The housing boom during the pandemic drew investors due to low rates, easy capital access and rising property values. The investor frenzy waned when rates rose in spring 2022. Additionally, high rates and limited housing inventory led to an institutional home-buying freeze in 2023.
Institutional home purchases declined significantly, with both Invitation Homes (NYSE:INVH) and American Homes 4 Rent (NYSE:AMH) becoming net sellers. Yieldstreet, owning about 700 homes, reported no purchases in 2023.
That said, institutional buyers are still a major force in the U.S. housing market, with a particular focus on single-family rental homes. These large investors typically purchase properties in bulk, often including entire neighborhoods or even small towns. They then rent out these homes to tenants, earning a steady stream of income and potentially benefiting from long-term property appreciation.
Let’s discuss some of the key ways in which institutional buyers are changing the face of the U.S. housing market.
What Are Institutional Buyers?
A qualified institutional buyer (QIB) is an experienced investor, exempt from certain regulatory protections. QIBs are typically institutions managing at least $100 million in securities, and they have permission to trade Rule 144A securities, including restricted or controlled securities.
Qualified institutional buyers (QIBs) are usually sophisticated investors or entities exempt from certain regulations. They are entities managing at least $100 million in securities or registered broker-dealers with a minimum of $10 million in non-affiliated securities. The category encompasses banks, savings and loan associations with a net worth of $25 million, investment and insurance companies, employee benefit plans and entities wholly owned by QIBs.
So how are they different from regular home buyers?
Selling to an institutional buyer differs significantly from selling to an individual. Institutional buyers are profit-driven and typically purchase properties as-is with minimal contingencies. That means you won’t need to invest in trendy updates or fret about inspection surprises.
One major advantage of selling to institutional buyers is their consistent all-cash offers. That streamlines the sale process, eliminating concerns about appraisals and financing and ensuring a reliable transaction.
What Drives the Rise of Institutional Buyers?
Following the 2008 foreclosure crisis, large institutional investors, backed by Wall Street capital, acquired hundreds of thousands of single-family homes, resulting in a significant growth of institutionally owned single-family rentals (SFRs). By 2019, these companies had amassed a portfolio of over 200,000 homes valued at more than $30 billion.
While this growth had some benefits like reducing vacancies and aiding the housing market’s recovery, it also led to negative consequences, including rising home prices and increased evictions. To gain a deeper understanding of the institutional SFR industry and its key players, this study systematically analyzed the industry, its companies and its strategies.
The Impact of Institutional Buyers on Real Estate
Institutional investors, due to their significant resources, wield substantial influence on housing inventory, affecting local and national markets. In growing areas, they can acquire homes in bulk, depleting the supply, particularly of affordable starter homes, further challenging regular buyers.
Institutional investors entered the market during the Great Recession when housing prices dropped and credit tightened. They purchased foreclosed properties at discounts, aided by government incentives, which increased demand. This mix of public policy and financial involvement by Wall Street accelerated institutional private-equity investor activity in the single-family rental market in 2012.
Institutional investors, including LLCs, LLPs and REITs, own a growing share of single-family homes, often numbering over 1,000 units in their portfolios. They can outbid individual buyers with all-cash deals and streamlined purchase processes, pursuing diverse strategies such as long-term rentals, capital gains or quick resales for profit.
Adding to the challenge, many investment firms opt for all-cash, as-is home purchases, which attracts sellers due to the lack of financing risks and the need for appraisals or repairs. Institutional investors can withstand initial losses and later raise rents, affecting both buyers and renters.
Impacts on Home Buyers
While institutional investors played a significant role in the housing market’s recovery, they also posed challenges to regular home buyers and renters. Their actions have contributed to rising home prices, making it harder for first-time buyers to enter the market and causing affordability issues.
The entry of institutional buyers into the single-family housing market quickly led to increased housing prices. Their substantial financial resources allowed them to outcompete individual buyers, causing prices to rise. That made it even harder for first-time homebuyers to afford homes in already challenging markets due to reduced inventory caused by institutional purchases.
Additionally, institutional buyers reduce the housing supply for first-timers by converting properties into rentals. That limits options for new buyers, who must compromise or explore less appealing areas.
Final Thoughts
Institutional buyers are increasing their acquisitions of U.S. homes, driven by macroeconomic factors. The trend particularly affects lower-priced properties typically sought by first-time and lower-income buyers.
Moreover, institutional buyers in the single-family housing market have disadvantaged first-time buyers, increasing prices and limiting supply. A solution demands government involvement, stricter regulations and support for aspiring homeowners. Such solutions may include collaborative efforts, which can promote a fairer housing market.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article.The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
