy. They may require too much work. The only time there would be competition with first-time homebuyers would be on a turnkey home, and for those that are buying and holding the home. If they are putting a property in circulation for rental, that is still putting a home in the supply and increasing the supply, which is a good thing for the housing market. Detroit and Philadelphia, Baltimore and Memphis have seen the biggest increase in real estate investment.

Do you see your home as an investment?

For most of my career, I have said that a home purchase is the largest investment you will make in your life, and here in Texas, for the most part this remains true as we have a relatively stable market with continuing, reasonable home value increases. MoneyUnder30.com gives us 7 reasons we should consider our homes as their primary function, shelter, versus an investment. Here are their reasons why a home is not an investment:

1.       It’s not an investment just because it appreciates. A true investment requires more than the prospect of an increase in value.

2.       A house has a more primary purpose – shelter. With a true investment you can generally control the timing of your sell, but with a home as an investment you have many factors to consider and often have no control over your timing of buying and selling. Life happens.

3.       A house cannot be an investment if you never plan to sell it. The most effective and efficient way is to sell the house after it has experienced a significant amount of price appreciation. However, selling a house is highly disruptive because it means you have to move. More significantly, when you do sell, you will most likely have to use the equity from the sale to purchase the next house. After all, you will be moving from one residence to another. This means that in a real way, home equity is trapped equity.

4.       Thinking of your house as an investment can lead to equity stripping. Many borrow money out their homes in the form of HELOCS, taking equity out of their home/investment.  This is a great tool for leveraging your equity, but as many saw in the housing decline, when home values are flat or decline, homeowners will no longer have equity in their homes. Placing them in a negative position.

5.       The carrying costs of a house are too high for it to be an investment.

6.       Your house won’t generate cash flow, unless it is a rental or multi-family.

7.       Appreciation is the magic ingredient, but it’s not guaranteed.

 

With the rise and fall of future home valuations, when the homes values increase people see their homes as investments, but as we remember from the past housing crisis, those areas that saw significant home value declines, the homeowners saw their home as more of a liability than an investment.

No matter, how you see your home, as a wonderful home to raise your family or as an investment, or if you see yourself as a potential real estate investor, it is important to understand the market and the economics of the house, and to approach home ownership from a place of understanding. 

 

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SOURCES:
CoreLogic – https://www.corelogic.com/blog/2019/06/special-report-investor-home-buying.aspx
NPR – https://www.npr.org/2019/06/21/734357279/1st-time-homebuyers-are-getting-squeezed-out-by-investors
National Association of Realtors – https://www.nar.realtor/newsroom/existing-home-sales-ascend-2-5-in-may
The Week – https://theweek.com/articles/848222/making-house-investment-social-poison
CNBC – https://www.cnbc.com/video/2019/06/24/are-investors-pricing-out-first-time-home-buyers.html
Wall Street Journal – https://www.wsj.com/articles/investors-are-buying-more-of-the-u-s-housing-market-than-ever-before-11561023120
MoneyUnder30.com – https://www.moneyunder30.com/why-your-house-is-not-an-investment