How real estate investors affect the housing shortage
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Real estate has seen a lot of volatility over the past few years. Home prices have skyrocketed; mortgage rates have fluctuated wildly. And while the severe inventory squeeze may be starting to ease up, the supply of homes for sale is still well below what a balanced market requires.
Many factors have influenced this unusual market, of course. But one that affects the housing shortage in particular is institutional real estate investment. Institutional investors purchased 13.2 percent of all properties sold in 2021, according to a 2022 report by the National Association of Realtors (NAR). Perhaps more concerning is the fact that they bought those homes for 26 percent lower than the state median prices during that period.
These large investment companies are exacerbating the home-inventory shortage by buying up the most affordable properties and renting them out, making it even harder for individuals and families, especially first-time homebuyers, to get themselves onto the housing ladder.
What are institutional investors in real estate?
Institutional investors are typically large companies (ie, institutions) looking to make an investment that ultimately turns a profit. They can invest millions, or even billions, at a time.
When it comes to real estate, these companies typically buy up large amounts of properties. An institutional investor might purchase 100 or more homes in a single city, creating a portfolio of properties that they can then rent out to tenants for a profit. This removes those homes from the sales market for residential buyers, making an already-low supply dip even lower.
How investors affect housing inventory
Because of their sheer size and deep pockets, institutional investors can have a massive impact on home inventory on both a local and national scale. This is particularly true in growth areas, where companies can swoop in and get what practically amounts to a “bulk deal” on inexpensive houses. While that may be good for business, it’s bad for hopeful homeowners: The number of homes these companies are able to purchase can greatly reduce the available supply in a given area, especially for affordable starter homes, making it even harder for regular buyers to compete.
To make matters worse, many investment companies make cash offers to buy homes and are willing to accept them as-is. This makes them more appealing to sellers than individual buyers, because there’s no financing risk and no need to worry about appraisals, repairs or updates.
Because of their financial resources, institutional investors “are often able to lose money on properties for a few years, eventually increasing rent enough to make it worthwhile,” says Dennis Shirshikov, head of content at Awning, a San Francisco–based real estate tech company and brokerage.
Even people who aren’t looking to buy a home can feel the squeeze in housing inventory caused by these investors. For example, with fewer people able to buy homes, more people wind up renting, which in turn can drive up rent prices.
Which markets are most affected?
While institutional investors are putting a strain on housing supplies across the country, the most affected areas are typically located in the south. The top five states with the highest share of institutional-investor purchases, according to the NAR report, are:
|State||Share of homes sales that went to institutional investors|
The next five states, Florida, Missouri, North Carolina, Ohio and Utah, all tied for sixth place with 16 percent. Some areas are affected particularly heavily. For example, in Lincoln County, Mississippi, more than 60 percent of homes sold went 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 are creating a long-term shortage of inventory in these markets. “When a hedge fund comes in and buys up a bunch of single-family properties, those houses are gone,” says Doug Greene, owner of Philadelphia-based Signature Properties. “And if they ever decide to sell, it will be to another large institution, which means they may never come back onto the market for the regular homebuyer.”
Investment buyers declining in some markets
Interestingly, according to a new Redfin report, the phenomenon of investors buying up residential homes may have peaked. The company found that investor home purchases fell drastically over the course of 2022, declining by 45.8 percent from the fourth quarter of 2021 to the fourth quarter of 2022.
The decrease was particularly notable in markets that saw a large bump in population during the pandemic. Five markets saw investor purchases fall by more than 60 percent, according to the report: Las Vegas (-67.0 percent), Phoenix (-66.7 percent), Nassau County, New York (-63.0 percent), Atlanta (-62.8 percent) and Charlotte (-61.9 percent). In fact, of the 40 metro areas Redfin analyzed, only one saw an increase in investor purchases: Baltimore, which was up by 1.4 percent year-over-year.
What homebuyers can do
There is still hope for house hunters, though. Even if you live in a market where institutional investors have taken up a lot of the inventory, here are a few things you can do to improve your chances of buying a home.
- Sweeten the offer: Cash deals are part of what make corporate homebuyers so appealing to sellers. While all-cash offers are out of reach for most people, companies like Ribbon and Knock will finance what amounts to an all-cash offer for you, which can help your offer stand out in a crowd. You can also reduce the financing risk sellers face by offering a larger down payment — there are many down payment assistance programs out there to help up the amount you put down.
- Go light on contingencies: Make it easier for a seller to say yes by lessening the amount of conditions you place on the purchase. Waiving certain contingencies, such as the home inspection, can be risky, but it can be done without getting burned if it helps you compete. Being flexible in other ways, such as letting the seller dictate the closing timeline, can also help.
- Expand your horizons: If you’re looking in a truly tough town, you may want to consider options in a less expensive housing market. Finding success with a purchase outside your initial search zone will give you the chance to start building equity — and you may eventually be able to trade up to a home in your desired area.