Is the party over?
Purchase activity by investors – particularly institutional investors – has slowed down in the housing market, but hasn’t stopped.
The slowdown is partly due to the fact that there are fewer distressed assets available for purchase as foreclosure rates slow down. But it’s also partly due to the fact that there’s just not much inventory of any kind on the market. Most parts of the country still have less than 6 months’ supply, and many of the markets where investors were initially buying (California, for example) have even less.
Other reasons for the slowdown are that some of the investors have already spent the capital they’ve raised for their single family rental initiatives and, in some cases, they’re trying to get the properties they’ve already purchased repaired and rented out.
Investors are still buying, though – they’ve simply shifted where and what they buy.
We see a lot of investor purchase activity at foreclosure auctions, for example. This is one of the reasons that there are fewer bank-owned homes on the market: investors are buying them before the banks repossess them. We’re also seeing investors move into different geographic markets – especially in the Southeast and Midwest – where their dollars will go farther, and where they can generate healthier returns on rental income.
Some of the larger investors, such as Blackstone and Cerberus, are also moving from asset purchasing to asset financing – offering loans to smaller investors who are interested in buying and renting out single family homes. So some of the inventory that institutional investors would have purchased is now being purchased by individual investors instead.
There is still a big market for rental units, though. Occupancy rates are still north of 95%, and rent prices are still rising in many markets, albeit a bit more slowly. Household formation has slowed down, and a higher than normal percentage of the households that are being formed are renters rather than home buyers.
While all of this could mean less competition for first time homebuyers, don’t expect to see a huge wave of buying activity from owner/occupants as investors scale back.
What’s keeping first time buyers on the sideline isn’t competition from investors, it’s other factors: lack of jobs for the 25-35 year old cohort that typically makes up most of the buyers; a mountain of student loan debt that makes it difficult for these folks to afford a loan – or qualify for a QM/ATR loan; tight credit overall, which makes it hard to get loans in general; and the lack of inventory.
On that last note, new home inventory is near a 40-year low (and much of the available inventory is made up of larger, more expensive “move-up” homes); distressed inventory is lower than expected; and a high percentage of existing home owners are either underwater or don’t have enough equity to sell their current homes.
This all adds up to weak demand – especially weak demand at the lower end of the market – and could lead to home prices weakening in some of the markets where price growth was accelerated by investor activity last year.
That should help from an affordability standpoint in those markets, especially as interest rates inch up, and eventually enable the next generation of home buyers to enter the market.