Traditionally, real estate investors make up a predictable segment of the residential real estate market (10%-15%). Made up of mostly individuals and small companies, these investors typically purchased distressed properties at a discount with the intention of fixing them up and selling for a profit. Other smaller investors focused on the income potential of holding the property long term and realizing the rental income on an annual basis. These “mom and pop” investors play an important role in the overall residential real estate market.
Since the recovery of the 2008 housing crash, a new type of investor has entered the scene – the institutional investor (often referred to as “iBuyers”). Originally, these investors tried to mimic the strategies of their smaller counterparts but at a much larger scale with the benefit of the financial backing of Wall Street and other hedge fund investors. Up until the pandemic, this strategy by iBuyers had marginal success representing a very small portion of the overall market activity (less than 1%).
Since the COVID-19 pandemic, the strategies of the iBuyers have adapted to the market conditions from less of a “buy low, sell high” philosophy to a “buy at or near market price and hold.” The monetary policy of generating trillions of dollars of cash coupled with the unprecedented imbalance of supply and demand in the housing market has created a perfect storm that may benefit the institutional investors. Rather than focusing on the income stream of the properties, these institutional investors see the predicted home appreciation as an attractive hedge against inflation. These institutional investors are sitting on hundreds of billions of dollars and trying to determine the best spot to place these investments and residential real estate is looking increasingly attractive.
If you turn on your TV, you would think that these institutional investors are dominating the market – with promises of quick sales, fast cash, etc. Consumers are wise, however, and recognize that exposing their home to the market with the help of a licensed real estate professional is going to yield them top dollar in most instances. Even with the flurry of advertisements and increased capitalization, the institutional investors still represent a very small portion of the overall real estate market (1%-3%). However, in some markets where a large majority of homes fits the iBuyers purchasing criteria, that number can reach 10%-15%. The Tampa Bay area is experiencing this type of surge in iBuyer activity.
One of the consequences of this increase in institutional investing is the further influence on higher prices by creating an additional layer of demand in an already imbalanced housing market. This drive toward higher prices, particularly on lower priced homes, creates added strains on affordability and particularly access to homes by first time homebuyers. Unable to compete with Wall Street’s insatiable appetite for more homes with a seemingly limitless supply of cash, first time homebuyers are on the losing end of this trend as their offers almost always require financing of some kind. The long term effects of this may be a further widening of the income gap for many as home ownership has traditionally been the catalyst for building wealth.
This is not to suggest that institutional investors are the sole reason behind the affordability challenges facing the housing market. However, it is important to pause and think if pouring huge amounts of institutional funds into the housing market and potentially placing the ownership of a large number of properties into the hands of a relatively small number of players is good for the overall housing market and economy as a whole. In the past, the housing market has had an uncanny ability to rebound to the norm, but these forces at play are very different and the question remains whether normal market conditions will ever return.
Peter Crowley is the president of Re/Max Alliance Group.
This article originally appeared on Sarasota Herald-Tribune: Home Front by Peter Crowley: Real estate investors aren’t all the same
