Over the last several months there’s been a lot of hype about Wall Street driving up the housing market. I’ve seen a few dozen headlines about how no one can buy houses because large institutional investors are buying up all the houses. Being the skeptic that I am, I wanted to see if this is really true.
Let’s dig into the data and information to uncover what Wall Street’s role is in today’s red-hot housing market—as well as the risks Wall Street poses to both homebuyers and small-time investors in the long term. To do this I looked at some data from Redfin, which shows that the share of homes that are purchased by investors is currently at 15.9%. For context, this is still a bit below where we were pre-pandemic, when investors were buying about 16.1% of all homes in the U.S.
Check out this graph below with data from Redfin. As you can see, the share of homes purchased by investors is recovering from a sharp decline last spring but is only now approaching where we were a few years ago.
Now, measuring the share of investors is pretty tough, but I looked through a few reports from Redfin, John Burns Real Estate Consulting, and CoreLogic—all respected firms in the real estate industry. And while they all had different methodologies, they all showed similar patterns: Investor homebuying has not reached new heights since the pandemic. And some reports, like from John Burns, show that investor homebuying peaked around 2013.
This provides a strong indication that investor activity is not leading to the surge in home prices. Nothing has really changed with respect to what percentage of homes are being purchased by investors. By all accounts, Wall Street investor activity is either lower than or, at worst, equal to smaller-scale investor activity over the last decade.
If we want to focus on large investors, recent data is tough to come by. However, a 2018 CoreLogic survey estimates that only about 1% to 2% of all single-family purchases were made by large investors, whereas about 18% were made by small investors.
Another data point suggests that as of today Wall Street’s activity is not fueling this chaotic housing market. Instead, the housing market is being fueled by the fundamentals:
The current housing market is more a function of these three factors than it is the activity of institutional investors. However, that might be about to change. These institutional investors are not dominating the housing market yet, but they have some serious advantages over regular homebuyers or small-time investors like myself. And that has me concerned for what might happen in the coming years.
As we dive into this topic, let’s first define who these Wall Street or institutional investors really are. The biggest of all companies is Invitation Homes, which—to no one’s surprise—is an offshoot of BlackRock, the world’s largest asset management company. Invitation Homes owns about 80,000 single-family residences across 16 markets in the U.S., which is undoubtedly huge.
In fact, it’s so huge that they are about 58% larger than one of their closest competitors, American Homes 4 Rent. But, to keep this in perspective, there are about 16 million single-family rental homes in the US, and Invitation Homes owns about 0.5% of them.
There are an estimated 80 million single-family residences in the US and Invitation Homes owns just one-tenth of 1% of that. To reiterate, companies like this are big, but they’re not currently controlling the housing market.
However, companies like Invitation Homes have massive advantages over individual investors and regular homebuyers. These advantages mean they can outcompete almost everyone—and, therefore, will probably only increase their acquisitions.
Let’s break down the advantages they have over small investors.
Right now, interest rates are incredibly low for regular buyers, and that’s great. If you or I were to go out and look for a mortgage, we could probably get a 30-year fixed for somewhere around 3% or 3.5%. It is close to the lowest it’s ever been. Invitation Homes, on the other hand, can borrow money at something like 1.5%.
That may not sound like a lot, but it means they can bid $10,000, $20,000, or maybe even $30,000 or more on a house and still pay the same amount on their loan that you and I would for a smaller loan. In short, institutional investors can offer more on a house and pay the same—a huge advantage.
The second is cash offers. Heard of anyone losing out to cash offers recently? I sure have. Well, not all of those are from institutional investors, but you can be sure that institutional investors can and will make cash offers and either hold the properties in cash or refinance later. This gives them a huge advantage in winning good deals. They can close in a matter of days when regular homebuyers have to wait weeks or months.
The third advantage is data and research. We at BiggerPockets are working hard to bring our members, who are almost all relatively small investors compared to these companies, as much data and research as we can. But these companies have teams of data scientists building algorithms to predict which properties and markets will yield the best returns. Not many people have access to that.
The fourth advantage is patience. These companies don’t need somewhere to live—they just want to chase the best returns. They can wait as long as they want to find a good deal. Regular homebuyers often don’t have that luxury.
The fifth advantage is the efficiency of scale. I told you earlier that Invitation Homes has about 80,000 residences. They absolutely have multiple teams of maintenance people, leasing agents, property managers, and more. They can use their purchasing power to source materials for cheaper, and they can rehab properties for cheaper. In general, the larger you become the more efficient you get, and that is definitely true of these companies.
The sixth, and, perhaps, most concerning of all these advantages, is market share in individual markets. I said earlier that these companies aren’t controlling the housing market on a national scale, but they could on a local scale.
There was a report that Invitation Homes actually bought 90% of the inventory in a single zip code in the early 2010s. Again, that won’t move the whole housing market, but this essentially gives Invitation Homes a monopoly on housing in this local market. They can outbid normal homeowners who just want to find a primary residence. And then when those homeowners turn to renting, they are facing the prospect of renting from a massive corporation that owns a large chunk of the rental inventory in your area, giving them pricing power over rent.
This has the potential to truly spiral out of control. We already have an affordability problem in American real estate where everyday Americans and individual investors cannot afford to get into the market. If big institutional investors start targeting a specific market, that market could really get out of control. They could start dictating pricing in both the housing and rental markets in any area where they get sufficient market share.
And let’s be clear: This is their stated business model. They are concentrating on specific types of markets like Charlotte, Atlanta, Phoenix, and Las Vegas. And we should expect those markets to see massive increases in both housing prices and rents in the coming years if this trend continues.
And their tactics seem to be working. All these advantages are leading to strong performance. Invitation Homes has a portfolio of about 16 billion and collects about $1.9 billion in rent, which is almost exactly a 1% rent-to-price ratio. This means that their portfolio, as a whole, is meeting the 1% rule, which is increasingly difficult to find for smaller landlords and individual investors.
Also, the types of homes these companies buy tend to be the same ones individual investors like to target: mid-price range fixer-uppers that make good rentals. Because these companies can bid more (oftentimes using cash) and renovate at lower costs, it gives them a structural advantage over the individual investor.
In this blog post, I’ve mainly focused on Invitation Homes, and although they’re far and away the biggest, they are just one example. There are dozens of other companies out there like this.
So, what to do about it? Should you just throw in the towel and buy stock in these giant companies? No way! There are still good deals to be had, and if you’re diligent and do your research, you should be able to find them. Like I stated earlier, interest rates are low, and long-term supply constraints and demographic trends indicate that the housing market is likely to show solid gains over the next decade, even if there happens to be a temporary slide in prices. Most importantly, don’t forget you have advantages too.
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You know your market better than any algorithm ever could (this is coming from a guy who went to graduate school to study algorithms). You care more about any individual deal than any corporation ever could. These companies are looking at macro-economic trends so they can find a market in which to buy hundreds, if not thousands, of residences. You, on the other hand, can hustle and find the one or two great deals in your neighborhood.
You’re more creative. If you’re just looking at a few deals at a time, you can figure out the best way to add a bedroom, improve the value and generate better returns. You can devote more time to making sure each deal produces a great return than any of these companies can. They are going to make their operations as generic as possible and do everything the same exact way—you can do the opposite. You may not be better at buying 200 units, but you can sure be better at buying just one.
Lastly, you can be a better landlord. By all accounts being a tenant in one of these company’s units can be a miserable experience. You, on the other hand, can provide an amazing experience for your tenants. By finding great tenants and developing strong relationships built on mutual respect, you can reduce your vacancy rate, reduce wear and tear on your properties and ensure you have excellent tenants for years to come.
By no means should we all panic. Individual homebuyers and small-time landlords still have advantages. Investing in real estate is the best way for everyday investors like you and me to achieve financial stability and independence, but the activity of these big firms is something to monitor. I plan to continue following what’s happening in this space for myself and you, too!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.