When the story is written about the housing market’s recovery, investors will play the leading role. Both individual and institutional investors stabilized the market by investing billions of dollars to purchase distressed properties.
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Most purchases were made by individual investors who got serious about buying single family homes in 2010. Institutional investors got in the game at the invitation of President Obama in 2011 and, according to RealtyTrac, by the end of 2012 institutional investors had purchased 138,540 homes in the United States. In 2013 the competition between individual and institutional investors became a horse race often leaving intended owner occupants in the dust. During the first quarter of this year, institutional investors had purchased 32,000 homes. Individual investors purchased three times that many.
The type of homes investors were buying was also key to the market’s recovery. Investors purchased a lot of damaged properties that were unattractive to most buyers and unable to be financed by conventional lenders. According to Campbell Housing Pulse Survey, 68 percent of damaged homes went to investors and only 19 percent to first-time buyers. Rehabbing and remodeling these damaged homes put thousands to work.
Traditionally, sales of single-family homes to investors account for 10 percent of the market. Some purchases become long-term rentals; others are fixed up and flipped for a short-term profit and a few become second or retirement homes. That percentage doubled in 2010 as investors started taking serious interest in the low-price opportunities available. By the end of the first quarter of this year, investor sales had peaked to 38 percent of all homes sold in the Sacramento Region. Investors now own more single-family homes than in any other time in history.
Several market factors created the perfect climate for investors. After home prices fell off the cliff, they became too attractive to pass up. Low-interest yields on other investments motivated investors to look for alternatives. They pulled cash out of low-interest savings accounts and purchased real estate. A million homeowners who lost their homes through foreclosure or a short sale still needed a place to live and investors were willing to meet the demand.
So who are these investors who were so instrumental in the market’s recovery and what are their intentions? The California Association of Realtors released its 2013 Investor Survey last week with the following findings:
• Investors like single-family homes, which accounted for 78 percent of all their purchases. Multifamily properties comprised 14 percent and other properties numbered 7 percent.
• Two-thirds of investors who purchased homes intend to keep them as long-term rentals while 26 percent intend to flip them for a quick profit. Seventy-five percent of all investors were small individual investors, owning less than 10 properties. Fifteen percent owned just one property, 46 percent owning between two and five properties and 14 percent between six and 10 properties.
• The median sales price of an investment property was $272,500. More than eight of every 10 investors made repairs to their investment properties, spending a median of $10,000 or about 4 percent of their purchase price. The median return investors were making on their purchases was 14 percent.
• Sixty-five percent of investment buyers paid cash, 27 percent of investors were foreign investors with China, India and Mexico the top countries of origin and two out of three investors managed their own properties.
Investors established a floor underneath the housing market which prevented a further decline in property values. They reduced our oversupply of inventory, turned damaged homes into available housing stock and led the way in the market’s recovery. No good deed, however, goes unpunished or at least isn’t carefully evaluated.
There is a growing concern about the historically large number of rental properties owned by absentee institutional landlords. Wall Street firms played a central role in the last housing boom, albeit, nearly collapsing our financial system. Now many of the same players have been taking advantage of the low housing prices that resulted in part from their past actions.
The hedge fund Blackstone Group, as an example, now owns 31,000 homes in nine states and 1,100 in our region. They are now the largest owner of single-family homes in the country. Colony Capital owns 5,500 homes, Waypoint Homes owns 2,500 and will add another 10,000 to their portfolio this year and American Homes 4 Rent currently owns 18,000 homes.
Wall Street has been on a home-buying binge and continues to raise capital to buy more. New research from Wall Street player Morgan Stanley predicts that the buy-to-rent sector will grow from its current $17 billion to $100 billion over the next several years. Will more folks choose to rent than buy? Yes, states the CAR report. “We expect homeownership to continue to decline for the next few years.”
The idea of investors buying homes and renting them out isn’t new. But in the past, landlords were almost always local mom and pops who made individual decisions about buying, rental rates and when to sell. Corporations and their stock holders act differently, often focusing on quarterly dividends rather on long-term appreciation.
It was in February of 2012 that the California Association of Realtors raised its concerns to President Obama’s directive to sell off thousands of foreclosed homes to Wall Street investors through bulk sales at greatly reduced prices. The short-term effect has had a beneficial impact on the housing recovery. The long-term impact is still uncertain.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.