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.”