Traditionally, real estate investors have been a predictable segment of the residential real estate market (10% -15%). Composed mostly of individuals and small businesses, these investors typically bought distressed properties at a discount with the intention of repairing them and selling them for a profit. Other smaller investors have focused on the income potential of owning the property for the long term and realizing rental income on an annual basis. These âmom and popâ investors play an important role in the overall residential real estate market.
Since the resumption of the real estate crash of 2008, a new type of investor has entered the scene: the institutional investor (often called âiBuyersâ). Originally, these investors tried to emulate the strategies of their smaller counterparts, but on a much larger scale with financial backing from Wall Street and other hedge fund investors. Until the pandemic, this iBuyers strategy had marginal success representing a very small part of the overall market activity (less than 1%).
Since the COVID-19 pandemic, iBuyers’ strategies have adapted to market conditions, shifting from a less âbuy low, sell highâ philosophy to âbuy at market or near price and holdâ. The monetary policy of generating trillions of dollars in liquidity, coupled with the unprecedented imbalance of supply and demand in the housing market, has created a perfect storm that could benefit institutional investors. Rather than focusing on the income stream of properties, these institutional investors view the expected home appreciation as an attractive hedge against inflation. These institutional investors are sitting on hundreds of billions of dollars trying to figure out the best place to place these investments and residential real estate looks more and more attractive.
If you turn on your TV, you’d think these institutional investors are dominating the market – with promises of quick sales, quick cash, etc. Consumers are wise, however, and recognize that putting their homes on the market with the help of a licensed real estate professional is going to get them the best price in most cases. Even with the flurry of announcements and the increase in capitalization, institutional investors still represent a very small part of the overall real estate market (1% -3%). However, in some markets where a large majority of homes meet iBuyers purchasing criteria, this number can reach 10 to 15%. The Tampa Bay area is seeing this kind of increase in iBuyer’s business.
One of the consequences of this increase in institutional investment is the additional influence on higher prices by creating an additional layer of demand in an already unbalanced housing market. This trend towards higher prices, especially on lower priced homes, creates additional constraints on affordability and in particular access to homes by first-time buyers. Unable to compete with Wall Street’s insatiable appetite for more homes with a seemingly limitless cash reserve, first-time buyers are on the losing side of this trend as their deals almost always require funding of some kind. The long-term effects of this may be a further widening of the income gap for many, as home ownership has traditionally been the catalyst for wealth creation.
This is not to say that institutional investors are the only reason behind the affordability challenges facing the housing market. However, it is important to pause and consider whether to pour huge amounts of institutional funds into the housing market and potentially place ownership of a large number of properties in the hands of a relatively small number of players. is good for the whole housing market and the economy. in general. In the past, the housing market has had a strange ability to return to normality, but these forces at play are very different and the question remains whether normal market conditions will ever return.
Peter Crowley is the President of Re / Max Alliance Group.
This article originally appeared on the Sarasota Herald-Tribune: Home Front by Peter Crowley: Not all real estate investors are the same