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.”
Mega Landlords Are Snapping Up Zillow Homes Before The Public Can See Them
Hot housing market drives alliance with real estate tech firms as landlords flush with cash tap iBuyers to find properties.
Wall Street firms scouring the frenzied U.S. housing market are tapping a new source of properties that regular buyers can’t reach.
Cerberus Capital Management and related entities bought more than 200 houses in the first quarter through next-generation home flippers called iBuyers, including 138 from Opendoor Technologies Inc. The pipeline to Wall Street from Silicon Valley often means the homes never hit the open market.
Other single-family landlords, flush with cash to bet on the demand for suburban rentals, are applying the same strategy. Their purchases come as many Americans can’t afford to buy houses — a side effect of the pandemic-driven real estate rush that’s sparked bidding wars for a shortage of available properties.
“At a moment when we have once-in-a-generation low inventory, we have for-profit companies making the decision to withhold houses from the market,” said Mike DelPrete, a real estate tech strategist who follows the iBuyers. “As a society, are we cool with that?”
Cerberus, which manages $53 billion in assets, operates more than 24,000 rentals through a portfolio company called FirstKey Homes. The firm recently borrowed $2.5 billion against a portion of the property portfolio at a fixed rate of 1.99%, according to Kroll Bond Rating Agency.
In addition to the homes it bought from Opendoor in the first quarter, Cerberus purchased 52 from Zillow Group Inc., the listing site that started flipping homes in 2018, and 28 from Offerpad, according to analytics firm PropertyRadar. The data, which was compiled from public records, may not be complete.
“Homes purchased through iBuyers are a minimal 1% of our entire portfolio of homes,” a representative for FirstKey said in a statement.
IBuyers have sprung up in recent years seeking to profit by streamlining the notoriously complex process of selling a home.
They use software to estimate values and make rapid offers to homeowners who express interest in selling their properties.
When an owner accepts, the iBuyers make light repairs and put the home back on the market, seeking to profit by charging convenience fees.
Cerberus isn’t the only large landlord turning to the tech companies. Invitation Homes Inc., the largest single-family landlord, tapped iBuyers for more than 5% of the 700 homes it purchased in the first quarter, Chief Executive Officer Dallas Tanner said on a recent conference call. Tricon Residential Inc. and Donald Mullen’s Pretium also bought homes through this emerging channel.
For the iBuyers, selling to Wall Street can offer better economics and a leg up in the race to get bigger. It limits expenses, cutting out commissions to real estate agents, and lets the tech firms move homes quickly and benefit from economies of scale.
But in a tight housing market, there’s increasing competition for the entry-level properties sought by first-time buyers and landlords alike.
“We’re in housing shortage, and whatever inventory institutional landlords are gobbling up means there’s less available to first-time homebuyers,” said Lawrence Yun, chief economist at the National Association of Realtors. “In that sense, the investors are an obstacle to the everyday buyer.”
Overall, the homes landlords bought through iBuyers were a tiny fraction of U.S. home sales during the first quarter. But for the tech companies, they add up. At Opendoor, which went public last year through a merger with one of Chamath Palihapitiya’s blank-check companies, entities that bought multiple homes accounted for 21% of the company’s first-quarter sales. For Offerpad, the number was 16%, according to PropertyRadar. For Zillow, it was 9%.
Representatives for Opendoor and Offerpad declined to comment. A representative for Zillow said that the company adjusts its strategies for selling homes to move inventory quickly and reduce the fees it charges sellers.
“These strategies include selling homes to all types of buyers, including individual families, non-profit organizations and investors,” Zillow said in a statement.
Institutional landlords are rushing to buy homes now, as the work-from-anywhere era accelerates the millennial generation’s shift to the suburbs. With backyards and extra space in high demand, investors have been betting that Americans who lack the cash for down payments will gravitate to single-family rentals.
A parade of investors, including JPMorgan Chase & Co.’s asset-management arm, Nuveen Real Estate and Brookfield Asset Management Inc. have committed billions in new capital to single-family rentals since the pandemic began.
But raising money to buy homes is proving easier than finding houses to acquire. In some cases, investors are partnering with homebuilders to develop houses that won’t be ready for tenants for months — or even years.
“The supply of single-family homes remains well short of growing demand,” said Tanner, the Invitation Homes CEO, on the recent conference call. “There is so much capital coming into the space that everything is pretty competitive.”
In Tight Housing Market, Thousands of Homes Are Reserved For Certain Buyers
‘Whisper listings,’ made directly to select customers, are growing at a time when housing inventory is near record lows.
Real-estate agents are selling more homes to select customers while bypassing the public market, a move that squeezes supply tighter for many buyers when inventory is already near record lows.
In the vast majority of transactions, an agent lists a home for sale on a local database and markets the property widely to drum up interest and get the best price. But in certain cases, a broker will show an unlisted property to a small circle of potential buyers more exclusively, often in hope of getting a deal done quickly.
These private sales are known as pocket listings, or whisper listings. They have been around for many years. But they are on the rise now even though the National Association of Realtors adopted a rule last year aimed at discouraging their use following complaints from some of its members.
The new NAR policy requires agents to add listings to their local database within a business day of publicly advertising the listing. But there is a notable exemption: Listings can still be kept off the database if they are only shared within one brokerage, called an “office exclusive.”
Pocket listings accounted for 3% of sales on average in the year ended in March, up from 2.6% of sales in the year ended in March 2020 and 2.5% in the year ended in March 2019, according to an analysis by brokerage Redfin Corp. That 3% represents roughly 169,000 homes a year sold through this sometimes controversial practice.
Proponents say pocket listings offer a preferred option for sellers who want more privacy, or worry about letting strangers or other individuals into their homes.
“A property listing is as unique as the home seller, who should have choice in how they position, price and market their home,” said Ryan Schneider, chief executive of real-estate brokerage giant Realogy Holdings Corp.
In today’s housing market, buyers are furiously competing for a limited number of houses for sale. With the mortgage-finance company Freddie Mac estimating that the housing market is nearly four million homes short of what is needed to meet buyer demand, some brokers say that pocket listings are making a bad situation worse.
Critics say they exclude buyers from viewing all available properties and can keep sellers from getting the highest price for their home.
“There’s no rationale for, ‘I’m going to show it to one group of buyers but not another group of buyers,’” said Glenn Kelman, Redfin’s CEO, who told his agents to stop using pocket listings in 2018.
Mr. Kelman said he was influenced by research from sociologist Elizabeth Korver-Glenn that connects the practice to racial exclusion. Dr. Korver-Glenn’s research in Houston showed that white agents were more likely to use pocket listings and to share the pocket-listing information with predominantly white networks, excluding buyers of other races, she said.
Pocket listings traditionally have been more widely used in high-end markets, where celebrity sellers might not want their homes advertised because of privacy concerns. But Redfin’s analysis showed an increase in pocket listings in many markets around the country.
In Des Moines, Iowa, for example, Redfin estimated that 5.4% of sales were likely done without being publicly listed in the year ended in March, up from 3.1% two years earlier. In Tampa, Fla., the proportion of estimated pocket listings rose to 6.1%, from 4.4% two years earlier, Redfin said.
Pocket listings persist in part because they benefit big brokerages, which can shop listings in-house and advertise to potential clients that they have properties that aren’t available anywhere else.
On brokerage Compass Inc.’s website, a search for active listings or those coming soon in San Francisco pulled up 1,320 online listings as of midday Tuesday. The website also said 105 listings in the city weren’t publicly available but were available through a Compass agent.
A Compass spokesman declined to comment.
Pocket listings are difficult to track. Redfin’s analysis considered pocket listings to be properties that were marked as being sold or under contract the same day they were added to a local listings database.
Real-estate executives and consultants said that is a good proxy for measuring the trend, but it isn’t perfect. In today’s super-competitive market, some properties really might sell within a day. Other property sales are never added to the database, such as some that are sold directly by an owner.
Real-estate listings websites such as Redfin and Zillow Group Inc. benefit when all listings are publicly advertised, making their sites a one-stop shop for home buyers. Zillow opposes pocket listings, said Errol Samuelson, the company’s chief industry development officer.
Bright MLS, a database that covers parts of six Eastern states and Washington, D.C., said its research in 2019 and 2020 showed that in its region, properties that weren’t listed on the database sold for 6% to 20% less than properties that were listed.
“I’m sure there are people out there with privacy concerns,” said Bright MLS CEO Brian Donnellan. “The point is, they should know ahead of time that they’re actually probably going to get less money for their house.”
Wall Street Can’t Get Enough Fixer-Upper Houses
High-interest loans to house flippers are a hot commodity on Wall Street, but inventory is scarce.
Wall Street has made a mountain of money available to house flippers, and selling move-in-ready rehabs has rarely been easier. The challenge is finding beat-up and out-of-date properties that can be renovated and resold for a profit.
“Investors like me, we’re like ants on a sugar hill all fighting for the same projects,” said Ed Stock, who started fixing and flipping houses on New York’s Long Island after the 2008 mortgage meltdown. “It’s the greatest time to be in this market; it’s just hard to find the inventory.”
Foreclosure moratoriums have shut off a big source of fixer-uppers since last spring’s lockdown. Meanwhile, competition is stiff from regular home buyers armed with superlow mortgage rates and inspired by cable-TV renovators. Rising costs and limited availability of labor and building materials, such as lumber, cut into profits and stretch out jobs.
Just 2.7% of home sales were flips—sales within a year of a prior sale—during the first quarter, according to property data firm Attom. That is the lowest portion of sales since at least 2000, when Attom started counting flips. The number of flipped houses and condos were the fewest in a quarter since 2003.
That was two housing booms back and long before measured-in-months loans to house flippers became some of the hottest properties on Wall Street. Mortgage trusts, pensions, hedge funds, private-equity firms, investment banks and insurance companies all want so-called flip loans, drawn by yields in the range of 8% to 12% at a time when one-year Treasurys pay less than 0.1%.
Mr. Stock’s lender, Roc360, last week received a $2 billion infusion from insurer Athene Holding Ltd. to make more loans to house flippers as well as landlords, who buy a lot of rehabbed houses. Arvind Raghunathan, Roc360’s chief executive, said his firm would have little trouble raising several billion more given the hunt for yield that has sent investors into less-familiar pockets of fixed income.
“These notes have done extraordinarily well the last eight years,” Mr. Raghunathan said. “There have been hardly any losses, and 8% for one-year paper is extraordinary.”
Many flip loans are repaid even sooner, allowing investors to recycle their capital by lending anew or buying additional loans to boost returns.
New York Mortgage Trust Inc. said it ramped up its investment in flip loans last fall and ended June with $622 million worth, carrying an average coupon of 9.33%. The firm bundled $167 million worth of loans into two-year securities, sold them to other investors and expects that replacing repaid loans with new notes before the securities mature will produce returns in the high teens or low 20s.
“There’s not many markets where you could achieve that type of return,” the firm’s president, Jason Serrano, told investors last month.
Toorak Capital Partners, which has been buying flip loans and pooling them into securities since 2018, in June sold a $339.5 million security, its first deal since before the pandemic. To supplement the scarcer house flips, CEO John Beacham said Toorak has been buying loans that fund renovations of small apartment buildings.
There is much less competition for these than houses. Additionally, the firm is bundling longer-term notes to rental-house investors, who have accounted for more than 1 in 5 home sales in some of the country’s hottest markets.
“We’ve seen a lot of competition come into the space,” Mr. Beacham said. “It’s hard for investors to find deals in a lot of places.”
On Long Island, Mr. Stock works his real-estate connections and estate-sale scouts to find deals before they hit the market. He looks for houses that need so much work that they won’t qualify for typical government-backed mortgages. Such homes have become hard to come by in the working-class neighborhoods where he used to do most of his flipping. So he has moved up market and into new areas, such as the Hamptons, where more people are living year-round, and even Florida.
Mr. Stock expects to do about 15 flips this year, well below the 53 he undertook in 2014 when foreclosures flooded the market. Most houses he buys are gutted to the studs, windows and roofs replaced, plumbing and electrical systems brought to code, mold remediated. Walls are knocked down and floor plans opened. Marble countertops, stainless steel appliances and other modern trappings are installed.
Roc360 finds flippers such as Mr. Stock with a team of data scientists who sift through public property records for houses that have been bought and quickly resold for gains. Once the people behind profitable flips are pinpointed, Roc360 targets them with advertisements and on social media, offering cheaper financing and deals on property and casualty insurance, appraisals and at home-improvement retailers.
“These are highly entrepreneurial crews,” Mr. Raghunathan said. “People who have really learned to keep their costs down and keep churning.”
Mr. Raghunathan, who has a doctorate in computer science, and others started the firm in 2013. It seeks to adapt the sort of technology his team at quantitative-trading hedge fund Roc Capital Management used to pick stocks and bonds to find the best borrowers in the realms of flip and rental houses.
Since it began, Roc360 has funded about 15,000 loans, which average roughly $350,000. This year, the firm expects to lend $3 billion and with the Athene investment plans to boost its output to more than $4 billion in 2022, he said.
Students Are Going Back to Class, And Property Investors Want To House Them
Companies are pumping billions of dollars into buying and developing off-campus housing.
With millions of students heading back to college campuses this month, some of the world’s largest property investors are pumping billions of dollars into buying and developing off-campus housing.
Blackstone Inc., Brookfield Asset Management Inc. and other investors are offering student housing facilities that feature game and video rooms, fully loaded gyms, speedy Wi-Fi, and even swimming pools in some cases.
These companies are raising their bets on the sector as more universities plan to offer in-class learning again this fall. Yet even last year, demand for student housing only fell slightly when most colleges were closed for in-person learning because of Covid-19.
“Now that we’ve seen the asset class through a global pandemic, it really shows the resilience,” said Christopher Merrill, co-founder and chief executive of Harrison Street, the investment firm that is the largest private owner of student housing.
In August, Blackstone Real Estate Income Trust agreed to pay $784 million for a majority stake in a portfolio of eight student housing properties with 5,416 beds developed and managed by Landmark Properties, of Athens, Ga.
Preleasing of the amenity-rich portfolio, near such schools as Florida State University and Georgia Institute of Technology, is back to 2019 levels, according to Jacob Werner, a senior managing director of Blackstone Real Estate.
Meanwhile, Brookfield is in talks to form a joint venture with Chicago-based student housing developer Scion Group LLC that would acquire at least $1 billion in student-housing properties, according to people familiar with the matter. The deal would be Brookfield’s first move into the property type in the U.S., these people said.
Smaller investors also are getting into the action. In the first half of the year, student housing deal volume was $2.52 billion, up from $1.68 billion in the first half of 2020 and close to the $2.96 billion in deals in the first half of 2019, according to JLL.
When Covid-19 first hit the U.S., investors worried that student housing values and profits would sink because of the large number of schools moving to remote learning. But rent collections remained surprisingly high even at schools that eliminated most in-person classes. Many students opted to live in their campus housing even while doing remote learning.
“Students showed up,” said Al Rabil, chief executive of Kayne Anderson Real Estate, which has developed 50 properties with 34,000 beds in 23 states. “They said, ‘Who cares if it’s remote learning? The last thing I want to do is stay in the room I lived in since eighth grade.’”
Kayne Anderson Real Estate is scheduled to close this month on sales of new properties it completed in 2020 near the University of Florida’s Gainesville campus and Rutgers University. Both were more than 90% occupied last fall, even though Rutgers was completely remote learning, Mr. Rabil said.
Major investors say they tend to invest in complexes near the largest schools in the U.S. where enrollment has been high. Student housing properties near smaller and less popular colleges have struggled more during the pandemic partly because their tenants tend to be less affluent.
Last fall, overall enrollment at public two-year colleges fell 9.5%, according to the National Student Clearinghouse Research Center, a trend some expect to continue. “I don’t think you would find a lot of people who think the U.S. needs 5,500 universities,” Mr. Rabil said.
But student housing at bigger schools saw some benefit from the pandemic because it put a damper on new supply, which was becoming a concern in the sector. An average of more than 40,000 beds a year were added between 2012 and 2019, close to double the rate earlier in the decade, according to Moody’s Investors Service.
Enrollment trends also have been more positive at many larger schools, which aren’t seeing a major impact from the highly contagious Delta variant. According to the Chronicle of Higher Education, more than 1,000 colleges and universities are mandating student vaccinations to put them and their parents at ease.
Such mandates also have helped demand for student housing, investors say. Occupancy is up about 3% to 4% over last year and is only down about 2% to 3% from 2019, according to Alexander Goldfarb, an analyst with Piper Sandler.
“That’s pretty darn good given everyone’s fears when you remember back,” he said.
Homebuying Startup Orchard Reaches $1 Billion Unicorn Valuation
Orchard, which offers cash to homebuyers upfront so they can purchase a new residence before selling their old one, raised $100 million to fuel growth in an ultra-competitive housing market that’s pushing shoppers to find new ways to stand out.
The fundraising round values the startup at more than $1 billion, making it the latest unicorn company to tackle the challenge of simplifying the process of buying or selling a home. Boston-based Accomplice led the round, with existing investors FirstMark, Revolution, First American and Juxtapose also participating.
“We can say we’re a unicorn, which feels good for about five seconds, and then it’s back to the real world of building a business,” Chief Executive Officer Court Cunningham said in an interview. “We’re trying to create a modern way to buy and sell homes, and that’s capital intensive.”
Cunningham, previously CEO of online marketing company Yodle, started Orchard in 2017 to take on what he viewed as a ripe opportunity: Consumers were frustrated with the traditional way of buying and selling homes, and the $1.7 trillion U.S. housing market was big enough to make tackling the problem worthwhile.
Orchard focuses on people who are trying to buy their next home while selling an existing one, a nerve-wracking process that can cause a transaction to collapse or result in households carrying two mortgages.
In addition to offering cash to help clients buy their next home, the New York-based company provides funds to make light repairs before listing the existing home on the market. Orchard seeks to profit by operating as a brokerage and earning commissions.
The startup’s gross transaction volume is approaching an annual run rate of $1.5 billion, Cunningham said. At that level, the startup remains a tiny part of the housing market, but investors see Orchard and companies like it soon having a bigger piece of the pie.
Publicly traded companies known as iBuyers are pioneering a high-tech approach to home-flipping intended to make selling properties easier. Those firms include Opendoor Technologies Inc., Redfin Corp., and Offerpad Solutions Inc. A fourth, Zillow Group Inc., recently raised $450 million by issuing bonds backed by the homes it buys and sells.
Orchard’s business model places it in a group of companies that real estate tech strategist Mike DelPrete calls “power buyers.” Others include Knock, which has explored going public, and Flyhomes, which raised $150 million in June.
Golf Real Estate Roars Back As Vacation Homes Boom In Pandemic
Wayne Swadron wasn’t looking to be near a golf course when he bought a plot of land at South Carolina’s Palmetto Bluff in 2018.
Sure it had an 18-hole, par-72 course designed by the great Jack Nicklaus. But the 55-year-old architect in Toronto was more impressed by the area’s natural beauty and the breadth of other amenities. “We were principally looking for an escape from cold winters,” he says.
He wasn’t in a hurry to erect a home on the property either—that is, until March 2020. Once the reality of Covid-19 set in, however, he hurried to start and now considers it the family’s principal winter residence.
As recently as 2016, developers of golf communities were doing so poorly that they were donating courses to national parks to take a tax break. Hundreds of them closed during the last decade after the building boom of the 1990s and early 2000s.
But like so much of life since the pandemic, everything around the game has changed: A new spate of beginners has taken it up—the National Golf Foundation estimates that a record 3 million people in 2020 tried golf for the first time. Existing fans have been playing more rounds, too, while sheltering in place and working remotely.
That rebound has extended to real estate as interest in vacation homes of all kinds has skyrocketed. “Demand for private golf club community amenities and real estate is at all-time highs,” says Jason Becker, co-founder and chief executive officer of Golf Life Navigators, which matches homebuyers with golf course communities.
Surveys conducted by GLN found that, since March 2020, 64% of those seeking both a club membership and a home were choosing to buy real estate inside a golf community—a stark contrast from 2019, when only 51% intended to live on such properties. “Before Covid hit,” Becker says, “the demand was to buy outside the gates of a golf community. But you need people to live inside to support the amenities.”
Dan O’Callaghan, director of sales for Discovery Land Co., estimates that the residential-community developer was doing $60 million in sales annually at its Silo Ridge property before Covid-19, but that number jumped to $130 million after. “In general, our numbers doubled during the pandemic,” he says.
Following a trend across the country and internationally, buyers in search of turnkey homes and cushy services discovered its development 90 minutes from Manhattan in New York’s Hudson Valley. “If they’d had more homes that were completed,” O’Callaghan says, “we could have sold more.”
Developer Ben Cowan-Dewar reports that the properties in his latest project, Cabot St. Lucia in the Caribbean, also sold well ahead of schedule. “The demand exceeded our wildest expectations” he says. “Product releases that we expected to take months sold in days.”
Sales figures for the Kiawah Island Club community near Charleston, S.C., meanwhile, totaled $152 million in the first quarter of 2021, with a 237% increase in the number of sales from the same period last year and a 337% increase from the first quarter of 2019. August 2020 was the highest-grossing month in the club’s history, with sales approaching $100 million. (The following month was its second-highest.)
What’s pushing this market segment isn’t really the golf, however. GLN’s survey found that the pandemic has increased the importance of safety and security for buyers, a perception that many of these communities invite with gates out front.
The evolution of remote work has also been critical. Both O’Callaghan and Chuck Cary, vice president for sales at Kohanaiki Realty LLC on the Big Island in Hawaii, say the biggest change they’ve seen on the property side is the home office build-out. “It’s no longer a closet tucked off the kitchen,” Cary says.
Instead, the office is a prominent feature of the home, allowing for expansive views, such as the ocean and mountains, as is the case with Kohanaiki. Two Apple Inc. executives have even moved their families there, committing to running their divisions away from the mother ship.
Broker Kevin Sneddon of Compass real estate calls it “the great reshuffle,” which is all determined by the lifestyle buyers desire.
“People want to be in a tony market. It’s a controlled environment, and it’s safe and luxurious.”
At Sand Valley Golf Resort in Wisconsin, where a private course, the Lido, is being built for homeowners, developers projected it would take seven years to sell its 17 lots, some as large as 22 acres. But they’re already sold out after a year.
“I don’t want to speak to the whole market,” says owner Michael Keiser Jr., who runs the property with his brother, Chris. “But in Wisconsin, I feel like Americans have had an existential reckoning over the last year and a half of their lives. For a lot of people, the answer is spending time with my family and spending time in nature and working on my terms and working where I want to work.”
Location, as usual, remains a big catalyst for the growth at the properties run by Chris Randolph of South Street Partners, including Kiawah Island Club, Palmetto Bluff, and the Cliffs, a development that encompasses several properties along the North and South Carolina border. “They’re all in irreplaceable, beautiful settings,” he says.
But Randolph says the seeds of this uptick were planted before the pandemic. In the mid-2000s, “golf communities essentially just got overbuilt, and a lot of bad golf courses were constructed, which were used as a means to sell real estate without any focus on what that external experience or club experience would be like,” he says.
“The segment took a major hit over the last 10 years, and candidly, I think it should have, because it wasn’t a thoughtful plan.”
Families, not retirees, are spurring sales now. Existing programs and facilities have seen a boost—Kiawah Island Club’s summer camps and swim teams for children, for example, had many more attendees this summer than in past years.
At Silo Ridge, the hockey rink was the most popular spot last winter. Food trucks were brought in for those who were tired of cooking, and tutoring arrangements were set up to help with remote learning. The community is looking to expand on that program with the help of nearby elite secondary schools, as well as add sports camps using the coaching staffs of those same institutions.
At each of Randolph’s properties, the buyers—parents or grandparents who wanted their extended families nearby—have been the ones pushing for both housing and new ways of living. Club use by legacy members at a Cliffs community in Asheville, N.C., is up more than 110% since 2019.
At Palmetto Bluff, where the architect Swadron bought a plot in 2018, 45 families are now living there full time with school-age children.
Swadron’s four sons are not school-age anymore, but the plot was a pandemic boon for them nonetheless. “Initially we expected to be there sporadically,” he says. But as a result of the lockdowns and closures last year, each of them was there during the winter for anywhere between four weeks and four months.
“This was an unexpected pleasure to spend large amounts of quality time together in our new home as a family,” Swadron says. “The house was designed with this possibility in mind, but we never really expected it to happen.”
Prefab, But Make It Luxury: Modular Homes Can Be High End Too
Manufactured homes are getting a luxe update, as more homeowners embrace prefabricated properties for their quick turnaround.
Ty Sharp, a 26-year-old software consultant from Aspen, Colo., is building a 2,876-square-foot vacation home in Ventura, Calif. The four-bedroom, four-bathroom custom home, for which he’s paying $1.695 million, will have an open-concept floor plan, a chef’s kitchen, engineered hardwood floors and a master bedroom with a private patio and soaking tub.
But if you visit the quarter-acre site, which has views of the Pacific Ocean, you’ll find only a foundation despite the fact that the home is slated for completion within two months. That is because Mr. Sharp’s new house, a prefabricated modular home, is being manufactured in a factory two hours away.
The term “prefab home” may conjure up images of a double-wide mobile home. But that is a misconception, experts say.
“A mobile home is a manufactured home, but built to a lower standard. Modular homes are also manufactured in a factory environment, so that confuses people,” said Kurt Goodjohn, co-founder and chief executive officer of Dvele, a San Diego-based luxury prefab-home manufacturer that is building Mr. Sharp’s home.
Joseph Tanney, a founder of Resolution 4 Architecture in New York City, who has been designing modular homes since 2002, said today’s modular homes can be very high end. A seven-bedroom, nine-bathroom modular home that Mr. Tanney designed in Bridgehampton, N.Y., and which was completed in 2018, has a pool, pool house, decking, geothermal- and solar-power systems and a green roof. It sold in September 2020 for its full asking price: $4.695 million.
The modules for modular homes are created in a factory, then delivered to the homesite via truck. There, they are placed on the foundation by a crane and assembled like Lego blocks. The foundation and site-preparation work takes place concurrently with the factory’s fabrication of the modular blocks.
That speeds up the construction process, especially because some modular manufacturers ship the modules with all cabinets in place, appliances installed, lighting complete and toilets hanging off the walls.
“Houses still need to get finished when they arrive on-site, so even though we’re doing 50% to 80% of the work off-site, you still have to connect everything,” said Brian Abramson, co-founder and chief executive officer of Method Homes, a Seattle-based manufacturer of prefab homes.
Mr. Abramson said that a high-end custom 4,000- to 6,000-square-foot, traditional stick-built home takes 16 to 18 months to complete, but a modular home of similar size would take less than a year. A typical 4,000-square-foot house would be composed of eight modules, Mr. Abramson said.
Demand for luxury modular homes, which was already strong, has increased due to the pandemic, developers say. Mr. Abramson, for example, who declined to provide specific sales data, said that Method’s sales for 2020 were up 50% from 2019 sales. He’s built a new factory to accommodate the increased demand.
An advantage of modular construction over traditional construction is that modular manufacturers control the entire fabrication process. Speed is another.
Mr. Sharp, who is purchasing the vacation home with his 28-year-old brother, Ian Sharp, said, “It’s a lot quicker than the normal construction process because they can separate the building from the site work and do both at the same time.”
Mr. Sharp, who is a software consultant for home builders, said that his own experience in the industry has shown that while his home will take only about six months to complete, a comparable custom-built home would take 12 to 18 months.
By automating much of the fabrication process, Mr. Goodjohn said that modular construction is more insulated from labor challenges than stick-built construction.
“Modular is a manufacturing process, not a product per se,” said Mr. Goodjohn. “You can train people to do a specific role in the process without the need for skilled labor to make decisions on the fly.”
Here Is What To Consider If You’re Interested In Purchasing A Modular Home:
Your site might not be suitable. Mr. Tanney, of Resolution 4 Architecture, says modules must comply with size and weight regulations for transport on highways and roads. This could affect the ability of the modules to reach your site.
You may not be able to make design changes once fabrication starts. All design decisions are made by a buyer before production, according to Mr. Abramson, of Method Homes. Once the factory starts to build your modules, you can’t make changes. That helps keep production on schedule.
Build in the cost of the build. Mr. Abramson said the cost of a module ranges from $250 to $350 a square foot, including all interior finishes such as cabinets, counters, appliances, tile, hardwood flooring and fixtures.
That price doesn’t include siding, roofing, decks, on-site connections, HVAC, transportation of the modules and installation. These additional costs are about 60%-120% of the modular cost, he said. You’ll also need to pay for the land, and the foundation and site work needed before construction.
Startup Firms Help Home Buyers Win Bidding Wars With All-Cash Offers
Some companies front buyers the cash to buy homes outright; others buy houses directly on a buyer’s behalf and then sell them to the buyer.
When Nestor and Tracy Eugenio decided to move to northern California, they worried about landing a home in such a competitive market. The Eugenios planned to take out a mortgage, which is often a disadvantage when pitted against all-cash buyers who can close quickly.
So they turned to Flyhomes Inc., which helps buyers with less cash on hand make all-cash offers. The Seattle-based startup bought a three-bedroom house in San Ramon, Calif., for $1.525 million in May on the Eugenios’ behalf, then sold it to them at the same price a few weeks later when their mortgage closed.
“We weren’t the highest, but we had the best terms, because we had a cash offer,” said Mr. Eugenio, who competed against five other bidders for the house.
In today’s frenetic housing market, buyers who take out mortgages are struggling to compete with those putting up all cash. Cash offers are more attractive because there is less chance the deal will fall through or be delayed due to financing issues.
Now, a number of startups are offering programs to help level the playing field. Some of these companies front buyers the cash to buy their homes outright, while others buy houses directly on a buyer’s behalf and then sell them to the buyer. The programs often target homeowners who need to buy a house before selling their current one.
“It’s really taken off this year,” said Mike DelPrete, scholar-in-residence on real estate technology at the University of Colorado at Boulder. “In a seller’s market—high demand, low supply—you need to empower buyers.”
Home sellers routinely receive multiple offers and can choose the most attractive one. Homes sold in July received an average of 4.5 offers each, according to the National Association of Realtors, up from 2.9 offers a year earlier. About 23% of existing homes sold in July were purchased in cash, according to NAR, up from 16% a year earlier.
Startups with cash-offer programs are expanding quickly. Companies like Ribbon, HomeLight Inc. and Orchard announced new funding rounds this month. Knock said this spring it is exploring plans to go public.
Opendoor Technologies Inc., a house-flipping company that went public in late 2020, launched a cash-offer program in March. Real-estate brokerage Redfin Corp. is piloting a cash-offer program in some markets, a spokeswoman said.
Cash-offer companies are paid through commissions, fees or both. In some cases, the companies act as the buyer’s real-estate agent or mortgage lender and are paid through sales commissions or origination fees. Other companies charge a flat fee, often between 1% and 3% of the purchase price.
One advantage for companies offering these programs is it helps them connect with consumers early in the home-buying process, said Guy Cecala, chief executive of industry-research firm Inside Mortgage Finance.
“The reality of the situation is it is very, very hard to shop for a house now unless you can put in an all-cash offer,” Mr. Cecala said. “The question is, what kind of strings and everything else do they have attached to it?”
Cash-offer companies are taking a risk. If a home buyer’s financing falls through, the company could end up owning the house and needing to resell it. There also might be limited demand for these programs in a less frenzied market.
Andrew Bouery, who is 24 years old and in the Army National Guard, made more than 10 unsuccessful offers on homes in the Atlanta area. His agent, Edgar Gonzalez, said it is more difficult for his clients to get offers accepted when using loans backed by the Department of Veterans Affairs, as Mr. Bouery was, because those loans can take longer to close.
Mr. Bouery worked with Ribbon, which bought a two-story house in Snellville, Ga., for $276,000 in May and sold it to Mr. Bouery in June after his loan closed.
“Once we started submitting offers as an all-cash offer, rather than a VA loan, I think we ended up going from the bottom of the stack of offers to the top three,” Mr. Gonzalez said.
Sean Black, chief executive of Knock, thinks this business can continue to attract home buyers even after the current housing mania subsidies. “In our case, it’s all about the convenience” offered to homeowners who are simultaneously buying and selling houses, he said.
Dave Ness, a real-estate agent in Denver, said he often suggests cash-offer programs to his frustrated clients. However, while sellers like the convenience of a cash offer, they will still pick a financed offer if it is significantly higher, he added.
Real-Estate Agents Gear Up For Fight to Save Their Commissions
Justice Department probe, civil lawsuits pose challenge to real-estate industry practices.
The residential real-estate industry is bracing for a challenge to the commissions charged by its sales agents, one that could put downward pressure on the fees paid by home buyers and sellers.
The Justice Department is investigating home sale commissions, and in a wide-ranging executive order President Biden asked the Federal Trade Commission to adopt rules to address unfair or exclusionary practices in the real-estate industry.
Several civil lawsuits challenging industry rules and practices around commissions have survived initial procedural challenges and drawn support from the Justice Department, putting added pressure on traditional broker fees.
The politically powerful real-estate industry has survived past challenges to its commission structure, but consumer advocates say rising home prices have exacerbated concerns about excessive fees.
“The litigation and the government attention that the industry is getting now is unprecedented,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America and a longtime critic of the industry.
At issue are the commissions real-estate agents earn for the sale of a home, typically around 5% to 6% of the sale price. For a home sale at the recent national median price of about $375,000, a 5% commission would be $18,750—or for a $1 million home, it would be $50,000.
Very high-end properties tend to have somewhat lower commission rates.
Home buyers end up contributing to these commissions as part of the purchase price, but often have little room to negotiate since it is the home sellers who generally set the commissions for agents on both sides of the deal.
Consumer advocates say this contributes to excessive commissions and point to the National Association of Realtors’ rules as the biggest roadblock to change. Those rules require sellers to offer commissions to would-be buyers’ brokers, which consumer groups say encourages sellers to offer high rates for buyer agents as a way to attract more potential buyers.
Industry critics also say that the fees are opaque to most buyers, and say the advent of online home search engines has diminished the traditional role buyers’ agents play in connecting buyers and sellers.
The National Association of Realtors says a tight sales market and rising prices have made real-estate agents more important than ever, and it says that commissions are fully negotiable and declining.
The average national commission rate is currently in the range of 4.9% to 4.94%, according to industry news and research site RealTrends, down from 5.40% in 2012.
The NAR says that the current commission structure also encourages more competition by giving all participants in local multiple-listing services equal access to information on available properties. It also helps make homes more affordable to first-time and lower-income buyers, the trade group says, because they don’t have to pay their own agents up front.
“NAR remains committed to advancing and defending independent, local broker organizations that provide for greater economic opportunity and equity for small businesses and consumers, including first-time, low- and middle-income home buyers,” said NAR general counsel Katie Johnson.
News Corp, owner of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.
Under the Trump administration, the Justice Department and the National Association of Realtors reached a deal to provide more disclosure on broker fees and make them more competitive. But this summer, the Justice Department under President Biden said it was withdrawing from the settlement so that it could pursue a broader investigation into broker commissions.
The Justice Department said that Americans paid more than $85 billion in home sale commissions last year, and that industry practices “may harm home sellers and home buyers.” Last week, the NAR challenged the department’s withdrawal, saying it would fight a Justice Department civil subpoena.
The civil subpoena issued by the Justice Department in July largely focuses on NAR and industry policies that could be shaping the commission structure, according to court records. For example, the subpoena requires NAR to “submit all documents relating to any policy, guideline, rule, or practice: a. requiring listing brokers to make an offer of compensation to buyer brokers to list a home” on a multiple-listing service.
The subpoena also probes practices that could restrict marketing of non-MLS listings—another subject of recent private lawsuits.
In a further sign of the mounting risks to the industry, the Justice Department has taken sides against NAR and other industry defendants, filing statements in several civil lawsuits. The Justice Department statements generally dispute the NAR’s contention that a 2008 settlement with the department gave the government’s blessing to the current commission structure.
Mr. Biden also has pushed the Federal Trade Commission to launch its own review. The president said in a recent executive order targeting competition problems that the FTC should consider rules to curb “unfair tying practices or exclusionary practices in the brokerage or listing of real estate.”
The FTC didn’t respond to a request for comment.
The Justice Department investigation could lead to an antitrust suit and eventual sanctions on the industry. The prospect of FTC action is more distant, given the procedural hurdles that the agency faces in adopting new rules.
The current Justice Department investigation began earlier this year. After the change in administrations, the department was eager to pursue a broader look at the industry and unilaterally withdrew from the settlement pact with NAR.
The department is concerned that an array of practices creates a closed marketplace for the buying and selling of homes, locking in higher fees and preventing maverick firms and agents from successfully offering lower-cost models.
These concerns are especially true at a time of potentially disruptive change in the industry, accelerated by the Covid-19 pandemic, which for example saw a boom in virtual models for touring homes and navigating the real-estate market.
Several civil suits against the industry seeking class-action status have been filed by private law firms, including one by Cohen Milstein and Susman Godfrey filed in U.S. District Court in Chicago that survived initial procedural challenges but hasn’t yet been granted class-action status.
The lawsuit contends NAR rules stifle competition, which Ms. Johnson disputes. Realtors “already are competing on commission, from offering varied commission models to flat fees,” she said.
U.S. District Judge Andrea Wood in Illinois sided with the plaintiff home sellers in denying the defendants’ motion to dismiss the case.
“Plaintiffs’ allegations plausibly show that the Buyer-Broker Commission Rules prevent effective negotiation over commission rates and cause an artificial inflation of buyer-broker commission rates,” the judge wrote last year. “But-for Defendants’ conspiracy, each Plaintiff would have paid ‘substantially lower commissions.’”
Zillow Caught Up In TikTok Drama Over Big-Money Role In Housing
A video posted by a real estate agent in Las Vegas — claiming a company was pulling off a convoluted scheme to manipulate housing prices — has gone viral.
Runaway home prices are fueling angst on social media over the role of big corporations in the U.S. housing market.
Zillow Group Inc. became the latest company to get enmeshed in internet drama when Sean Gotcher — a real estate agent in Las Vegas — posted a TikTok video that said an unnamed company was pulling off a convoluted scheme to manipulate housing prices in his home market.
To understand why the video went viral on social media, it helps to think about the state of the U.S. housing market, where the pandemic unleashed demand that has swamped available inventory in both the for-sale and rental markets.
And to understand why Zillow is facing backlash in the wake of the video, it helps to know a bit about its business. The company, best known as a place to search real estate listings, has spent the past three years building out a home-flipping operation in a bid to simplify the buying process and, eventually, make money.
The company doesn’t like to be called a home flipper, but that’s what the business boils down to. The company invites owners to seek an offer for their property, then uses its software to calculate a bid.
If the owner accepts, Zillow buys the house, makes light repairs and puts it back on the market. The big idea is that selling a home is stressful, and that some consumers will pay Zillow to make the process less nerve-wracking.
Gotcher has a different take. In the hypothetical he lays out in the video, the company uses its cash to amass an inventory of 30 homes in a given neighborhood, all for one price: $300,000. Then the company buys an additional home for $340,000 in a bid to drive up the value of the first 30 homes.
This is a devious and possibly brilliant idea, but probably not what Zillow is up to.
A much more likely explanation is that Zillow sometimes overpays for homes, because the market has been really hot, and at times prices in certain markets have been moving so fast that it’s hard to know what a property is worth.
Zillow said in a statement that it pays market value for every home it buys.
Unlike traditional home-flippers, who aim to buy low and sell high, Zillow aims to run a low-margin business and profit by doing it at scale. Chief Executive Officer Rich Barton recently reiterated that the company is on pace to buy 5,000 homes a month by 2024. The rush to get big fast is another reason the company might sometimes overpay for homes.
This isn’t the first time social media has inflamed angst over the role that big companies are playing in a housing market that’s increasingly difficult for regular people to navigate. In June, “Hillbilly Elegy” author J.D. Vance complained on Twitter that the investing titan BlackRock Inc. was buying up single-family homes for the sake of its rental business, pricing young people of the market.
Vance had likely mistaken BlackRock, which hasn’t been a major player in the single-family rental business, with Blackstone Inc. — which helped create the industry — and had probably exaggerated the role the Wall Street institutions were playing.
Every home that a private equity firm buys is one that a family can’t, but the companies own a tiny share of U.S. houses. That didn’t stop Vance from continuing to go after them in launching his campaign for U.S. Senate.
Private equity landlords, tech unicorns and others are getting involved in the housing market at the same time as a severe inventory shortage is driving up prices and making it harder and harder for regular people to buy or even rent a home. The corporations all say they’re making things better for the consumer, and they may be.
It’s also possible that for all their sophistication, the Wall Street and Silicon Valley players are getting swept up in a speculative craze and could wind up losing money. But that doesn’t really matter to the family who keeps getting outbid for homes.
Zillow’s Home-Flipping Bonds Draw Wall Street Deeper Into Housing
The company’s iBuying program is part of a boom in programs that make it faster for customers to sell.
Zillow Group Inc. is best known for the addictive real estate listings that keep people browsing the internet all night, checking out interior shots of homes for sale or the estimated prices of their own houses or the ones down the street. But Chief Executive Officer Rich Barton has staked his company’s future on a bet that its software can also ease a critical pain point for U.S. homeowners: the time it takes to sell.
In recent years, Zillow has essentially dived into the house-flipping business, offering to quickly take properties off sellers’ hands. And in the process it’s helping pull Wall Street even deeper into the $2 trillion U.S. housing market.
In August, Zillow raised $450 million from a bond backed by homes it’s bought but not yet sold. The offering, led by Credit Suisse Group AG, was modeled on the loan facilities that car dealerships use to finance floor models.
The novelty of using that structure for houses didn’t scare off investors hungry for a new way to bet on the hottest housing market on record. The offering was over subscribed and Zillow, which declined to comment on its bond market activities, is now in the process of selling another $700 million in bonds.
More such offerings are almost certainly coming. Zillow is one of a growing field of tech companies, often known as iBuyers, who are taking advantage of the surge in investor demand to fund purchases of houses. They’re still a small part of the overall market, but as the mortgage meltdown of 2007-2010 showed in the extreme, the mix of housing, easy money, and new forms of financing can be combustible.
“We could very quickly be talking about more than $100 billion in debt,” says Tomasz Piskorski, a professor of real estate finance at Columbia Business School, speaking of the companies as a group. “What happens to the iBuyers when home prices drop? You could imagine a situation where they have a big inventory of homes, and they aren’t able to repay their debt.”
Zillow’s websites and apps get billions of page views a quarter, fueling a high-margin business in charging real estate agents a fee to connect with house hunters. But Barton, who founded Expedia Group Inc. before launching Zillow in 2004, decided the company risked falling behind new entrants into the real estate business if it didn’t get into the buying-and-selling game, too.
IBuyers such as Zillow and its competitors say they’re trying to solve a timing problem for their customers, particularly buyers who are trading up from an existing property. Until they sell their old house, it can be tricky or stressful to pay up for the new one. Or if they sell their current property more quickly than expected, they could find themselves in a rush to find a new place to live.
In 2014 a startup called Opendoor introduced a potential solution. It invited homeowners to request an offer on their house, then used algorithms to come up with a price. If the owner accepted, Opendoor purchased the property, made light repairs, and put it back on the market. Sellers generally accepted a small discount compared with what they would have gotten on the open market.
In return, they could schedule the closing to line up with their purchase of a new property. Zillow joined the iBuying fray in 2018. In some markets, its web and app users are even given the option to “sell to Zillow for your Zestimate,” the company’s marquee instant estimate of a home’s price.
The iBuyer model depends on software that predicts short-term changes in local home prices, since it usually takes three to six months to flip a home. It also requires a network of home renovation contractors and debt facilities for funding home purchases. All of those are complicated in their own right. Still, the four largest iBuyers acquired about 15,000 homes in the second quarter of 2021, accounting for 1% of all purchases nationwide.
Now those volumes are set to explode. Zillow expects to acquire homes at a pace of 5,000 a month by 2024. Another competitor, Offerpad Solutions Inc. could eventually buy 70,000 homes a year, based on its view of the future opportunity.
Opendoor, still the largest iBuyer, has said its playbook calls for the company to capture 4% of all home sales in 100 markets. Together the three companies could soon be buying close to $100 billion worth of homes a year, requiring more than $20 billion in revolving credit facilities.
In the early days, iBuyers funded purchases with credit facilities that charged about 7% interest on committed capital, similar to what a traditional home flipper might have paid. As lenders got more comfortable, the rates came down.
Zillow currently carries separate $500 million facilities with Credit Suisse, Goldman Sachs Group, and Citigroup, all with rates below 3%. Going to the bond market is a way to reach an even larger pool of capital beyond the banks. “It’s kind of a fuel for the ship,” Barton said on a recent call with investors.
Of course, Wall Street has long played a major role in the U.S. real estate market. The massive mortgage-backed securities market is the key source of financing for loans and the backbone of many fixed-income portfolios. But the iBuyers are offering investors a new kind of short-duration exposure to U.S. housing that isn’t directly tied to consumer credit.
And while Americans are used to financial players having a big role in mortgage debt, the ownership of single-family housing has long been a mom and pop affair. That’s changing.
Private equity firms and asset managers have been buying houses to convert to rentals. And now iBuyers backed by Wall Street cash and vast troves of data are becoming a noticeable and sometimes controversial presence in some hot real estate markets.
In September, a TikTok video by Las Vegas real estate agent Sean Gotcher accusing unnamed iBuyers of manipulating prices went viral with more than 2.4 million views. That prompted a six-post Twitter response by Redfin Corp. CEO Glenn Kelman, whose web-based real estate brokerage is also an iBuyer. “We’d never intentionally underpay or overpay for a home,” he wrote.
Zillow said in a statement that it pays market value for every home it buys, and that the prices it pays and sells for are shown on its site. It said it expects to earn thin margins by providing a convenience to sellers.
To date, most of Zillow’s purchases have been median-priced homes in Sun Belt metros, where its price-estimating algorithms operate with the highest confidence. Zillow pledged 1,416 homes as collateral in its initial bond deal, according to documents seen by Bloomberg News, half of which were already under contract to the next buyer.
When those sales close, the homes will fall out of the bond, and Zillow will have to replace them with other real estate. At the end of a two-year term, the company has the option of paying down the loan, or the more likely option of refinancing into a new facility.
The houses pledged in its initial bond deal have an average price of about $320,000. But as much as 20% of the collateral could eventually consist of homes that cost $950,000 or more, the loan documents show.
The main risk for Zillow is that it overpays for houses. If the market slows, the company could take a loss on the homes, or struggle to sell them as quickly as anticipated. The societywide lockdowns at the beginning of the pandemic were an early test.
As the housing market froze in the spring of 2020, the iBuyers scrambled to reduce exposure for a time. But things quickly gave way to a suburban buying boom that boosted their businesses.
A true shock to home prices could be a different story, says Karan Kaul, a researcher at the Urban Institute’s Housing Finance Policy Center. “The last five or so years have been the best time to be in the housing market in a very long time,” he says. “The iBuyers haven’t been exposed to an adverse economic cycle. It’s too early to tell what their long-term future looks like.”
For iBuyers, The Price Is Right
Some frustrated home buyers blame automated home flippers for the tough market, but those iBuyers also play a helpful role.
Capitalism can be a bummer, but it isn’t a crime.
In a soaring and ultracompetitive housing market, U.S. consumers are finding it difficult to buy a home. Zillow Research shows the typical U.S. home was worth over $300,000 in August—up over 23% from the same time two years ago—pricing out many single families.
IBuyers including Zillow Group, Opendoor Technologies and Offerpad, that buy and flip homes with the help of algorithms, may have had a hand in that.
An analysis of property data from Attom published last month by Mike DelPrete, scholar in residence at the University of Colorado Boulder, shows that while leading iBuyers were paying a median purchase price of less than 99% of what an automated market model showed a home was worth back in 2019, several were paying well over 100% as of the second quarter of this year, with Opendoor paying nearly 108%.
Mr. DelPrete offers several possible explanations for this premium, including the fact that houses are generally getting more expensive and, especially in rapidly appreciating markets, pricing may now be more difficult to predict with an algorithm.
Whatever the reason, he concludes there appears to be a shift from tight pricing discipline and to “a free-for-all, acquire at any cost strategy.”
Their strategy is stoking conspiracy theories among frustrated home buyers. A viral TikTok video posted by a Las Vegas real-estate agent earlier this month took aim at automated home flippers. It painted them as deliberate market manipulators, alleging they overpay for select homes to unload the remainder of their inventory for higher gains.
While data show iBuyers have paid well over market value for homes this year, that likely has little to do with them being insidious profiteers and a lot to do with the reality that they are highly funded public companies that need to show their shareholders growth.
It is perhaps an unsavory, but above board, motive furthered by the fact that the iBuying business ground to a temporary halt last spring, costing iBuyers time and money.
IBuyers aren’t the only cash-rich companies helping to fuel the recent market frenzy. Earlier this year, private-equity firm Blackstone Group said it was paying $6 billion to acquire Home Partners of America, a company that buys and rents single family homes.
J.P. Morgan Asset Management and Rockpoint Group LLC also have made big investments in single-family rental operators. Lately entire neighborhoods have sold to investors. In one instance, a Texas community reportedly sold for roughly twice what the builder said it typically makes selling homes one by one to the middle class.
Big tech has certainly been in the news recently for harmful practices behind the scenes, but its actions in housing aren’t so mysterious. IBuyers have been clear that their businesses are built to mostly make money off of ancillary services like mortgage, title insurance and escrow, rather than on home transactions themselves.
Zillow Chief Executive Rich Barton even said on his company’s first-quarter conference call that the margins it was earning “are not what our goal is,” noting iBuying can only be a big business when pricing is perceived to be fair to consumers.
Fair or not, the greater hand iBuyers have in local market transactions, the more consumers are likely to feel their effects.
IBuyers say they represent just 1% of U.S. home transactions today, but that share isn’t evenly dispersed. Among 33 markets analyzed by Zillow, four showed iBuyers commanding market share of 5% or more in the second quarter. And in those cities, iBuyers’ share had risen by nearly two-thirds year over year.
While they may not help lower prices, iBuying can be beneficial to housing-market turnover. It spares time and energy required to host open houses. IBuyers handle small renovations and provide sellers with choice and a guarantee on a closing date. They may also bring inventory into a market that right now needs more of it.
Zillow Research reports 84% of homes sold to one of the four largest iBuyers last quarter weren’t listed for sale beforehand. Unlike private-equity landlords, iBuyers are also sellers.
Much like food-delivery platforms can drive up the cost of a restaurant’s food, higher home prices may be merely a consequence of the addition of large, for-profit companies as middlemen to the equation. One day you might benefit from such a service; another day you might pay some of the tab for your neighbor’s convenience.
Similarly, while it may become more difficult to buy in markets where investment firms purchase single-family homes to rent, they are useful for families that can’t, don’t want to or aren’t yet ready to take the ownership plunge. Gilles Duranton, professor at the University of Pennsylvania’s Wharton School, thinks of it as a kind of arbitrage—it won’t make everyone happy, but some will benefit.
No one said a free market would be free of cost.
Billionaire Charlie Munger’s Timely Apartment Bet Began With Hebrew Bible
Munger couldn’t read it. But the encounter led to an improbable friendship and, more than a decade later, an investment in California apartment complexes before the pandemic sent values soaring.
The young man’s business, Afton Properties, has become a force in the market in the past few years. It bought more apartments in California than anyone else in 2020, on its way to building a real estate portfolio with an estimated value of $1.2 billion, according to Real Capital Analytics.
Munger and Afton declined to comment on how much of that growth was funded by the 97-year-old investor, who’s best known as Warren Buffett’s longtime business partner. Still, Munger’s public remarks and other data provide a glimpse into a little-known chapter in his storied investment career.
Afton, run by Avi Mayer and Reuven Gradon, has focused on an unglamorous corner of the real estate market: Garden-style apartment buildings in the vast sprawl of Southern California.
They spent $423 million last year on more than 1,700 units, and the purchases have continued in 2021, according to RCA data. They’re still on the hunt and prepared to make all-cash offers for apartment complexes.
“Avi and Reuven, they were one of the first to see the secondary markets” had potential, said Otto Ozen, executive vice president at the Mogharebi Group, a multifamily investment banking firm in California that has closed deals with Afton. “They’re buying with a long-term hold strategy.”
With Americans struggling to find affordable properties to buy, demand for apartments is at the highest level since the 1970s. That’s pushing rents higher at a startling pace and boosting the value of apartments. Prices for multifamily buildings gained 15% in the year through August, according to RCA.
In the Antelope Valley and Inland Empire – north and east of Los Angeles, respectively – rents climbed about 16% from April of last year through this June, according to data compiled by Marcus & Millichap, a real estate brokerage and consulting firm. In downtown Los Angeles, rents fell 8.1% during the same period. In all three areas, the prices investors are paying for apartments have jumped since the start of the pandemic.
The story of how Munger came to invest in apartments began about a decade-and-a-half ago.
“One day, into my house, a very young 17-year-old Hasidic Jew came by and gave me the Hebrew Bible — in Hebrew,” Munger recalled at an event last year in Redlands, California, referring to Mayer.
They struck up a friendship and, years later, Munger suggested they partner to purchase buildings.
Loan documents for one of the first properties they bought show how things have improved. Occupancy increased to 98% last year, from 95% in 2019, while net operating income climbed 15% to $6.9 million.
Part of the strategy is to upgrade the complexes they buy, Munger said, noting they spent $600,000 on trees in the first year. There’s more money to be made taking care of the customer, he added.
“It’d be nice if I were Mother Teresa and did something I didn’t like doing, because I’m a noble soul,” Munger said. “But my life is organized so that time after time, what works for my pocketbook works for every moral teaching that I’ve been taught.”
Short-Stay Housing Companies Are Confident Even As Workers Return To The Office
The firms, raising millions for their short-term apartment rentals, are expanding units and locations.
Even as some employers command workers back to the office, a handful of housing providers, flush with new venture funding, are betting that one pandemic trend is here to stay—the demand for flexible, short-term apartment rentals.
Companies such as Blueground, June Homes and Landing have been expanding this year to new cities and adding thousands of units to their platforms. They have been raising tens of millions of dollars each in recent funding rounds, and in some cases much more than that.
At the height of the pandemic, most office employees worked remotely, though not necessarily in their own home. Some were fleeing a city and didn’t know when they would return. Others were taking advantage of the chance to experience life in a novel location. That created new demand for short-term housing with flexible terms.
Now, that business model is coming under new pressure. Only half of the nation’s office workers are still working remotely, short-term housing providers estimate, and that number will continue to decline as many employees resume their old commutes.
But the housing companies predict that the number of workers remaining fully remote will ultimately level out at roughly 20%.
If their forecast is right, that would still represent a large potential market.
“That’s about 36 million workers,” says Kulveer Taggar, co-founder and chief executive officer of San Francisco-based Zeus Living, a provider specializing in single-family homes.
The companies are also betting that even some renters returning to the office will ditch the traditional 12-month apartment lease when presented with a more convenient and flexible alternative.
Most of the startups lease units from building owners that they sublease to tenants through their own digital platform on a month-to-month basis—no security deposit required.
New York City-based Blueground is typical. Its units come fully furnished and stocked with items from coffee to trash bags and linens. Depending on length of stay, the monthly rates—determined by a dynamic pricing algorithm—are 15%-100% higher than what one might pay on a traditional 12-month lease for an unfurnished apartment, says CEO and co-founder Alex Chatzieleftheriou.
The company raised $140 million last month.
Some of these companies say they also appeal to workers who have returned to big cities but felt wary of making a commitment. New York and Seattle are two examples, said Landing CEO and founder Bill Smith. The company has expanded from 10,000 to more than 30,000 units across 200 cities this year while maintaining an occupancy rate in the 90th percentile.
Sonder Holdings Inc. a hospitality company that has 15,000 available and contracted units globally, recently created a new dynamic pricing system that optimizes rates on each home for stays ranging from one to 365 days. Longer stays generate lower rates, said Shruti Challa, the company’s senior vice president, revenue. “But these longer-term guests are predictable and have lower turnover costs,” she said.
June Homes, meanwhile, recently started offering tenants the option of renting any unit on its platform unfurnished, furnished or something in-between. “It adds operational complexity, but unlocked so much demand,” said founder and CEO Daniel Mishin.
The company is targeting a younger market by offering a shared apartment option on many properties. And because it focuses on smaller mom-and-pop owned buildings rather than luxury doorman properties, its rates are more in line with what one might expect to pay on a traditional 12-month lease, said Mr. Mishin.
Others aim to win new business by offering even greater flexibility to those who want to maximize their city- and neighborhood-hopping. Zeus Living, for example, recently launched a pilot “Nomad” program that allows unlimited moves within a six-month period with just 14 days notice. The hope: that folks who try the service once will get hooked on the flexibility and convenience.
“Once you’re in an Uber,” says Zeus Living’s Mr. Taggar, “you can’t go back to hailing a cab in the rain.”
Property Investors Bet $64 Billion On U.S. Homes In Record Buying Spree
Real estate investors acquired a record 18% of U.S. homes sold in the third quarter of 2021, wagering $64 billion that home prices and rents will continue to surge.
Investors bought more than 90,000 homes in the three months through September, up 10% from the prior quarter and 80% from a year earlier, according to a report by Redfin Corp.
Low interest rates and a persistent shortage of affordable properties have pushed investors to stomach higher prices as they bank on rent growth and price appreciation.
The record surge of capital into the housing market comes as soaring home prices have made it harder for many families to buy a house.
“I largely attribute this to the decline of the middle class in America,” said Daryl Fairweather, chief economist at Redfin. “The more the rich get richer, the more opportunity there is for investors to buy homes and rent them out.”
Investors have typically focused on lower-priced homes, but in the third-quarter they ramped up their purchases of higher-end properties, reflecting increased competition and confidence that the housing boom will continue.
The median price of investor purchases was $438,770, the highest on record. Three quarters of the homes were single-family residences, while the balance was a combination of condominiums, co-ops and other property types.
For the purposes of the report, Redfin defined investors as any buyer whose name included “LLC,” “Inc.,” “Corp.” or other keywords that indicate professional ownership.
Proptech Fundraising Soars To Record Highs In 2021
Venture capitalists and other investors poured $9.5 billion into sector through mid-November
Growing landlord demand for better data, new apps and other real-estate technology is fueling a boom in proptech and attracting record sums of capital into the sector during the pandemic.
Venture capitalists and other investors poured $9.5 billion into proptech through mid-November, according to data firm CB Insights. That is the most ever raised in any year, topping the $9 billion invested in the sector for all of 2019, the previous record.
The new investment reflects how owners of commercial real estate are increasingly relying on technology to draw back workers or customers during the pandemic.
Mall owners are looking to data analytics and new technologies that combine online retail and bricks-and-mortar stores. Office landlords are turning to technology as they try to lure businesses back to traditional workspaces after more than 18 months of working from home.
Some office building owners are providing tenants and their employees with new office apps to make the transition smoother. Others are buying energy technology to improve building efficiency or data services to get an accurate read on rent trends.
New York-based startup CompStak, which uses crowdsourcing to compile detailed data on office, industrial and retail lease and sales terms, is among those raising more dollars. The 10-year-old firm, which has 1.7 million properties in its database, this month closed a $50 million new funding round led by Morgan Stanley Expansion Capital.
Michael Mandel, chief executive and co-founder of CompStak, said record fundraising from venture-capital firms that invest in proptech is helping the sector.
“What that means is they need to write much larger checks to deploy the capital and raise their next fund,” he said.
Proptech has been making strides on the residential side, too. Place, a company that provides technology and business services for home sales agents, said on Wednesday that it closed a $100 million funding round led by Goldman Sachs Asset Management, valuing the firm at $1 billion.
The venture-capital business overall has been hot this year because their funds offer the prospect of higher returns during a period of historically low interest rates. In the proptech world, this enthusiasm has been stoked in recent months by the big payouts venture-capital firms have enjoyed from earlier investments.
SmartRent.com Inc. merged with a special acquisition company set up by venture-capital firm Fifth Wall that valued the startup at $2.2 billion. Landlords use SmartRent to operate building systems and provide tenants with apps that operate security, thermostats and virtual assistants like Siri and Alexa.
Real-estate firm JLL last month said it plans to pay about $300 million to acquire Boston-based Building Engines, which provides owners a cloud-based system for operating their properties.
“The opportunity is big and capital is flowing like water,” said Mihir Shah, co-CEO of JLL Technologies. “When you have a marriage of those things, it’s going to drive valuations up.”
The flood of capital into proptech this year contrasts with a slump in the business last year when the country was hit by the full brunt of the pandemic. Capital raising slumped to $8.1 billion, down about 11% from 2019, according to CB Insights.
Some retail and office landlords felt so squeezed during the pandemic they stopped using proptech services to cut costs. “No matter how much you might want data, you have to be able to afford it,” said Mr. Mandel of CompStak.
The renewed interest has been powered partly by the strong demand for all types of commercial real estate pushing sales volume to a record level.
“The strongest growth area for us in 2021 has been commercial lenders,” Mr. Mandel said. “Nobody was lending on anything in 2020, and now there is a lot of lending activity happening.”
Dozens of new startups have jumped in. Keyway, an online marketplace for small and midsize businesses to sell their offices and lease them back, launched earlier this fall after raising $15 million in seed financing.
Matias Recchia, Keyway’s CEO and co-founder, said the firm raised the capital faster than expected because of the strong demand from venture-capital firms and other investors.
“We saw broad interest from more generalist funds,” he said. “I know from having been an entrepreneur before, that’s not always the case.”
Miami Mini-Condos Offer Investors A Small Slice Of A Hot Market
It’s not just home sales that are sizzling in Miami. Investors eager to play in the hot property market are also buying up tiny condos that can be rented out as hotel rooms.
Developers are giving them a lot to choose from: There are 2,770 short-term units — micro condos that can be rented out daily — planned or under construction in greater downtown Miami, according to data from Related ISG Realty. That compares with just 779 that were built from 2012 to 2020.
Of the nine towers with short-term rentals that are in the pipeline, four have sold out, including the 448-unit Natiivo, and the Legacy, with 310 micro condos within a traditional hotel.
The properties are drawing investors — particularly from South America — looking for a slice of the South Florida real estate market at lower price points, said Craig Studnicky, chief executive officer of Related ISG. The deals are also a bet on the future of the area’s hospitality industry, as many of the developments won’t be completed until 2025 or 2026.
“Some of these projects are very, very inexpensive,” Studnicky said. “And this buyer is looking to buy an income-producing property, not a home.”
The sold-out Natiivo’s units started in the mid-$300,000’s, Related ISG said. Prices at a not-yet-begun tower, called District 225, start at $388,000. More than 80% of that project’s 347 units have committed buyers, according to the firm.
The investment is a bargain compared with buying into some of the area’s swankiest condo buildings. In the third quarter, the median sale price of luxury condos in Miami was $1.25 million, a 47% jump from a year earlier, according to a report by Miller Samuel Inc. and Douglas Elliman Real Estate.
Biden Administration Unveils Plans To Fight Corruption
One proposed measure would raise reporting requirements for all-cash property purchases to avert money laundering.
The Biden administration on Monday unveiled steps to combat corruption globally, including assistance to foreign governments to increase financial transparency and new regulations on U.S. real-estate purchases to prevent money laundering.
The United States Strategy on Countering Corruption outlines steps for cracking down on criminal actors and their networks while improving cooperation between federal agencies—including the State Department, Treasury, Commerce and U.S. Agency for International Development—and law enforcement.
The 38-page plan was released Monday morning ahead of a virtual Summit for Democracy that the administration is hosting later in the week with more than 100 countries participating, officials said.
President Biden has put an emphasis on anticorruption efforts. His administration has said that corruption breaks down public trust, deepens economic and political inequality and degrades the business environment.
The White House has cited estimates that acts of corruption cost between 2% and 5% of global gross domestic product though didn’t provide more details.
In June Mr. Biden issued a directive to help improve collaboration between government agencies on issues including kleptocracy and illicit finance.
This week, in coordination with the democracy summit, the U.S. is expected to levy sanctions against foreign government officials and people it accuses of corruption and human-rights abuses.
‘Changing embedded cultures of corruption requires significant political will…’
— The United States Strategy on Countering Corruption
“Countering corruption is not a simple task,” the strategy document acknowledges. “Changing embedded cultures of corruption requires significant political will, and achieving sustained progress can take decades.”
In taking aim at a significant source of corruption, the Treasury’s Financial Crimes Enforcement Network, or FinCEN, announced a proposed regulation on real-estate purchases made in all cash.
The initiative, subject to a public comment period, would seek to make nationwide current reporting requirements on transactions in 12 metropolitan areas with residential property selling for more than $300,000, officials said.
“Increasing transparency in the real-estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real-estate market,” said Himamauli Das, FinCEN’s acting director.
“Addressing this risk will strengthen U.S. national security and help protect the integrity of the U.S. financial system.”
Details of the initiative still to be worked out include which types of real estate, including commercial property, would be included. The U.S. Treasury’s goal is to minimize the burden on the real-estate industry while offering up a fuller accounting of property sales that could be used by law enforcement or national-security agencies, according to officials.
Shell-company real-estate purchases, while legal, have been used by money launderers because the deals can be made anonymously. Experts say such deals have been used by foreign leaders who have stolen money from their countries, human traffickers and other criminals.
Property has been seized across the U.S., from Manhattan apartments to California mansions, but the problem remains.
More than $2.3 billion was laundered through U.S. real estate between 2015 and 2020, according to an analysis cited by the Treasury.
Also Monday, the Treasury Department issued sanctions targeting businessman Alain Mukonda and a dozen associated companies for allegedly fostering corruption in the Democratic Republic of the Congo.
The department said Mr. Mukonda, a Congolese national, worked on behalf of Dan Gertler, a billionaire Israeli businessman who was sanctioned by the U.S. in 2017 for his dealings in the central-African nation.
The Treasury Department said the alleged corruption fostered by Mr. Gertler, who amassed a fortune through mining and oil deals in Congo aided by connections with government officials, contributes to what nonprofit groups call a violent kleptocracy.
The Congo Embassy in Washington and Messrs. Mukonda and Gertler didn’t immediately respond to requests for comment.
The U.S. strategy document calls for government agencies to work with Congress to develop new laws and use existing regulations to make it harder for so-called gatekeepers to the financial system—lawyers, accountants, trust and company-service providers—to evade scrutiny.
The administration will seek additional oversight and stiffer penalties for people who facilitate corruption and money laundering, according to the strategy document.
U.S. federal departments would be required to provide an annual progress report to the president.
The document also outlines steps to help foreign countries strengthen their own monitoring and regulation and for protecting investigative journalists who expose corruption.
Under the plan, the State Department would lead a Democracies Against Safe Havens initiative that would coordinate with other countries on law-enforcement actions, sanctions and visa restrictions as well as on kleptocracy and foreign bribery, according to the document.
“Those that abuse positions of power for private gain steal not just material wealth, but human dignity and welfare,” the administration said.
Biden Eyes Tighter Rules For Shell-Company Real Estate Purchases
The U.S. Treasury Department will begin developing regulations that could expand reporting requirements for all-cash real estate purchases as part of the Biden administration’s efforts to cut down on global corruption, according to two senior administration officials.
The new rule could force title insurance companies to turn over information about cash purchases funneled through shell companies in additional metropolitan areas, or implement new disclosures for commercial purchases in addition to residential sales, according to the officials, who requested anonymity to detail the effort before it’s formally announced.
The rule-making process is an outgrowth of a new strategy to counter corruption that the administration is expected to unveil on Monday ahead of President Joe Biden’s democracy summit this week.
Federal departments and agencies are expected to announce additional steps as part of the strategy, including the creation of senior anti-corruption jobs across federal departments.
Deputy Treasury Secretary Wally Adeyemo said Monday that the new scrutiny being paid to real estate transactions was part of a broader push at the department to stop corrupt practices that intersect with the U.S. financial system.
The Treasury is also implementing a new law requiring U.S. and foreign companies to disclose the identity of the persons who actually own and control the businesses when they are formed, registered in the U.S. or change hands, he said in a speech at the Brookings Institution in Washington.
The Pentagon has committed to including risk analysis about possible corruption as it determines the distribution of security assistance to other nations, while other departments are expected to more heavily weigh the issue as they consider foreign humanitarian aide.
But the proposed real-estate rule may have the biggest domestic impact. Currently, title insurance companies are required to identify to the Treasury Department’s Financial Crimes Enforcement Network the persons behind shell companies used in all-cash purchases of residential real estate — but only on homes costing more than $300,000, and only in a dozen metropolitan areas.
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” Himamauli Das, Acting Director of Treasury’s Financial Crimes Enforcement Network, said in a statement.
“Addressing this risk will strengthen U.S. national security and help protect the integrity of the U.S. financial system,” Das said.
Officials said the new rule could expand that reporting requirement beyond existing geographic areas — which include cities like New York, Boston, Chicago, Los Angeles and San Francisco — to cover the entire U.S. The regulation could also be written to demand information about those using shell companies to buy commercial real estate.
The goal, administration officials said, was to prevent those who obtained their money through corrupt or illicit acts from parking their gains in U.S. real estate, driving up prices for ordinary consumers. Still, the officials said, they want to develop the new regulations while minimizing the impact on the real estate sector as a whole.
“To say that this is long overdue is the understatement of the year,” said Ross Delston, a lawyer and anti-money laundering expert. “I’m not sure where the U.S. Treasury has been for the last decade or two, but give them credit for attempting to address a gap that has festered for years and has resulted in the U.S.A. being the money laundering haven of choice for the world’s corrupt politicians.”
Congress passed legislation this year requiring shell companies with 20 or fewer employees and less than $5 million in annual sales to report ownership information to the Treasury Department.
The law has come under fire from small business advocates, who have said the expanded reporting requirements create additional legal costs. The law also includes carve-outs for larger corporations and certain charitable trusts.
The Biden administration is expected to formally unveil the beneficial ownership reporting requirements mandated under that legislation as part of a series of additional regulatory efforts and financial sanctions slated to be announced this week ahead of the democracy summit that begins on Thursday.
Wall Street Is Using Tech Firms Like Zillow To Eat Up Starter Homes
A business that’s touted as a convenience for home sellers has created a secret pipeline for big investors to buy properties, often in communities of color.
Zillow Group Inc. spent last year aggressively expanding a home-flipping operation designed to make the $2 trillion U.S. real estate market better for consumers, until a bad bet on home prices pushed the company to pull the plug.
As it shuts down the operation, Zillow’s efforts to sell off its inventory of thousands of homes has highlighted a little-noticed truth about the business, called iBuying. The tech industry’s attempts to simplify the process of selling a house depend on flipping properties to some of the biggest names in global finance.
A Bloomberg News analysis of more than 100,000 property records shows that Zillow and the two other biggest iBuyers, Opendoor Technologies Inc. and Offerpad Solutions Inc., are selling thousands of homes to landlords backed by KKR & Co., Cerberus Capital Management, Blackstone Inc., and other large institutions.
In many cases, those properties are never even listed, further squeezing average buyers out of competitive housing markets.
Two out of 10 homes flipped by the iBuyers last year wound up with investors and other entities, and the rate is double that in some Sun Belt metro areas, where the companies are most active. What’s more, in some of those markets, the flips are happening at a higher rate in communities of color.
The transactions raise questions about the role the iBuyers are playing in a housing market starved of affordable properties, both for rent and purchase. A diverse range of U.S. political voices, from the Biden Administration to the conservative television host Tucker Carlson, have blamed institutional landlords for crowding out regular families.
Populist angst over the role investors play in housing has also expanded from Shenzhen to Seoul and Stockholm to Berlin.
“It just doesn’t feel right,” said Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder, who studies iBuyers. “These companies go around saying, ‘We’re going to help mom and pop and inject liquidity into the market.’ They don’t say, ‘We’re going to suck up houses from the ordinary market and sell them to Wall Street.’”
Home flipping is an old business, and investors who buy houses cheaply and fix them up can play an important role in the market by improving outdated properties.
The iBuyers brought a tech-powered spin to the idea. Instead of hunting for deeply discounted homes, they use algorithms to buy near the market price, trying to capture a small profit on a large number of transactions.
The business model has resonated with customers during the pandemic, allowing property owners to sell without hosting an open house or waiting for the buyer’s mortgage to get approved.
The three largest iBuyers acquired more than 27,000 homes in the third quarter of 2021, nearly twice as many as they bought in the previous three-month period. At the end of September, the companies owned more than $10 billion worth of real estate.
Acquiring homes is only one part of the iBuyers’ business; they also need to offload what they purchase. Big landlords transact quickly and buy repeatedly, helping the tech companies save money and gain scale.
They’re also flush with cash, having raised more than $30 billion to acquire and develop rental houses since the beginning of the pandemic. And they tend to focus on the same moderately priced, Sun Belt suburbs where iBuyers are most active.
As Zillow neared its Nov. 2 decision to get out of the business in the face of mounting losses, it marketed thousands of homes to institutional landlords, starting a process that has helped the company wind down the business.
Zillow spokesman Viet Shelton said that the company’s remaining inventory represents a tiny fraction of U.S. homes sold annually, and that the company intends to sell houses to a variety of buyers, including families, small investors, institutional landlords and nonprofits.
“Leveraging these varied sales channels is common among all iBuyer companies in the space, with the noted exception that Zillow is selling these homes as we exit iBuying, while other iBuyers will continue these sales practices in perpetuity,” he said.
A representative for Offerpad said most homes it sells are purchased by individuals, and that the geography of investor purchases reflects how property funds approach the market.
“We have a diverse mix of customers that benefit from the ease and simplicity of our services,” the representative said. “Where investors choose to do business is a function of their strategy.”
Opendoor declined to comment.
While selling to property funds has clear benefits for iBuyers and their customers, it’s yet another way some parts of the country are being deprived of affordably priced houses.
Investors accounted for more than 18% of all U.S. home sales in the third quarter, according to research from Redfin Corp., the highest share since at least 2000. Atlanta was one of the most popular markets, with investors buying 32% of homes sold during that period.
Bloomberg analyzed flips in census tracts where the median home value was between the 40th and 60th percentile — neighborhoods where properties should be affordable for regular families.
In these parts of greater Atlanta, iBuyers were 60% more likely to flip homes to investors and other entities in predominantly non-White areas, compared with those where White people are in the majority.
In metro Phoenix, where iBuyers flipped more than 4,500 homes last year, the rate was 41% higher. In greater Charlotte, the iBuyers were three times as likely to do the flips in non-White areas.
McDonough, Georgia, is a hot spot within a hot spot. Roughly 30 miles southeast of downtown Atlanta, it’s a city of about 29,000 where two-thirds of residents are Black. The population has surged over the last two decades, amid a suburban building boom.
Much of the town sits in one of the ZIP codes where iBuyers are most active nationally, selling more than 100 homes last year, according to Bloomberg’s analysis of the property records, which were compiled by Attom Data Solutions. About 70% of those houses went to investors, many without ever being listed.
Back in 2001, Nicole Prince was able to buy a modest, three-bedroom home there while earning $12-an-hour. She lived in the house for a few years, moved to something bigger nearby and kept it as a rental.
Last year, Prince, who’s Black, decided to sell and turned to the iBuyers. Offerpad agreed to pay $191,000 — far more than she thought she’d get: “I was like, ‘What?’ You couldn’t say no.”
The sale closed in mid-September. About three weeks later, the house was scooped up by Tricon Residential, a landlord that buys and manages single-family rental homes, for $5,000 more than what Offerpad paid, according to data from Attom.
It still nags her that it didn’t go to a young person or family of color — somebody that was starting out like she was two decades ago.
“I feel like I didn’t pay it forward,” she said.
While there’s growing concern about investors turning more and more homes into rentals, complaints about the rise of Wall Street landlords often skip over the complexity around the issue.
For one thing, the vast majority of the country’s rental houses are owned by small investors. For another, the U.S. is also facing a shortage of rental housing that has driven up prices and stressed family finances.
When a landlord buys a home from an iBuyer, they’re often adding a unit of rental housing to a market that desperately needs it, said David Howard, the executive director of the National Rental Home Council, a trade group.
At the same time, the institutional players are offering homes in desirable neighborhoods to households without the cash for a downpayment, he said.
“Race and ethnicity never factor into decisions about where or when to buy or sell a home,” Howard said in an email. “The overriding motivation is having a presence in those neighborhoods and communities where the demand for quality and affordably priced rental housing is strongest.”
KKR declined to comment. A representative for FirstKey Homes, a Cerberus portfolio company, said that it’s purchased just 1% of its properties through iBuyers. Kathleen McCarthy, global co-head of Blackstone Real Estate, said that “not one of our portfolio companies have purchased a single off-market home from an iBuyer.” Blackstone has a small stake in Tricon.
The confluence of iBuyers and Wall Street-backed landlords is on display in the Creekwood Station neighborhood of McDonough, where Prince sold her home to Offerpad.
Aimee Turner moved to the subdivision two decades ago, when the homes were new and most residents owned their properties. These days, she said, roughly three-quarters of the houses are rentals.
“I probably couldn’t even tell you five homeowners on this street,” she said on a recent afternoon while out walking her dog.
An entity affiliated with Tricon bought the home next door to Turner in February, paying Offerpad $140,000, according to Attom data. Tricon also paid $140,000 to buy a house two streets over from Opendoor.
And Zillow flipped another home in the neighborhood in July to Progress Residential, a company run by New York-based investment firm Pretium Partners.
A representative for Tricon said most of the properties the company acquires from iBuyers are listed on the open market. Kevin Baldridge, the company’s chief operating officer, said in a statement that single-family rentals let families live “in neighborhoods they may not otherwise be able to afford to buy in.”
The company receives “up to 10,000 leasing inquiries each week across the country for an average of just 200 to 300 available homes,” he said. Pretium declined to comment.
The increasing number of rentals in the neighborhood was a good thing for Tyrone and Sherece Sapp, who were scrambling to find a place to live with their two kids after Tyrone accepted a job transfer to Atlanta from New York.
After several other rental options didn’t pan out, Tricon accepted their application to lease the house next door to Turner’s. The $1,500-a-month rent was higher than what some smaller landlords, like Prince, were charging.
But for a couple that had been living with two kids in a two-bedroom apartment in New York, the cost for a whole house didn’t seem that bad.
“In New York, sometimes that’s a basement apartment,” Sherece said.
The challenge comes when renters look to purchase a house, so that they can start building wealth.
Institutional landlords already have all kinds of advantages over average buyers, said Desiree Fields, an assistant professor of geography and global metropolitan studies at the University of California, Berkeley, who studies single-family rental companies.
By giving them access to off-market listings, the iBuyers are only strengthening their hand, she said.
“It’s troubling,” Fields said. “It’s just going to make it that much harder for people who might otherwise be in a position to acquire a starter home.”
Warren Renews Criticism of Private Equity’s Role In Housing
* Senator Complains About Rent Hikes, Acquisition Plans
* Number Of Evictions In Recent Years Also A Concern For Warren
Senator Elizabeth Warren is doubling down on her criticism of private equity’s involvement in the U.S. housing market as the nation grapples with an affordable-housing shortage.
In letters sent Thursday, the Massachusetts Democrat asked housing firms Progress Residential LLC, Invitation Homes Inc. and American Homes 4 Rent about recent rent hikes, plans to acquire more properties and the number of evictions in recent years.
Warren and other Democrats have scrutinized Wall Street’s role in the housing market since the 2008 financial crisis. During the pandemic, lawmakers have been on high alert for violations of eviction moratoriums and unfair treatment as Americans struggled financially to stay on their feet.
Warren also expressed concern about automated homebuying practices, which allow companies to buy up properties using algorithms. Bloomberg reported that last year Zillow offloaded thousands of homes to institutional investors.
Invitation Homes and American Homes 4 Rent are both publicly traded companies. Blackstone Inc., a leading private-equity firm, took Invitation Homes public in 2017, but later sold its stake in the company.
Progress Residential was formed by alternative-investment manager Pretium Partners LLC.
American Homes 4 Rent said in a statement that it was “looking to help improve the situation and arrive at solutions.” Progress Residential said it has complied with eviction moratoriums and would work with Warren. Invitation Homes didn’t immediately respond to a request for comment.
Investors Are Buying Up Homes. Cincinnati Is Pushing Back
Since the 2008 financial crisis, institutional investors have bought up thousands of homes around the country to rent out, crimping the supply of available homes for average buyers. But a new gambit by an economic development agency in Cincinnati aims to put a dent in that dynamic. We speak to its CEO and WSJ’s Konrad Putzier about the stakes.
Ryan Knutson: Chasie Robinson lives in Cincinnati. She works as a nurse, and she and her husband used to own a home there. But after the 2008 housing crash, they lost it in foreclosure. Do you ever think about that house that you used to own?
Chasie Robinson: Oh, yeah. When I drive by, I’m like, oh. But it’s one of those things … if I whined about everything that I lost, I would probably be sitting on a curb, just rocking back and forth. So I keep it moving. We’re in a better place now, financially and emotionally.
Ryan Knutson: Chasie still lives in the same neighborhood. She can see her old house out the window, but now she rents. What do you like about your neighborhood?
Chasie Robinson: That it’s close to pretty much everything. And it’s the only place we could find a house big enough for all of us.
Ryan Knutson: All of us? How many people do you live with?
Chasie Robinson: Well, I have my 80 year old mom, all the way to my two month old granddaughter. About 10 of us.
Ryan Knutson: Wow, 10. That’s literally a full house.
Chasie Robinson: Yeah.
Ryan Knutson: Chasie has built up some savings and says she’d like to own a home again, but buying a house in her neighborhood is tough. Prices are high and demand is competitive. And some of that demand has come from big institutional investors who are buying homes and converting them into rentals. But a new gambit by an economic development agency in Cincinnati might give Chasie another chance to be a homeowner. Welcome to The Journal, our show about money, business, and power. I’m Ryan Knutson. It’s Thursday, January 27th. Coming up on the show, inside an effort to take on big investors in the Cincinnati housing market. Chasie Robinson isn’t the only one having a hard time buying a house right now. Our colleague Konrad Putzier writes about real estate and says the housing market is difficult for a lot of reasons.
Konrad Putzier: You have demand going through the roof. There is this growing number of millennials that want to become homeowners themselves, that have the money to buy houses and want to buy houses. On the other hand, you just have no supply. There just hasn’t been much housing construction since the 2008 financial crisis for a number of reasons. And then throw in on that, this growing phenomenon of investors coming in.
Ryan Knutson: Over the last decade, publicly traded companies, private equity firms, and smaller investors have all started buying single family homes and renting them out.
Konrad Putzier: You’re seeing almost a fifth of all homes that are sold in the US now are selling to investors, which is way higher than it used to be. So think about it, on any given street, one in five homes is now sold to an investor. And even as late as 2009, it was less than 10%. So essentially the share of investors in the housing market has doubled during that period.
Ryan Knutson: This means there are more houses to rent, but fewer available for people like Chasie to buy. In fact, Chasie rents her house from a private investment company that’s based in California. They’re just one of several firms investing in Cincinnati real estate. We couldn’t reach them for comment.
Konrad Putzier: So these out of town, private equity investment firms have identified Cincinnati as a really appealing market to get into. Houses there are just incredibly cheap to buy compared to what the rent is. So you can actually get a decent return if you buy a house and rent it out, because rents compared to the sales price are relatively high.
Laura Brunner: So really, our awareness of this issue started with an article in the Wall Street Journal.
Ryan Knutson: That’s Laura Brunner, a Cincinnati official who’s been worried about the influx of big out of town investors.
Laura Brunner: It talked about this trend and how Ohio was being particularly targeted because we have low home values and high rents.
Ryan Knutson: Laura runs an organization with, kind of a confusing name.
Laura Brunner: The full name is the Port of Greater Cincinnati Development Authority. We just don’t have a port.
Ryan Knutson: Instead of managing a port, Laura’s organization works to improve property values in Cincinnati and boost home ownership. It normally buys and redevelops land and other properties, and then sells at affordable prices. Some of its money comes from taxpayers, but it gets most of its funding by issuing bonds. After seeing that Wall Street Journal article about investment firms, Laura decided that her organization should do some of its own research. They found that since 2008, five companies bought more than 4,000 houses in the county where Cincinnati is. Big investors often say they’re expanding the supply of affordable rentals, but home ownership advocates were telling Laura that these out-of-town investors were making it hard for local residents to buy homes. Laura saw that as a big problem, especially for low to middle income buyers.
Laura Brunner: Home ownership is the best way in our country to create wealth. To have a house that appreciates, have your mortgage payment actually be a savings account … partially at least. A savings account that you can borrow against to send your kids to college. So if we take a significant percentage of the homes off the market, that’s a problem. It’s a bigger problem then, when it’s in these particular neighborhoods. Neighborhoods that are low to moderate income, often black and brown people, and say, you in particular, don’t get the chance to own a home. It’s taking wealth, the wealth creation out of our local economy and putting it somewhere else.
Ryan Knutson: One thing that private investors have said is that a lot of people in America want to just rent homes. They don’t want to buy because maybe they don’t have enough savings or many other reasons. And so by buying single family homes and turning them into rentals, they’re increasing the supply of homes to rent. And when you increase the supply, it can keep the cost of rent lower.
Laura Brunner: Well, once again, I think the other perspective on this is that the rent that they’re paying now is more than the mortgage they would have to pay. Now, granted they have to have the funding for the down payment and they might have to have more of a savings for repairs, but that’s where home ownership training and having a bigger support system is so valuable.
Ryan Knutson: Last year, Laura got a call that she thought could be her opportunity to address the threat she saw from private investment. It was from a real estate firm. They told her that a California based investor was in foreclosure and was looking to offload a bunch of properties. 194 of them were in the Cincinnati area, including Chasie’s house. And the real estate firm was asking if Laura’s organization wanted to bid on them. The Port had bought homes before, but never on this scale. So when this real estate firm called you up and said, we’ve got these homes for sale in Cincinnati, what did you think?
Laura Brunner: Well, I’m a fast thinking risk taker. And what I said was, heck yes. We’ll figure it out. We’re definitely interested.
Ryan Knutson: Why? Why was your first thought, heck yes?
Laura Brunner: Because we knew from the very beginning that if we didn’t buy them, just another investment group would buy them and keep these houses out of home ownership for the foreseeable future.
Ryan Knutson: But then, 13 other bidders showed up. That’s after the break. Before Laura got that phone call from the real estate firm that was looking to sell a bunch of houses, she hadn’t been thinking about taking on a project at this scale.
Laura Brunner: It came to me in that moment. But then, obviously, between that moment of saying, heck yes, we’re interested, between then and when we made the bid, we obviously developed a plan.
Ryan Knutson: The plan Laura and her colleagues came up with was to buy the homes, renovate them, and then sell them to Cincinnati residents. Current tenants would get first dibs, and the Port would help connect them to financial counselors and mortgage lenders to try to help them buy. But getting the homes wasn’t going to be easy. Laura was going up against 13 other bidders, including some major institutional investors. Did anyone say Laura, this is crazy.
Laura Brunner: No. And honestly, our board, on the last day, when best and final bids were due, we had a board meeting that morning. And I told them where we were and said, we’re sticking with the bid we made, we think we’re in good shape. My board said, raise your bid. We don’t want to lose them. This is too impactful of an opportunity for us. We cannot pass it up. So I went back and raised our bid another $500,000 that day.
Ryan Knutson: Laura’s final bid for those 194 homes was $14.5 million. That works out to about $75,000 per house. So do you remember the moment when you won the bid?
Laura Brunner: Yes. There was a lot of hooting and hollering. We were nervous until the very last minute. We tried to feel confident for a while, but then we were like, oh man, somebody is going to come in and outbid us by enough that they can’t turn that bidder down. And then we just knew the way that would play out for all these people.
Ryan Knutson: Laura says the Port isn’t looking to make a profit, it’s only hoping to break even. It’ll fund the purchased by taking on debt, which it plans to pay back when it sells the houses. It sounds like this actually is a very complicated project. I mean, you’ve got to fix up the homes. You’ve got to be a landlord to 194 homes. You’ve got to try to get mortgage assistance to all these people. Are you biting off, maybe more than you can chew?
Laura Brunner: It’s not more that we can chew, but it’s, of course, going to be a lot of work, but all great impact is hard. You can either do the easy stuff and make little impact, or you can do the hard stuff and make a big impact. And that goes back to why I love this job, because we are willing to work hard and make a big impact. And I’m not going to let you discourage me.
Konrad Putzier: So what the Port Authority is doing here makes sense on paper.
Ryan Knutson: That’s our colleague Konrad, again.
Konrad Putzier: They have low cost of capital. They think they can break even on these deal. If all works out, all these tenants are going to be homeowners and they’re going to be happy. But even what the Port Authority is doing carries some risk, right? It’s a lot of money involved. It’s possible that the repair and renovation work that they have to do on these houses is way more than they’re anticipating, it’s going to be way more expensive. So there is the chance that this is not going to work out. But I think the fact that the Port Authority is willing to take these risks just shows how concerned they are about this influx of single family rental investors.
Ryan Knutson: Has this been attempted anywhere else?
Konrad Putzier: To our knowledge, this has not been attempted on this scale anywhere else. There are community land trusts in places across the country that are basically nonprofit community groups that are buying homes, and then making sure that they remain affordable for the people that live there. But often, those are on a much smaller scale. They usually wouldn’t buy 200 homes in one fell swoop. So this is certainly a game changer for the housing market. And if it becomes a trend setter, if other cities follow the example of the Cincinnati Port Authority, it could really have an impact on the housing market.
Ryan Knutson: It could also be a game changer for Chasie Robinson. She lives in one of those homes the Port is buying. Which means that as a tenant, she’ll have a chance to buy the home she’s currently renting, which she says is something she’d really like to do. Were you skeptical that the Port Authority would actually follow through on this plan and that you might actually be able to buy this house?
Chasie Robinson: Well, you’re always skeptical. I’ve been burnt quite a few times, so I’m still in wait and see mode.
Ryan Knutson: So if this does work out with the Port Authority and you are able to buy this house, how do you think it’ll make you feel?
Chasie Robinson: It’ll take a lot of weight off of me. I won’t be waiting for the next shoe to drop with the house. And right now, that’s how I feel. That’s the reason why I’m working extra hours. So that we can get this money up as fast as possible. And just in case, we’ll have it for a down payment or if something else happens, we’ll be able to deal with it. I’ve worked since I was probably about 14, so I want something to show for all that. And it would also make sure that my grandkids always have a place that is home. A foundation to come back to.
Ryan Knutson: That’s all for today, Thursday, January 27th. The Journal is a co-production of Gimlet and the Wall Street Journal. Additional reporting in this episode by Will Parker. Thanks for listening. See you tomorrow.
The Super-Rich Bought More Than $40 Billion In Luxury Homes Last Year
Transactions on homes priced at $10 million or higher jumped 112% in 2021. Los Angeles had the most, followed by Manhattan and Palm Beach.
The rich, who got even richer in the pandemic era, are unceasingly deploying their wealth into luxury homes.
More than $40 billion worth of residential real estate valued at $10 million or higher changed hands in 2021, according to a report from real estate brokerage Compass Inc. That’s more than double the amount in 2020.
In New York’s Long Island alone, five properties — not in the Hamptons — sold for $10 million or more last year, totaling $101 million.
With the stock market booming and interest rates low, the past two years have been good to the richest 0.1%. The luxury home market in turn is being flooded by those looking to both trade up and and potentially protect their money from rising inflation. And despite the prospect of tighter Fed policy and market volatility, purchases show little sign of slowing down.
“Many look at luxury real estate as a safe and appreciating asset that’s a hedge against inflation,” Compass agent Carl Gambino said in the report.
There were more than 2,300 transactions of homes priced at $10 million or higher last year — a 112% jump from 2020. Los Angeles had the most, followed by Manhattan and Palm Beach.
For the markets growing the fastest, Austin and suburban Long Island excluding the Hamptons led the way, with each notching transaction increases of more than 400%.
Texas looks especially promising for future sales in 2022, according to the report, especially the waterfront and ranch properties there. Luxury purchases in Austin totaled almost $190 million last year, while Dallas saw $115 million.
Demand For Second Homes In The U.S. Hits Highest Level In A Year
Interest is up 87% compared to pre-pandemic levels, just below its peak of 90% in September 2020.
Demand for vacation homes in the U.S. picked up pace in January, up 87% compared to pre-pandemic levels, the highest in a year, according to a Thursday report from Redfin.
Interest in second homes is just below the peak recorded in September 2020, when demand for vacation digs was up 90% compared to the same time in 2019, the property portal said. The growth significantly outpaced demand for primary residences, which was up 42% in January compared to pre-pandemic levels.
“Demand for second homes was strong in January as buyers tried to lock in relatively low mortgage payments,” Taylor Marr, Redfin’s deputy chief economist, said in the report. “Mortgage rates surpassed 3.5% in January for the first time since March 2020, encouraging buyers who were on the fence about purchasing a vacation home to commit before rates increase further.”
Although the ability to work from home continues to fuel the second-home market, additional rate increases are likely to curb some buyers’ enthusiasm in the coming year.
“While I expect demand for second homes to remain higher than it was before the pandemic, mostly because of remote work, it may fall slightly in the coming year as mortgage rates continue to go up and fees for second-home loans increase,” Mr. Marr continued.
No surprise, the increased demand has caused prices to surge in seasonal locales, according to the report.
A typical house in a seasonal town—an area where more than 30% of homes are used for just part of the year—sold for $501,000 in December, the most recent data available. That’s a 20% year-over-year increase and was the 18th straight month of double-digit price growth. At the same time, inventory in such locations was down 29% annually in the fourth quarter.
In contrast, the median sales price of a residence in a non-seasonal town was $408,000 in December, a 13% year-over-year rise. Inventory dropped 16% in the fourth quarter, the figures show.
For the report, Redfin looked at seasonally adjusted mortgage-rate lock data from real estate analytics firm Optimal Blue. A mortgage-rate lock is an agreement between a lender and a buyer that freezes an interest rate for a specified amount of time.
Home buyers specify what kind of house they are buying, whether it’s a primary residence, a second home or an investment property, and about 80% of mortgage-rate locks result in a purchase.
The report did not break down demand by region.
Buying A New Home? Make Sure It’s Electric Vehicle-Ready
New electric-vehicle owners should plan ahead to determine their daily recharging routines.
Electric vehicles are gaining momentum. Sales of pure and hybrid plug-ins doubled in the U.S. last year to 656,866, according to data from electric-vehicle sales database EV-volumes, making up 4.4% of the passenger-vehicle market.
With more cars come more questions. Chief among them: how the recharging routine can work at home.
“The real opportunity, but also the real difficulty with EVs, is it’s much more like charging a cellphone than going to the gas station,” says Jacob Bolin, electric-transportation specialist at nonprofit consulting firm Advanced Energy. Where possible, he says, consumers want to plug in where they live and work.
That could mean having to update their home wiring plus bumped-up electric bills when electricity prices are already trending higher.
Here, EV charging experts answer common questions about making the switch.
Can My House Handle Charging An EV?
You won’t blow a fuse if you plug your electric car into a standard wall outlet, says Tom Moloughney, senior editor of InsideEVs and host of the “State of Charge” YouTube series.
You also won’t get very far. Relying on 120-volt household outlets, known as Level 1 charging, will give you between 3 and 5 miles of range per hour, Mr. Moloughney says.
What’s The Difference Between Level 1 And Level 2 Charging?
To reach charging rates between 15 and 40 miles of range per hour, called Level 2 charging, you’ll need to upgrade to a more powerful 240-volt outlet.
Chances are you have some of these outlets at home, since appliances such as electric ranges and clothes dryers rely on them too. For a car, you’ll likely need to install an additional 240-volt outlet in your garage or on the side of your house.
How Much Will It Cost To Upgrade To Level 2 By Installing A 240-Volt Outlet?
Between a few hundred and a few thousand dollars, says Brent Gruber, who directs EV studies at analytics company J.D. Power. “The difference in satisfaction with charging for Level 2 versus Level 1 is so dramatic that the investment in making those upgrades we feel is worth it,” he says.
Mr. Moloughney, who consults on residential EV setups, says new wiring should only cost a few hundred dollars if your fuse box has the capacity for a roughly 30- to 50-amp dedicated circuit. “Most houses can spare that extra amount of electricity,” he says. In 95% of the roughly 500 housing upgrades he has assessed, it cost less than $1,000 to make the change, he adds.
In older homes, however, the service panel might already be full. Replacing the breaker panel can cost up to $4,000, electricians say.
How Much Will My Electric Bill Go Up?
It depends on where you live and which time of day you choose to charge. The national average for electricity is about 14 cents per kilowatt-hour, according to U.S. Energy Information Administration data from November.
That means if you drive a Tesla Model Y, which needs about 75 kilowatt-hours to charge completely (the car’s range is about 318 miles with a full charge), a “tank” of electricity will cost you about $10.50.
The national average for a gallon of gas, in comparison, is $3.53 as of Friday, according to AAA. Smaller cars generally hold 12 gallons of gas, so it costs about $42 to fill up.
If you live in a state such as California with high electricity prices, Mr. Moloughney suggests switching to a time-of-use plan. These plans, which many utility companies offer, adjust pricing based on when you use power. “Your refrigerator has to run all day, but you can set a timer in the car to charge at a certain time,” he says.
You can save money setting your car to charge between midnight and 6 a.m., when prices might be 15 cents per kilowatt-hour versus 40 cents at peak times.
Do I Need To Buy Any Extra Equipment After I Upgrade My Wall Socket?
Many electric cars come with dual Level 1/Level 2 portable chargers. (You can plug the Level 1 into any standard outlet, and the Level 2 into a 240-volt.)
Drivers who want to keep the original charger in their trunk as insurance against roadside stranding can buy a high-quality Level 2 charger for between $400 and $700, depending on the features and power level. Mr. Moloughney, who has reviewed dozens of units, likes the Grizzl-E charger as a more-affordable option, and the smart ChargePoint Home Flex Electric Vehicle Charger and Wallbox Pulsar Plus as higher-end choices.
Can I Charge My Car Outdoors In The Driveway?
Most EV chargers are rated for outdoor use, but certain models hold up better against the elements, Mr. Moloughney says. And you don’t have to worry about getting electrocuted if you charge in the rain. “Twelve years of doing electric-car charging, I’ve never heard of anyone getting hurt from their charger,” he says.
Still, he advises against plugging in during a lightning storm, which can damage the electronics in your car.
What About Superfast Chargers?
You can’t install a DC fast charger at home. The superfast chargers require a level of power (400 to 800 volts) that typically isn’t available in private homes. The chargers also cost many tens of thousands of dollars.
About 16% of EV owners, however, rely primarily on DC fast chargers in places such as grocery stores or office parking lots, J.D. Power’s Mr. Gruber says.
He adds that home charging isn’t likely holding people back from buying EVs: They are waiting for more-robust public charging. “The people who may not be able to charge at home are likely standing by on the sidelines waiting for better public charging and longer battery ranges to make it easier.”
Home Builders Bypassing Individual Home Buyers For Deep-Pocketed Investors
Rising mortgage rates could lead to a pullback in demand by traditional buyers.
Investors who buy and then rent new homes are fast becoming a favorite customer of the home builder industry.
The vast majority of the hundreds of thousands of new homes built last year were sold to individuals and families to live in. But rising mortgage rates are making those purchases much more expensive and could lead to a pullback in demand by those traditional buyers.
However, investors holding billions of dollars are eager to buy these homes in bulk, a boon to home builders who have increased construction in recent months.
More than one in every four houses purchased by a professional rental investor in the fourth quarter last year was a new-construction house, according to a report from John Burns Real Estate Consulting LLC and the National Rental Home Council, a landlord trade group.
Brand new homes were just 3% of what these investors bought during the third quarter in 2019.
Large investors have amassed some $89 billion in capital to spend on building or buying new rental homes and have deployed only about one-quarter of it, according to real-estate research and advisory firm Zelman & Associates.
Home builders often choose to sell in bulk to investors because it allows them to turn a profit on new homes more quickly. Investors have more capital and can close on a large number of homes at once.
As of February, there were 799,000 single-family homes under construction across the U.S., up 28% from a year prior, according to government figures.
Rising mortgage rates, meanwhile, are shallowing the pool of individuals who can afford to buy new homes. The average fixed rate for a 30-year mortgage was 4.72% as of April 7, according to Freddie Mac, up from the 2.97% rate during the same month last year.
Mortgage application volume fell 41% below what it was during the same week in 2021, according to the Mortgage Bankers Association.
That makes selling to rental investors even more attractive to builders, especially those who typically sell to entry-level buyers, said Robert Dietz, chief economist at the National Association of Home Builders, a builder trade group.
“Those potential buyers still want more space,” he said. “And so single-family rental is likely to continue to show some strength.”
Investors say new rentals enable people to live in single-family homes in desirable neighborhoods, where they either can’t afford to buy or prefer to rent. Investors offer a reliable sale even if interest rates rise because many already have cash on hand.
“We can offer them something that feels a lot more certain,” said Sudha Reddy, founder of investor Haven Realty Capital, which has acquired more than $1.1 billion worth of new construction rental homes from builders since late 2020.
Builders like Rich Eneim, Jr., agree that sales to investors have strong appeal. His firm, Keystone Homes in Scottsdale, Ariz., last year decided to refocus almost entirely on rental houses. Keystone has an 800-house construction pipeline, and about half of what it builds now it will sell to investors, Mr. Eneim said. The other half he will hold on to and lease to tenants.
One of Mr. Eneim’s latest developments is The Havenly Fountain Hills, a community of stucco-and-tile homes about 30 miles outside of downtown Phoenix. Houses average only about 1,100 square feet, but they rent for more than $2,500 a month. Collecting rent now and selling to an investor later allows the company to ride out any headwinds in the for-sale market, Mr. Eneim said.
“When we do a for-sale community, we have to sell, no matter what the price is, no matter what the market is, if it’s good or bad” he said. “For rent, we can be patient.”
Many of the new homes investors are now buying were originally conceived as rentals, but a majority are homes that builders later decide to sell to rental companies. When combined, these homes account for as much as 9% of all single-family home starts, according to estimates from the Burns firm, though that percentage has been rising in recent years.
Rental investors also bid up land prices in hot markets, home builders and analysts say. Higher land prices make it difficult to build for entry-level buyers in those areas, analysts say.
Rental builders can often pay more for land because they are backed by larger capital sources, build denser communities with more units and come in with plans to raise rents every year, said Rick Palacios, an analyst at the Burns firm.
“It’s not a shocker,” he said. “In the Southwest, rents are going up double digits, and they have been going up double digits for a while now.”
Investor Home Purchases Drop 30% As Rising Rates, High Prices Cool Housing Market
Buying activity by companies fell in line with the decline in overall home sales amid higher borrowing costs.
Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.
Companies bought around 66,000 homes in the 40 markets tracked by real-estate brokerage Redfin during the third quarter, compared with 94,000 homes during the same quarter a year ago.
The percentage decline in investor purchases was the largest in a quarter since the subprime crisis, save for the second quarter of 2020 when the pandemic shut down most home buying.
The investor pullback represents a turnaround from months ago when their purchases were still rising fast. These firms bought homes in record numbers last year and earlier this year, helping to supercharge the housing market.
Now, investors are reducing their buying activity in line with the decline in overall home sales, which have slumped with mortgage rates rising fast.
But with investors’ large cash positions, and with big firms such as JPMorgan Chase & Co. planning to increase its exposure to the home-buying business, investors are poised to resume more aggressive buying when rates or home prices begin to ease.
These firms have seized on a pandemic-driven rise in demand for houses in suburban areas. These owners rented out the homes and increased rents on homes by double-digit percentages. By the first quarter of 2022, investors accounted for one in every five home purchases nationally.
But ballooning borrowing costs have kept investors from buying as much recently, said John Pawlowski, an analyst at Green Street. Buyers and sellers are also agreeing less often on pricing, stifling sales.
“It leads to a lot of people just putting down the pen,” Mr. Pawlowski said.
Rent growth has also begun to slow. Rents for single-family homes rose 10.1% year over year in September, down from 13.9% in April, according to housing data firm CoreLogic.
That rate of growth is still very high by historical standards, however, and much stronger than in the apartment market. Multifamily rent increases are now much lower by most measures.
Near record-high rental prices are failing to attract as many new tenants, and demand in the third quarter fell to its lowest level in 13 years.
Demand for rental houses has held up better, in part because many of these homes are leased to relatively high-earning people who have found the for-sale market too expensive to buy, some analysts say.
That rent growth for single-family owners hasn’t translated into stock-market gains this year. Investors have lumped these owners in with home builders and sold many of them.
Shares for the three largest publicly traded owners, Invitation Homes, American Homes 4 Rent and Tricon Residential, are each down more than 25% year to date, underperforming the S&P 500 over that period.
Rental landlords also face headwinds from rising property tax assessments that have come alongside enormous increases in home-price appreciation.
At the same time, large rental landlords are coming under greater scrutiny from federal and local governments. Congressional Democrats have hosted a series of hearings focused on eviction practices and rent increases.
Three Congress members from California this month introduced a bill called the “Stop Wall Street Landlords Act,” which proposes levying new taxes on single-family landlords. It would prevent government-sponsored enterprises like Freddie Mac from acquiring and securitizing their debt.
Many of the places where investors have eased purchasing are the same cities where they had counted for an outsize share of total sales.
That includes Las Vegas and Phoenix, where investor sales dropped more than 44% in the third quarter compared with a year ago.
Fewer purchases by online house-flippers, or iBuyers, may have contributed to those declines, according to Redfin. Redfin decided to close its own home-flipping business, RedfinNow, earlier this month.
Nationally, investors still accounted for 17.5% of all home sales in the third quarter, a higher share than they held at any time before the pandemic, by Redfin’s count.
That share seems likely to rise again. Builders with unsold homes due to widespread cancellations by traditional buyers have been looking to sell in bulk to rental landlords.
Meanwhile, some institutional investors are now readying large funds to snap up homes. J.P. Morgan’s asset-management business said this month it had formed a joint venture with rental landlord Haven Realty Capital to purchase and develop $1 billion in houses.
A unit of real-estate firm JLL’s LaSalle Investment Management, in partnership with the landlord Amherst Group, said it plans to buy $500 million of homes over the next two years.
Tricon has nearly $3 billion it plans to tap to buy and build homes. “We will lean in and deploy that capital when the time is right,” Tricon’s Chief Executive Gary Berman said on a November earnings call.
While a recession could bring down borrowing rates, it would likely be accompanied by higher unemployment, making it difficult for traditional buyers to take advantage, said Daryl Fairweather, Redfin’s chief economist.
For investors, however, that could offer an opportunity to acquire homes at favorable prices.
“An investor may have more resources to jump in at exactly the moment when rates decline,” Ms. Fairweather said.
U.S. Investor Home Purchases Plummeted In The Third Quarter
Pandemic boomtowns including Phoenix, Portland and Las Vegas saw the largest decline, Redfin says.
U.S. real estate investors are putting the brakes on home purchases while facing falling price growth, higher borrowing costs and economic uncertainty.
In the third quarter, purchases by investors fell 30.2% year over year to roughly 65,000 homes, the second-largest decline since the Great Recession, from 2007-09.
The largest quarterly decline was during the second quarter of 2020, when investor activity was hindered by the onset of the pandemic, according to new data from Redfin released Tuesday.
In dollar terms, investors bought $42.4 billion worth of homes in the third quarter, down 26.3% from $57.6 billion one year earlier, according to the report.
The number of single-family homes purchased by investors declined 32.3% year over year in the months from July to September, more than any other property type. Investor purchases of condos and co-ops were down 27.5%, according to Redfin.
“It’s unlikely that investors will return to the market in a big way anytime soon. Home prices would need to fall significantly for that to happen,” Sheharyar Bokhari, Redfin’s senior economist, said in the report.
Investor purchases accounted for 17.5% of all home purchases during the third quarter. The overall home purchases fell 27.4% year over year, Redfin said.
The brokerage tracks housing markets across 50 most populous metro areas and defines investor purchases as those bought through entities instead of individuals.
Phoenix; Portland, Oregon; Las Vegas; Sacramento, California; and Atlanta, which were top migration destinations during the pandemic, all had more than 42% annual decline in investor home purchases, according to the report.
“The housing markets that investors are backing out of fastest are those that rose rapidly during the pandemic and are now falling rapidly,” Mr. Bokhari said. “That volatility creates a lot of uncertainty, which raises the risk of investors losing money.”
In the second quarter of last year, purchases by investors hit record high, when 67,943 homes were bought for investment purposes, up 106.7% from the same period of 2020.
The Airbnb Collapse Is Real
Arizona And Texas Cities Among Hardest Hit, Data Show
Call it the Barbie top?
Vacation rental group Airbnb announced earlier this week that a Barbie-themed hot-pink DreamHouse mansion in Malibu is temporarily back among its worldwide listings.
This time, two lucky applicants will get two free nights in the mansion, as part of a promotion from Airbnb ABNB, +3.27% and Warner Bros. for the soon-to-be-released comedy about a real-life version of the iconic doll. The movie stars Margot Robbie and Ryan Gosling.
But back in the real-life Airbnb world, times may be getting tough as new data from one analyst show rental dollars may be dropping in major cities, as the debate continues as to whether the U.S. consumer is running out of spending steam.
Nick Geril, CEO of Reventure Consulting, late Tuesday tweeted the below chart from short-term rental data and analytics group AllTheRooms that showed revenue per available listing dropping by nearly 50% in some top U.S. cities.
The data highlighted the change in that revenue (RevPAL), calculated on a three-month-average basis, between May 2022 and 2023. The biggest decline — 47.6% — was reported for listings in Sevierville, Tenn., hometown of country-music legend Dolly Parton and her Dollywood theme park as well as a shopping destination in the foothills near Great Smoky Mountains National Park.
A similar drop in revenue per available listing was seen in Phoenix, while the resort town Myrtle Beach, S.C., saw a 45.1% fall over the one-year span. On the lower end of the scale, the Florida destinations Panama City and Orlando saw nearly 35% drops in revenue per available listing.
Not everyone accepts Geril’s information as factual. Jamie Lane, chief economist and senior vice president of analytics at AirDNA, which tracks performance and trends in short-term rentals, offered up different numbers in a Tuesday tweet. His figures had RevPAL in Sevierville down 8.4%, far less dramatic than the 47.6% fall-off reflected in Geril’s data.
Lane did not, however, explain why the two sets of data were so different.
In a twitter thread, Geril drew a line between Airbnb and the housing market, using AllTheRooms data to show how Airbnb and other vacation-rentals-by -wner listings are at roughly 1 million, versus just 570,000 properties for sale in the U.S. housing market. This, he said, would create “huge home price downside if struggling Airbnb owners elect to sell.”
He reasoned that fewer people are now working from home and vacationing in states like Montana, Texas and Tennessee, he said.
He said owners also may not also be aware of what he called a pending “Airbnb crash,” noting that Phoenix has 18,000 short-term rentals but just 8,000 properties for sale. With revenue down around 50% for the former, it creates a “cocktail for massive forced selling,” he said.
The most trouble could be looming for “newbie” Airbnb owners who financed property purchases via mortgages in the last two years and “got in at a high price. And have a high monthly payment.
And little margin for error,” he said. While they could be first to sell later this year, more seasoned owners who paid less for houses with lower-interest-rate mortgages may be able to ride out a storm.
“The data is not consistent with our own data,” an Airbnb company spokesman told MarketWatch in an email. “As we said during our Q1 earnings, more guests are traveling on Airbnb than ever before, with Nights and Experiences Booked growing 19% in Q1 2023 compared to a year ago.”
Airbnb shares have climbed nearly 50% this year, more than recouping losses in 2022. Last month, the company reported a record in nights booked in the first quarter, driving the first profitable start to the year on record, but the stock fell on a less-bullish-than-expected forecast by executives, who said growth in nights and experiences booked would be “unfavorable” a year-earlier travel surge powered by pent-up demand in the wake of pandemic-era lockdowns.
Despite signs of weakening in some Airbnb markets, the U.S. consumer doesn’t seem to be deterred from vacationing this summer as spending continues to shift from goods toward experiences.
A survey by Allianz Partners released last month predicted total vacation spending exceeding $200 billion this summer, 10% higher than in 2022 and 39% above 2021’s level and 111% more than prepandemic 2019.
Records are also expected to be broken for the number of people traveling — more than 50 million — for the Fourth of July, the AAA has said.
Data released Tuesday showed U.S. home prices rose in April amid a scarcity of listings, as buyers readjust to higher home-loan rates.
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