Investors Are Buying More of The U.S. Housing Market Than Ever Before (#GotBitcoin?)
Their interest poses a challenge for millennials and other first-time buyers. Investors Are Buying More of The U.S. Housing Market Than Ever Before (#GotBitcoin?)
Investor purchases of U.S. homes have climbed to an all-time high, a sign that rising home prices have done little to dampen demand for flipping homes or turning them into single-family rentals.
Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018, according to data released on Thursday by CoreLogic Inc.
The investor purchases are the highest on record and nearly twice the levels before the 2008 housing crash. The investor interest poses a challenge for millennials and other first-time buyers who are increasingly looking to buy starter homes and are forced to compete with deep-pocketed cash buyers.
Big commercial property owners like Blackstone Group LP and Starwood Capital Group began buying thousands of homes out of foreclosure during the housing bust. Many economists credit investors with helping to stabilize the housing market in 2011 and 2012 by buying with cash when prices were low and mortgage credit froze.
But analysts expected those purchases to slow, as the market rebounded and properties could no longer be had for fire-sale prices.
Instead, demand for properties has intensified. While these purchases dipped slightly when the market started to recover in 2015 and 2016, they have rebounded to surpass the previous peak of six years ago.
Strong rental demand, technology that facilitates buying homes online and low interest rates that make other investments less appealing have fueled investor appetite.
Investors are an especially powerful force at the bottom of the market, where they often pay all cash. Investors purchased one in five homes in the bottom third price range in 2018, according to the CoreLogic analysis, up 5 percentage points from the 20-year average of less than 15%.
“These are the homes that first-time home buyers would logically be buying,” said Ralph McLaughlin, deputy chief economist at CoreLogic.
Shane Parker, a real-estate agent in metropolitan Detroit, said first-time buyers he works with are struggling to win bidding wars against out-of-state buyers. The locals he works with are becoming more aggressive, putting in escalation clauses and agreeing to pay the difference if properties don’t appraise.
One of his clients, Michael Burnett, a tech writer in Detroit, and his wife are looking for their first home so they can have a treehouse for their young girls. They have visited 25 properties and bid on half a dozen but keep losing out to cash buyers.
The couple recently fell in love with a property they thought had great potential. “It’s ugly on the outside, ugly on the inside, but it can be made beautiful,” said Mr. Burnett, 43 years old.
The house ended up getting a dozen offers, more than half of which were cash, and selling for $40,000 over the asking price of $150,000. “We write letters. You think you’ve composed this great heartfelt, ‘I have a family, see my family,’” he said. “Oh, please…Cash is king.”
Real-estate entrepreneur Gregor Watson’s business has helped boost investor participation. Following the housing bust, he and partners bought more than 6,000 homes across the country and turned them into single-family rentals.
Then he founded Roofstock, a company that enables investors to purchase properties online. The internet has made it easier for smaller investors and foreign buyers to purchase properties they may never have visited. Demand is also shifting toward former industrial cities in the Northeast and Midwest where prices remain low.
Mr. Watson said that many people in San Francisco and New York are priced out of buying homes where they live but are able to purchase an investment property in less expensive cities.
Michael Pickens, 31, who works in tech sales in the Bay Area, and his wife kept losing out in bidding wars to all-cash offers. “It was all cash, no contingency, seven-day close,” he said.
He and his wife decided instead to rent a small apartment in Santa Clara County and buy investment homes on Roofstock in less expensive locales.
They now own homes in Georgia and Tennessee despite never having visited either state.
So-called iBuyers, such as Opendoor, Zillow Offers and RedfinNow, which snap up homes in cash for a fee to help sellers avoid the hassle of putting their homes on the market, comprised less than 2% of investor purchases last year, according to CoreLogic.
The biggest markets for investor purchases in 2018 were Detroit, followed by Philadelphia and Memphis, Tenn., where home prices are still low enough for investors to profit by renting them out. Investors bought nearly half the starter homes in Philadelphia last year and about 40% of lower-priced homes in Detroit, according to CoreLogic.
When Tawan Davis launched a business renting out single-family homes three years ago, he focused on Philadelphia because of the city’s slow foreclosure process and history of disinvestment, he said.
Mr. Davis typically purchases homes for about $75,000 to $90,000, puts an additional $50,000 to $80,000 into renovation and rents them out for around $1,300 a month.
He said he is often welcomed in these neighborhoods because his modestly priced rental properties help act as a bulwark against gentrification. Many of his renters are single and work as nurses or adjunct professors, he said.
“They’d much rather see us than a lawyer from New York,” he said.
Demand For Houses Boosts Home Construction
Strength in home building highlights uneven nature of the recession; outlook is a sharp turnaround from early spring.
A surge in home-buying demand and limited inventory for existing homes is spurring construction to help fill the gap.
Home builders attribute their robust sales to low interest rates, a shortage of existing homes for sale and consumer willingness to move farther from city centers in exchange for more space.
New single-family-home sales rose 13.9% in July from June to a seasonally adjusted annual rate of 901,000, the highest level since December 2006, according to the Commerce Department. Single-family housing starts, a measure of U.S. home building, rose 8.2% in July from June to the highest seasonally adjusted annual rate since February.
“The demand feels really good right now,” said Martin Connor, chief financial officer of Toll Brothers Inc. “The longer it goes, the more comfortable we are that it’s got longer legs.”
The strength in the home-building sector underscores the uneven nature of the economic recession, which has hit low-wage workers especially hard. While millions of workers have lost their jobs in recent months, those who are still employed have saved more money due to the pandemic and can take advantage of record-low mortgage interest rates.
Home builders’ positive outlook is a sharp turnaround from early spring, when coronavirus lockdowns forced construction sites to halt in some parts of the country and builders swiftly cut spending on land acquisitions and new projects. U.S. home-builder confidence rose in August to match the record high last reached in 1998, up from an eight-year low in April, according to the National Association of Home Builders.
The S&P Homebuilders Select Industry Index is up 15.3% this year as of Monday, exceeding the 8.3% rise in the S&P 500 over the same period, according to FactSet.
Home builders also are benefiting from demographic changes, as younger millennials are entering their early 30s and accounting for a growing portion of home sales. Booming demand also has pushed sales of previously owned homes to multiyear highs.
Housing demand has outpaced supply for years, but the housing shortage has become even more acute in the existing-home market in recent months as the pandemic has made some sellers reluctant to list their homes.
At the current sales pace, there were 3.1 months of existing homes available for sale at the end of July, according to the National Association of Realtors. In comparison, the new-home market had 4.0 months’ supply available at the end of July, according to the Commerce Department.
When Stephanie and Sven Christensen moved to Grand Haven, Mich., this year for Mr. Christensen’s job, they couldn’t find anything on the market that fit their needs. They decided to build a new house instead.
“We’re super, super excited,” Ms. Christensen said. But “we would have much preferred to find a house that would work for us that we could just buy and move into.”
In response to the strong demand, home builders are raising prices. The median sales price of a new house sold in July was $330,600, up 7.2% from a year earlier.
Home builders are limited in how quickly they can grow due to shortages of skilled labor, delays in obtaining some appliances and rising land costs, said Ali Wolf, chief economist at Meyers Research.
Lumber futures also have climbed to a record high, pushing the cost of building a single-family home up by more than $16,000 since mid-April, according to the NAHB.
Eighty percent of builders in August said challenges on the supply side are going to affect their sales plan this year, up from 30% in June, according to a Meyers Research survey.
“You can’t just build 25% more houses,” said Sheryl Palmer, chief executive of Scottsdale, Ariz.-based Taylor Morrison Home Corp. “We just won’t be able to meet the demand overnight.”
Housing economists say high unemployment could also limit home sales in the coming months, especially if job losses spread to affect more high-paid workers.
Ty Andersen paid a deposit on a townhome under construction in Bluffdale, Utah, in April, before being laid off from his digital-marketing job in May. He hopes to find a new job before he applies for a mortgage loan in the fall.
“I’m beginning to worry more” about the home purchase falling through, he said. “I just keep pushing forward with the hope that I will find a job and that it will work out.”
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