As US home prices ascended into the stratosphere amid a confluence of pandemic dynamics all turbocharged by Fed largesse, I suggested it was implausible to assume everyday people would keep buying half-million dollar houses.
That assessment wasn’t based on any affordability index or, really, on anything at all other than common sense, which seems to dictate that the “median” American doesn’t buy things that cost $500,000, regardless of how favorable financing conditions might be.
I patiently reviewed various math-based rationales purporting to show that, in fact, average people can afford to pay that much for a single-family dwelling, but notwithstanding the (manifestly false) notion that “numbers don’t lie,” I remained unconvinced.
After reading a new Redfin study, I’m more dubious than ever.
“Real estate investors bought a record 18.2% of the US homes that were purchased during the third quarter of 2021, up from a revised rate of 16.1% in the second quarter and 11.2% a year earlier,” an article published Monday read. The figure (below) gives you some context.
Redfin’s data goes back 21 years. They define an investor as “any institution or business that purchases residential real estate.”
Investors bought more than 90,000 homes last quarter, up more than 10% sequentially and more than 80% YoY. Note that prior to COVID, investor purchases had exceeded 60,000 in a quarter on only four other occasions.
The total amount spent by investors on homes in Q3 was $63.6 billion. That too was a record. 77% of the 90,215 homes were paid for in cash.
Redfin Senior Economist Sheharyar Bokhari was unequivocal. “Increasing home prices fueled by an intense housing shortage have created opportunities for investors to reap big profits,” Bokhari said, in the linked article. “Those same factors have pushed more Americans to rent, which also creates opportunities for investors because investors typically turn the homes they purchase into rentals and can now charge higher rents.”
So, as wealthy investors bid up the price of homes, home ownership drifts further out of reach for non-investors. Demand for rentals then rises, allowing investors to raise the rent.
As a reminder, the median new home price jumped 18.7% YoY in September to almost $409,000 (figure below). The average selling price was almost $452,000.
Redfin’s data showed that as a percentage of total investor purchases, single-family homes comprised 74.4%. Investors thus bought 67,120 single-family homes in three months. If you’re shopping for a house, that’s your competition.
Bokhari continued: “With cash-rich investors taking the housing market by storm, many individual homebuyers have found it tough to compete.”
Once again, I’m compelled to reiterate that when we talk about “Americans’ household wealth” (typically in the context of the Fed’s data) the figures don’t represent what they purport to represent. Not really, anyway. We’re actually talking about the wealth of people who own assets. And because assets are concentrated in the hands of a relative few, “Americans” is a misnomer.
Sure, a sizable percentage of the populace owns a home. But a sizable percentage doesn’t. And, as Redfin’s data makes clear, the market is increasingly dominated by investors, many of whom are betting (literally) that America will morph into a nation of renters, that home prices will continue to rise or both.
As a reminder, real estate values jumped $1.2 trillion in the second quarter (figure above). The higher prices go, the more acute the trends documented by Redfin are likely to become.
I’m compelled to channel Xi: “Housing is for living in. Not for speculation.”
At some point, something is going to have to give. Ideally, it should be zoning regulations. A plan B is internal migration not even to Austin or Atlanta but to Kansas City, Louisville, St Louis, Cincinnati, Oklahoma City etc.
If only banks would consider a perfect rent payment history instead of DTI ratios
After all, renters are paying the mortgage… just not their own.
I’m not sure why the purchase of single family housing by institutional investors (whether “iBuyers” like Opendoor or Zillow looking to renovate and sell or income investors like Blackstone, BlackRock and Invitation Homes looking to amass large rental portfolios) has not yet fallen into the crosshairs of politicians like Elizabeth Warren and AOC. This investor appetite has clearly driven up home prices and contributed to affordability issues particularly for entry level home buyers and relatively lower income home buyers.
H-Man, the current residential market is beginning to smell more and more like 2006. There has been an explosion of apartment construction which will be competing with those residential units. Methinks the next phase will be converting those apartments to condos.
A large pool of single family homes are not as conducive to being owned by a corporation as large apartment buildings.
The rental process, management of real estate taxes and inside maintenance (different plumbing, heating, cooling, electric systems in every house) and variable outside maintenance (siding, sidewalks, roofs, windows) is going to be far more inefficient and costly than the corporation’s estimates.
This won’t work in the longer term, is my guess.
One man’s opinion-Cycles have not been repealed. We’ve had a 40 year plus interest rate rally. We’ve had a suppression of household formation. Our national debt has grown quite a bit, but low interest rates increased spending and the expansion of the balance sheet haven’t reached critical mass. There is is also massive damage beginning from climate change and modern agriculture. Could we go froma virtuous appearing cycle to a vicious one? Sure… What I haven’t seen in 2021 is what I and many others saw clearly in 2019: Inverted yield curve, sharp disruption of the overnight lending markeets, big news from the elliott wave crowd, etc….Did this predict the pandemic? Maybe.. But sentries at the outer ranges of the empire have their ear to the ground….stock market total value/GDP over 231%. Anumber of big bulls selling. etc. Time horizon unknown. In 1987, a lot of equity money fled for residential real estate, In 1992, they gave it all back and then some. We have an unresolved pricing adujustment decision for commerical real estate, particularly stores and office space. We could have one heck of a crackup in the next five or so years in the financial markets while we also experience a large generational sea change. Meanwhile, we need a much better understanding of what the GFC and pandemic bailouts have wrought….
Just in time for Christmas, we’re watching the nation’s housing turn into Potter’s field.
As this article points out – there are a lot of factors influencing house prices. One thing I have observed is the longer run cycles in housing. We just got about 5 years worth of appreciation in the last 12 months. But prior to that, after the housing market crash in 08-09 we had very slow price appreciation for the most part. And demographics suggest that we are in a buying cycle as the millenial generation reach the age where they start families and buy houses. We are pretty much in that demographic peak. So what next? If I had to guess I would say we could see 4-7 years of slow growth starting next year. No crash. Just very slow growth in prices. That will reset income to cost ratio for buying a house. And incomes will likely grow faster than house prices very soon. Local markets that have run up too fast may see some correction but nationwide a significant bust is unlikely unless you get a severe recession.