25 years ago, the share of low-priced homes bought by investors in any given quarter was around 10%. In the fourth quarter of 2023, that share was more than 26%.
The figures come from Redfin, which analyzes county-level records in dozens of large US metro areas to determine investors’ purchase share. An “investor” is defined as an institution or a business buying residential properties.
Investors’ dominance of the overall US residential housing market peaked above 20% in the first quarter of 2022, just before the Fed escalated what would go on to become the most aggressive rate-hiking campaign in a generation. That figure was 18.5% last quarter, according to the new data, released Wednesday.
As the chart shows, sales are still falling on a YoY basis. Investors bought 46,419 properties in Q4, down from 51,881 in Q4 of 2022. But their market share moved higher because, as Redfin put it, “they didn’t retreat as quickly as individual buyers.” The vast majority (nearly 70%) of those purchases are single-family homes.
Note also that the YoY decline in Q4, 10.5%, was the shallowest of the six-quarter streak. It seems likely that aggregate sales will begin to rise again on a 12-month basis soon enough. Indeed, the problem isn’t necessarily demand. It’s supply. As one broker put it in remarks to Redfin for the linked article above, “There are a lot of investors out there fighting for properties, there just aren’t enough properties to go around.”
Needless to say, investors’ growing share of the residential housing market is a contentious topic. Some interested parties (including would-be homebuyers who aren’t investors) view the investor class as a bane, and while I’m sympathetic to such concerns, I’d be remiss not to concede that this is yet another socioeconomic problem for which the proposed solutions are in some cases suboptimal and arguably open the door to unintended consequences.
Still, the figure below is alarming. It shows the evolution of investors’ market share in the lower-tier price bucket. (Note that I’m using “affordable” colloquially. This isn’t “affordable” housing in any official, government-defined sense. Just “affordable” relative to mid-tier and high-priced homes.)
Try as I might, it’s difficult to square that with the idea that investor-buying isn’t contributing to higher prices for first-time homebuyers.
Investors now comprise more than a quarter of affordable home purchases. It beggars belief that a market participant whose footprint is that large somehow doesn’t have a price impact, particularly at a time when inventories remain severely constrained. Like saying the BoJ doesn’t have an impact on JGB prices.
This is a buyer class that’s less sensitive to financing costs, and they’re competing for scarce supply. Further, it’s reasonable to assume that because many non-investors remain priced out by high mortgage rates, the competition for scarce homes is between investors, a dynamic which could be expected to push up prices even further.
Redfin cited a (very) recent study which concluded, among other things, that there’s “no evidence” for the contention that single-family REITs “crowd out residential homebuyers or increase home prices.” That conclusion, the authors, who included researchers from the Philadelphia Fed, said, is “consistent with [SFR’s] low overall share of the housing stock.” Maybe. But it seems inconsistent with common sense, at least on some level.
The paper’s abstract appeared to tacitly chide the media. The authors referred to “narratives in the popular press,” where their use of the term “narrative” seemed clearly derisive. This is one case where I’m inclined to side with the mainstream media. I think those narratives have merit.
Redfin’s Lily Katz, a Bloomberg veteran, summed it up on Wednesday. “Many are concerned that investors are hurting regular buyers by driving up costs and exacerbating the shortage of homes for sale,” she said.
Again: Common sense. But common sense “ain’t so common,” as the old adage goes. Especially not among academics and economists.
I can think of an easy way to discourage investors from crowding out owner-occupants. Tax the bejesus out of rental income for entities owning more than X single family houses. X could be 5 or 20. And make those houses ineligible for GSE financing.
This is one of the greatest threats to what vestige of income equality remains. Every asset class other than SFR is dominated by the very highest income. SFR is the only asset class still mostly owned by ordinary households, and is how many median income persons’ primary retirement savings. Our system is designed to make this investment available to ordinary folks, with subsidized long term fixed rate loans, 10:1 leverage, tax subsidy, secured credit lines, and the shelter benefit in addition to the investment.
A simple tweak would be to make it more expensive to own by reducing or eliminating depreciation allowances. I once attended an investor seminary where the residential investors were encouraged to depreciation things like carpet at higher rate and ostensibly to do it multiple times as the property is sold. Same carpet but multiple times depreciated.
Individual homeowners cannot take advantage of depreciation to write off income but wall street firms can.
I own a rental property in a resort area. The real estate tax mill rate that I pay is 13.5% vs. 2.5% for owner occupied properties. Not exactly what you are suggesting- but if this multi-tier real estate tax rate structure spreads from counties where resort properties exist to non-resort counties throughout the US, this will make the economics considerably less attractive to large investors.
I think we should change the tax code such that all SFR and possibly duplexes not able to benefit from writing off ordinary income from depreciation. This one parameter warps behavior in a way I would contend are not good for our economy. There are moves here to make state property tax assessments for all commercial property on short term rental equal. The definition for real estate is proposed to be 90 days rented out. Virtually the entire state is tourist centric therefore there are many short term rentals. I am proposing federal tax code changes but it seems at least two states have proposed changing or have changed mil rates.
You will be waiting forever for Congress to change the tax code as you are suggesting (imho- that will never happen).
In the meantime, counties can set different mill rates for different types of real estate- which essentially shifts the tax burden from owner occupied residents to investor, non- occupied owners.
In the county where I own a rental property, the county has shifted 80% of the tax revenues to those properties that have a short term rental license.
My real estate taxes have tripled in the past 3 years. Since I am not a resident, this truly is “taxation without representation”. Luckily, however, I am able to increase the rental rates to offset the majority of the real estate tax increase, so that I only have a slight drag on the bottom line.
somehow the tax code was changed at some point to the current state. I am not a defeatist that our federal government rules and laws can be tweaked to give us a more balanced economy. I point to Mr. Kennedy’s proposals, which if history is any guide, proposals by losing politicians have been coopted before and made into law.
The financialized U.S. economy. Exceptional.
As such a new entrant to the field, I’ve been impressed by the quality of color RedFin provides.