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Are Institutional Investors Helping Sink the Home Market?

Updated: Jun 11, 2022

By Erik Sherman

May 02, 2022 at 08:26 AM

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And, if so, how big a factor are they?

A common question among the public is whether institutional investors continue to scoop up massive numbers of houses with large cash war chests and drive prices up to a point that regularly people can no longer afford one.

According to a Redfin analysis, institutional investors purchased 18.2% of US homes in the third quarter of 2021. And, as the firm separately noted, 43% of real estate agents think private pocket listings have become more common. Such purchases are a tool used by institutional investors interested in blocks of houses.

So it’s not surprising that the National Association of Home Builders brings this question to the forefront. Everyone in the industry knows that prices have skyrocketed, but the NAHB put it into an interesting context: “Some homes are now earning more for their owners than their jobs: for the first time, the nationwide growth for the average American home value exceeded the inflation-adjusted median pretax income.”

That may be good for existing homeowners, but it’s perilous for people trying to buy a first house. There’s no relief in renting, as the average monthly asking rent is now $1,901, according to Redfin, but things are still worse for homebuyers with rising mortgage rates.

And this is where institutional buying reenters the discussion. As the NAHB puts it, “Although the causes of the affordability crisis vary, purchases by institutional investors or private firms of for-sale and for-rent units to rent or flip to sell for higher prices are potentially making first-time homeownership more challenging, which limits the ability to build wealth.”

Offered examples include a Bloomberg article noting that some of the tech platforms, like Zillow and Opendoor, “are selling thousands of homes to institutional landlords backed by KKR & Co., Cerberus Capital Management, Blackstone Inc., and other large institutions.” These sales often involve those pocket listings that may be becoming more common.

And then, as the New York Times reported, Blackstone was expanding its reach into rental housing, as an inflation hedge, though purchasing the REIT Preferred Apartment Communities. That seems a likely vehicle for future purchases to expand the rental house market.

Ultimately, it’s not the institutional investors moving in so much as years of underbuilding both houses and multifamily properties. That created a shortage that pushed up the values of houses, making them an attractive investment vehicle.

The danger for investors is that eventually push will come to shove and people, and their local governments, will demand changes. St. Paul, Minnesota recently passed significant rent control legislation. A number of states have considered rent control legislation, pro or con, but didn’t enact anything yet. If house prices and rents keep escalating, what will happen next year?

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