The Elephant in the Real Estate Room


Rarely articulated publicly but high on the agenda for many traditional real estate folks is the question:  How soon will it be before those foreclosures they converted into rentals flood back onto the market and reduce home prices?

It’s the elephant in the room that won’t go away in light of inventory shortages, double digit price increases and record new home construction.

While one camp dreads the prospect of millions of mom-and-pop investors simultaneously booting their tenants and listing their SFR with their favorite Realtors, another group applauds the idea.  Here’s a passage from the State of the Nation’s Housing 2013, an annual report by the Joint Center for Housing Studies at Harvard that was published Wednesday.

A key issue for markets where investors have been most active relates to the longer-run impact on housing prices. For now, investors are earning returns from rents, but eventually they are likely to liquidate their real estate holdings when prices have recovered sufficiently. Over the past 12 months, prices of bottom-tier homes have already climbed sharply in several key metros including Atlanta (up 37 percent), Las Vegas (up 34 percent), and Phoenix (up 39 percent). If many investors were to decide to lock in their gains by selling, house prices in these areas could again weaken…

Since much of the increased demand for rental housing has been satisfied by the expanded supply of single-family rentals, future market adjustments may come from a return of these units to owner-occupancy.

The JCHS has a coined a term for the conversion of these properties from rental to ownership: tenure switching.  Tenure switching is not as simple as it may appear.  Most investors today, and probably yesterday as well, aren’t investing for appreciation and don’t want to just “lock in their gains” as the JCHS report suggests (See Repeat After Me: “Appreciation is a Loser”).  They are in it for the cash flow in the form of rents, which over time will generate a much more attractive return on investment than selling after only a few years of renting.

A couple of months ago, when we were designing the National Survey of Investors we decided it might be a good idea to ask investors themselves just what it is that they plan to do.  Without introducing the thought that prices might continue to rise (In May, when we conducted the survey prices were accelerating at a record pace but have slowed down since).

We simply asked investors how long they intended to hold their properties before selling.  Of the investors who own rentals, only 37.5 percent plan to sell in fewer than five years, only 10.4 percent would sell in less than one year after buying their investment property.  Most of the investors in the survey were not professionals who make a living buying and managing rentals but “amateurs” who own just one or two properties.  Some 65.8 percent own an investment property but have no plans to purchase more.  Only 8.8 percent in of the investors in the survey sample make more than five purchases a year.

Yet it is these more active investors, coupled with the hedge funds, who are in a position to impact local housing markets the most should they choose to sell off large numbers of properties suddenly because they own the most.  Yet if their goal is to realize profits based on appreciated value, they might shoot themselves in the foot by flooding local markets.

Reminds me of the fears following the Attorneys General agreement on Robogate last year.  I was one of those raising alarms about floods of foreclosures being unleashed upon vulnerable local housing markets (Weather Report on the Foreclosure Storm).  Last March I questioned Marc Fleming, chief economist at CoreLogic, about it.  Don’t worry he said.  Lenders would not do that, it would be against their interests to lower prices for their foreclosures.  He was right. I was wrong.

Likewise it makes no sense for investors, large or small, to sell off profitable rentals into a market where everyone else is doing the same thing.

Time to tell the elephant in the room to return to the zoo.
Photo: Murilo Morais

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. In my area the lower tier homes would be gobbled up immediately by demand. I don’t think a flood of investor owned properties would hurt us much at all.

    I also question how much investor owned inventory is actually out there. Like you said, most investors aren’t looking to sell as soon as prices go up. The hedge funds might look to sell, but they make up a tiny percentage of the market.

    • Mark,

      Thanks for your comment.

      To answer your question, some 52 percent of all rental units in the U.S. are single-family homes, housing 27 percent of all renters. Most, 3.6 million, were originally built for owner occupancy but passed into the ranks of rentals when their owners lost them through foreclosure. From the peak of the housing boom in 2005 to 2010, single-family rentals grew at 21 percent versus just a 4 percent increase in total housing units, As of May, institutional investors owned 59,150 properties, according to one estimate.

      By comparison, about 4.66 million existing homes were sold in all of 2012.

      CORRECTION: Please add a “not” to the sentence near the end of the third paragraph from the end….. Lenders would NOT do that.



  2. Good article Steve,

    I would have to agree with you. If your a serious investor with multiple properties, I might sell off the less desirable of my income producing properties as prices climb in order to free up money to roll into better deals or restructure financially, etc. I’d treat it more like the culling of my property herd. Pick out the ones that have been problems or aren’t earning the best ROI and put those back on the market to create more capital. Now as far as HedgeFunds go, not even going to try to guess what they’ll do. But if they actually do have a long term plan, I could see something like this happening but at a pace that keeps the market prices consistent and not just dumping all at once. My 2 cents worth.

    • Roy;

      Thanks for your comment. I totallt agree and I think that’s what most serious investors would do. The real wild card, in my view, are the “amateur” investors, the folks who rent out their old house because they couldn’t afford to sell it when the moved or people who have inherited a house they dont want to live in themselves and ar just counting the days until the market is good enough to list it.

      There are a LOT of those kind of landlords and I dont think anyone knows what they might do….

      Stay tuned!


  3. Jerry Kaidor on

    I run apartment complexes in the CA central valley, and I can *hardly wait* until the glut of investor-owned SFR’s works itself out. Both my rents and occupancy are down because of it. Around 2008, the phone stopped ringing just like somebody had flipped a switch. Our section 8
    business pretty much went away – who in their right mind would have the government rent them an apartment when they could get a house?

  4. Great post Steve, I think the JCHS quote that you opened with is right on the mark. In fact Tom Barrack over at Colony was just saying that their REO-to-rentals (RtR) Colony American Homes was an appreciation play, not an income deal. Of course that was after they pulled the plug on the REIT IPO exit. It seems that the invest for income theme has lost it’s sparkle now that talk of the Fed’s ‘tapering’ is front page news so it’s back to invest for appreciation*. If you want to learn from a master spin/salesman/storyteller watch the sad story of his ‘poor baby’ here: (If they want you to register there before seeing the video you can find it on our site without having to register).

    I’m sure Colony’s not the only one caught in the same situation so now major institutions are ‘long’ (have bought a lot of) RtRs with a lot of debt and/or investor money and if things start to sour they might pull the plug overnight and bam, thousands of homes hit the market in your city. Heaven forbid that multiple institutions like Colony, Blackstone, Carrington or others all have properties in your market that they decide to unload at once.

    I don’t think that the mom and pops can hurt a market they way the institutions can. In fact mom and pops best exit might be to sell to the institutions before the music stops.

    *That said I think he’s one of the smartest real estate guys around (in spite of becoming a regular on CNBC) and I’ve been following Tom since he started buying real estate for pennies on the dollar from the RTC back in the 1980’s. You can see more of Tom’s real estate insights collected on our website here:

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