The Incredible Shrinking Real Estate Investor

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Investors continue to be a big percentage of home sales although overall home sales are rather low. Big investors started pulling back from the housing market late in 2013 and steadily into 2014. But even as that trend continues, we find some states heavily dominated by investors. In more “normal” markets all-cash buyers represent 10 to 15 percent of total sales. These sales in the past largely went in expensive markets rather than investors buying up single family homes to turn into rentals. Big investors have had a good share of activity over the last four years. In this period, institutional investors have bought up half a million homes in targeted markets. While this may be a small portion of overall sales, when this money is targeted in one specific area, rapid price increases can unfold. While California has a large share of all-cash buyers, we find Florida and Nevada leading the way.

All-cash buyers pulling back

It is important to understand that while the sheer number of cash buying is pulling back, all-cash buyers still make up a sizable portion of all home sales. In California, all-cash buyers continue to make one out of every four home sales. This is twice the historical rate in a market that still has very little inventory. But states like Florida and Nevada continue to see all-cash buying as the cornerstone fueling the market.

Take a look at this data:

Source: RealtyTrac

Cash buyers have pulled back in big numbers but continue to be a large portion of total home sales. In the last few years we have seen a massive number of households becoming renters. It is still clear that most people want to own across the country. This is a general perspective but the market with Millennials shows that 6 out of 10 would prefer renting. Future home sales will need to come from younger buyers unless older people plan on trading houses to one another in an internal game of property ladder. Trade crap shack one for junk shack two. And in places like Florida or Nevada, it is highly doubtful your traditional buyer is paying all-cash for a $200,000 or $300,000 home. It is more likely it is an investor looking to flip or to turn a property into a rental.

So has this investor play been a good one? I would say an astoundingly YES!

Over the last ten years, the number of homeowners has fallen by 1 million. During this same ten year period we have added 10 million renter households. Now the RealtyTrac data only tells us that in the last four years, half a million properties were bought by big investors. But heavy investor buying started in 2008. Also, the data is looking at institutional buyers. How many non-institutional investors bought properties as well? Given the volume of all-cash sales and absentee buyers, we know it was enormous. Plus, the home-ownership rate has fallen dramatically suggesting one big buyer buying up multiple properties in many instances. For example; Blackstone has been buying up thousands of homes.

Why are investors all of a sudden pulling back if the renting trend is so obvious? First of all, rents are a big function of local area incomes. You have little ability to use a mortgage to leverage your monthly rent payment. This has to come out of earned income in your bank account. So there is a limit as to how much landlords can increase rents. We are already seeing in the high price markets that people are doubling or even tripling up in units just to cover the rent. It is clear that some don’t understand the wear and tear that comes from having multiple tenants in units. Also, many in higher priced states are moving back home with parents since they simply cannot afford rents.

There are two main driving forces pulling investors away. The first is cap rates are not looking all that attractive. Next, prices have been driven up to a point where yields are looking inflated. You can see that price gains are coming off their lofty 2013 pace:

Nationwide home prices were going up 13 percent at some point in 2013. The latest point has them up by 4 percent. Investors are in it to make money. It should be telling that many pulled back dramatically in 2014.

One thing that is clear is that we are in a renting trend: 1 million fewer homeowner households and 10 million more renter households over the last ten years. That speaks volumes. 

Interesting stuff. Is cash sale the only info being used to determine investor v. owner occupant? I sold properties last year to OOs, all cash, one as high as $175K. In my farms, in the lower end, cash sales to OOs are common. Lots of cash, not a lot of credit and/or a fear of banks. Seems like cash sales wouldn't be a very accurate way to determine investor v. OO.

Welcome to BP. Several good points made in your post. Especially about the hedge fund purchases and slow down. Vegas' recovery was largely due to their purchases at the time inventory shortages began due to new legislation back in 2011. Those two factors combined really sparked the boom years of 2012 and 2013. Once they slowed down due to cap rates as you mentioned the local market became more balanced in regards to inventory and demand. First time home buyers and owner occupants seem to be driving demand on the higher priced homes while the cheaper condos and town homes seem to still be attracting mom and pop investors. 

Again welcome to BP!

Welcome aboard, Gregg!

"One thing that is clear is that we are in a renting trend: 1 million fewer homeowner households and 10 million more renter households over the last ten years. That speaks volumes."

I agree that this is huge.  Will the trend continue or reverse, and when?

I don't think that hedge funds pulling out of the SFR market is necessarily a bearish sign. It was an anomaly that brought them in the first place. A historical price correction and lending drying up, created a one time opportunity that they jumped on, since equities were giving them very little a few years ago.