The number of investors purchasing single-family homes in the U.S. reached an all-time high last year, according to a report from real estate data company CoreLogic. A little more than 11% of all home sales in 2018 were made by investors, up from 7% in 1999 when CoreLogic started tracking the data.
This trend could be putting pressure on first-time homebuyers in some markets, said Ralph B. McLaughlin, CoreLogic’s deputy chief economist. “It is tough to win a bidding war against a cash buyer, especially if that cash buyer can offer a very quick close, where first-time homebuyers typically take 30 to 60 days to close,” McLaughlin said.
Still, investors may be buying and then renovating homes that are dilapidated or have experienced long periods of deferred maintenance, McLaughlin said. This may be putting homes on the market that otherwise would have decayed. McLaughlin spoke with Scotsman Guide about the findings of his company’s report, the evolving investor landscape and what surprised him most about the research.
Why were you interested in this topic?
The common assumption was that investor activity peaked just after the recession and I wanted to test that assumption. From what I understood, it was mostly big investors that were buying homes in 2010, ‘11, ‘12 and ‘13. Then, they fell out and I wanted to see whether or not other investors had stepped up to the game — smaller investors. Sure enough, that’s exactly what the data showed.
What else did you find?
What we found was that investor activity is basically at an all-time high, at least the highest in the 20 years since we started keeping track. Indeed, big institutional investors have retreated from the marketplace. At the same time, they have been replaced by smaller investors, in particular mom-and-pop investors. I think that was somewhat of a surprise that I wasn’t necessarily expecting.
In general, what price tier of homes most attracted investors?
Since the start of the housing-market recovery in 2012, investors have been increasingly attracted to starter homes, so homes that fall within the lower third of the price distribution in any market in any given year. I think that at least is somewhat compounding some of the problems that first-time homebuyers are facing in the market — namely, low inventory and higher prices.
While it may be easy to blame investors, however, for crowding out first-time homebuyers, it’s equally possible that they are just replacing them. If first-time homebuyers aren’t buying homes (because it’s so hard to get into the market), that potentially is allowing the opportunity for investors to fill that void.
What surprised you about this research?
I think what surprised me most was actually what share of starter homes in some markets were actually being purchased by investors. We all know that there is a competition on the low end. … What I didn’t expect was how significant that competition is in some markets.
In places like Philadelphia, Detroit and Baltimore, we’re talking about four to five out of every 10 starter homes is actually being purchased by an investor. It’s likely the case that in these markets, first-time homebuyers are literally passing investors in the hallway during open houses.
Can you describe the mix of investors in the past couple of years? You already mentioned that institutional investors have retreated since the recession, but what does it look like now?
Looking back to 2013, it was basically a two-to-one ratio — that basically for every two mom-and-pop investors out there, there was one institutional investor. That ratio now is over four to one. … That’s the interesting trend I think that we’ve seen over the last five or six years.
Do you have anything else to add?
One of the other findings that came out of the study is we find that markets that have seen a larger increase in investor activity over the last six years have also seen a larger increase in how quickly homes come off the market.
While we don’t find direct correlation with prices, we do see that an increase in investor activity does tend to at least be correlated with homes coming off the market faster. One interpretation of that is that investors are driving down supply and making it more difficult for first-time homebuyers. But, you know, there’s also a chicken-egg problem here, because markets that are seeing homes fly off the market faster may be drawing in more investors.