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Institutional Investors Are Having a Big Impact on Home Sales, SFRs

By Erik Sherman

May 18, 2022 at 08:10 AM

Low interest rates and rising inflation drive a demand for returns from residential real estate.

Institutional purchases of US homes are on the upswing according to data from the National Association of Realtors. Agreeing with other data sources, the analysis suggests that institutional investors, reacting to macroeconomic forces, are taking a significant portion of existing home sales with a likely emphasis on lower-priced units that would otherwise be available to first-time and lower-income buyers.

Using property deed records from Black Knight, the NAR analysis found that institutional buyers were 13.2% of the residential sales market in 2021, up from 11.8% in 2020. As with an analysis recently done in Newark, New Jersey, the data rests on a definition of institutional buyers being companies, corporations, or limited liability companies.

That has a potential shortcoming in that smaller buyers of homes might use an LLC under recommendations from lawyers and CPAs to protect their personal finances by such a business structure. However, it still suggests that, whether by an institution or smaller investor, a significant amount of property is coming off the market as private homes and being turned into rental units.

There was also a correlation between where institutional purchases were heaviest and the availability of homes: “in counties where the investor share was higher than the national average, listings were down 7% year-over-year as of March 2022, and in counties where the investor share was lower than the national average, listings were down just 4% year-over-year. Texas led all states with the highest share of institutional buyers (28%), followed by Georgia (19%), Oklahoma (18%), Alabama (18%) and Mississippi (17%).”

In addition, median prices that institutional investors paid were about 26% lower than the median prices in the same states. “The difference could be due to differences in quality of homes being purchased, as suggested by the NAR survey where 42% of respondents reported that institutional investors were purchasing homes that needed repair,” the analysis noted. “States with a higher share of institutional buyers than nationally had a lower price difference of 20% while states with a lower share of institutional buyers had a price difference of 30%, which indicates that more competition among institutional investors tends to push up their price offers.”

A second major finding was that institutional buyers tended to purchase homes in areas with strong housing and rental markets as well as high incomes. Additionally, there was a correlation between institutional purchases and “a high density of minority groups especially Black households, with twice as many Black households in markets with higher share of institutional buyers.”

The third major finding conflicted with the image of institutional buyers simply outbidding individuals for houses. The offer price is about the same as non-institutional buyers, but they “offer cash and services that home sellers prefer.”

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