Single-family home prices and rents both remain at or near record highs. In its State of the Nation's Housing 2022 report, the Harvard Joint Center for Housing Studies found the runup in prices that began during the pandemic has been largely caused by a huge increase in demand as apartment dwellers in cities moved to the suburbs.
But there’s also been a hidden force at play inside the real estate market for single-family homes that has simultaneously hiked both rents and sales prices. Investors have entered the market like never before, aided by the ability to use technology to spot good deals. Some are big hitters with huge financing. Many more are smaller investors borrowing the tricks of the big guys.
“Investors moved aggressively into the single-family market over the past year, buying up moderately priced homes either to convert to rental or upgrade for resale,” the Center’s authors wrote.
The result? Many consumers have been unable to escape the steady increase in housing prices wherever they turn. Even as increased mortgage rates dampen home sales, prices are barely budging downward, at least not yet.
The rise in single-family homes as investment tools has been no inconsequential trend. Data from CoreLogic, a data analytics firm, found the investor share of single-family homes sold in the first quarter of 2022 was 28%, well above the 19% share a year earlier and the 16% share averaged from 2017 to 2019. Michael Gifford, CEO and co-founder of Splitero, a firm helping homeowners tap equity, believes that by now about 20% of U.S. homes are owned by investors, up from 12.5% in 2013, according to the Minneapolis Federal Reserve.
What’s really behind the home investing push
Two under-the radar developments have contributed to the rise in investors snapping up single-family homes. The most obvious is that inside the worlds of large investment firms and private equity, housing went from one of many categories bundled under “alternative investments” to become its own high-status category, right along with stocks and bonds.
The rationale for investing in single-family homes at scale stems back a decade or more. Before the 2008 financial crisis and housing market crash, real estate investors were often small-time operators who owned one or two properties they rented for income. When the market crashed and home prices plunged, more individuals, along with larger companies, got into the act.
In some cases, this helped the market to recover. An investor who purchased a distressed property at a deep discount made improvements and sold it to an owner occupant.
But larger deep-pocketed investors began buying more residential properties not to flip them into a quick sale. The attraction now was rental properties.
“Since the Great Recession, the concept of single-family rentals (as investments) has exploded, said Eddie Lorin, CEO and co-founder of Alliant Strategic Development, a real estate development firm. The investment hypothesis was to buy homes at market prices and spend more money improving the properties, which incentivized investors to raise rents in order to get a proper return on investment.
This buy-to-rent phenomenon began pre-pandemic but really took off—along with both rents and home prices— in 2020 when the pandemic and the sudden increase in remote work led to the massive, now-infamous demand for single-family homes.
“The supply shortage is also an advantage for landlords,” says Redfin economist Sheharyar Bokhari. “Many people who can’t find a home to buy are forced to rent instead.”
To smart investors, Bokhari says, paying the market price for a single-family investment property is justified by the cash flow it produces.
“Investors are chasing rising prices because rental payments are also skyrocketing,” he says.
What’s been underappreciated is how the side effect of removing homes from the available home purchase inventory created a double-whammy on prices.
“Home prices have skyrocketed due to a lack of supply for those who plan to buy and live in their homes,” says Lorin.
In addition to private equity firms, major real estate players like Redfin, OfferPad, and OpenDoor bought up single-family homes on a large scale. Zillow only recently abandoned its foray into real estate investing after deciding it wasn’t a fit with its business model.
Invitation Homes, Fundrise, and Tricon Residential are also among the major institutional investors that have moved more deeply into residential real estate. CoreLogic data shows investors with a thousand or more homes bought 3% of houses both in 2021 and this year so far, compared with about 1% in previous years.
Big data, small investors
Reason number two for the upsurge in investors involves the technology modern real estate companies use to scale their home purchases, a process known as “iBuying.” Kurt Carlton, co-founder and president of New Western, a company helping individual investors find “fix-and-flip” residential properties, says starting in 2017, major investors adopted computer algorithms that have helped them identify ideal properties everywhere in the U.S. and buy them quickly.
No surprise there—using big data is how companies that can afford it optimize their investments. What was less predictable was the growing army of small investors who started to employ home-searching technology to find gems, with many locating and buying homes in other states to convert to rental property.
Together with institutional investors, the surge in small investors made it especially difficult for home buyers last year, according to real estate broker Redfin. And the rapid market shifts of 2022 may make agile small investors, who already dominate this investor-owned single-family home market, an even bigger influence on housing prices.
“Fast forward to today, and Wall Street’s investment in data and technology has made it into the hands of small investors who can now identify and buy a property within days,” Carlton told ConsumerAffairs. “This has fueled the solopreneurs and semi-pros. And as mortgage rates rise, institutional buyers are beginning to pull back a bit as this impacts their ability to service new debt, creating opportunities for the mom-and-pops.”
Homebuyers are now at a disadvantage
“While record-high home prices are problematic for individual homebuyers, they (prices) are one reason why investor demand is stronger than ever,” said Redfin’s Bokhari. “Investors who ‘flip’ homes see potential to turn a big profit as home prices soar.”
While real estate investors focused on single-family homes are active in just about every part of the country, they are more heavily involved in some neighborhoods than others. A Washington Post analysis of Redfin data shows investors have been most active in minority neighborhoods.
According to the Post analysis, 30% of 2021’s home sales in majority Black neighborhoods were purchased by investors, compared with 12% in all other Zip codes. This activity has reduced the number of single-family homes available for purchase in these areas and led to rising rents.
Civic leaders in Orlando expressed concern earlier this year when industry data showed investors bought nearly half of the properties sold last year in the predominantly Black ZIP code of 32805.
Some communities are beginning to push back. In North Las Vegas, which is mostly Hispanic and Black, residents have launched a petition drive for a ballot initiative limiting rent increases, saying they’ve been outbid by investors who have raised rent sharply in recent years.
Similar efforts are also underway in Charlotte, Memphis, and Chicago.
Matthew Desmond, a sociology professor at Princeton University, says the reason this is important is the unintended consequence of making it more difficult and expensive for people who want to buy a home and live in it. Recently testifying before a Senate committee, Desmond said all regions of the country have experienced a huge surge in rents.
“Last year, rents increased faster than they ever have on record,” Desmond told lawmakers, noting that the U.S. median rent increased 17% in one year.