About one in five homes sold in 2020 were purchased by investors in the USA, a trend that is being observed even outside the USA (such as Australia), where retail buyers are continuously finding it hard to compete with investors who don't need home inspections, appraisal contingencies, or a mortgage. Such corporations might be institutional investment organisations, public trading firms, pension funds, etc. Institutional investors are also described as non-lending entities that purchased at least ten properties in a calendar year.
Market Trend
An interesting trend that has been observed is that the value of loans to first-time buyers dropped 7.8 per cent in the month of June, down 14.7 per cent from the January peak, even though demand for housing increased along with house prices. This clearly shows that there are buyers in the market with deep pockets (aka institutional investors). Lending to investors is heading in the opposite direction, up 0.7 per cent in the month and 40.5 per cent higher than in January.
An increase in the price of real estate in recent months has drawn new investors interested in future capital growth and low-interest rates that may last until 2024. This has led homeownership further out of reach for some first-home hopefuls, who struggle to save enough to keep up with the increased deposit requirement. In the USA, 10.3% of all single-family house and condo purchases in the second quarter of 2021 in the major markets were to institutional investors. This represents a 234 per cent increase year-on-year, up from 3.1 per cent of all such transactions in the second quarter of 2020.
For example, in Charlotte, during the second quarter, investors acquired 22.8% of the properties listed on the market with a total aggregate value of $782,143,504. This has also led to the median rental rate in the market increasing by 5-7 per cent year-over-year in the USA. The reason for this could be attributed to the demand for rentals as retail buyers are getting priced out of the market and are resorting to renting homes, thus leading to demand for rentals.
Can Institutional Investors Be Beneficial To The Market?
Investors often assist purchasers in large metropolitan areas with low inventory levels such as during April, 19 U.S markets out of 50 metro markets saw a number of homes being added, with 399 homes in Atlanta, 239 homes in Dallas, 188 homes in Baltimore, 122 homes in Los Angeles and 93 homes in San Francisco experiencing the biggest boosts. Real estate investors played a key role in restocking housing markets in Atlanta, Dallas, Baltimore, Los Angeles and San Francisco.
Investors, on the other hand, have a net negative effect in smaller markets with a greater inventory. Within 31 metro U.S. cities, investors bought most of the inventory, leading to a shortage for retail buyers; led by Phoenix, where bulk purchases by investors led to a shortage of 429 homes. There was also a shortage of 287 homes in Charlotte, 256 homes in Miami, 224 homes in Tampa and 221 homes in Chicago.
Investors are also worsening the rental market in the top 50 U.S. markets. According to Apartment List's August 2021 rent report for the city of Raleigh, rental rates have risen 14.3 per cent over the past 12 months, with the average monthly rent for a two-bedroom apartment being $1,424. Charlotte's data indicates a 13.3% year-over-year increase in rental rates, while Durham's shows a 12.6% increase.
Many cities around the country have seen property prices rise as a result of a lack of single-family houses for sale. Future buyers, however, learn that they are being outbid not only by other property buyers but also by hedge funds.
According to the Home Builders Association of Fargo-Moorhead, permits for all new dwellings starts in the metro region and neighbouring towns increased from 294 in May 2020 to 545 in May 2021.
What can be done?
While home builders are working tirelessly to complete homes, the sector has been hampered by a limited supply of building supplies and a severe scarcity of trained labour. Hence, new ways have to be found out to help retail buyers ease into the market. A few major roadblocks that builders face are stated below. If these can be alleviated, then it can help bring down the cost and thus help reduce the overall price of the houses.
Three Major Roadblocks that Builders Face:
- Regulatory hurdles: Building regulations are important, but have become increasingly more inconsistent and difficult to follow. According to a 2011 poll conducted by the National Association of Home Builders, the combined effect of building standards, land use regulations, and environmental regulations increased the cost of a home by $65,224. After ten years, such standards and restrictions have expanded to add roughly $94,000 to the average new home's cost.
- There is a severe scarcity of building supplies, once again, thanks to COVID. It started with lumber costs, which soared 200%, adding a cost of $36,000 to the average price of a home. Despite the fact that timber prices are on the decline, nearly any building material is difficult to obtain at the moment. There is a pressing need for government intervention in supply management at a time when covid is subsidising, and lumber prices are falling off.
- Skilled-workforce shortage: Residential construction jobs have grown 87,900, in a year, according to the National Home Builders Association. There were 266,000 available construction opportunities as of February of this year. Again, this might require government intervention as no skilled labour can lead to a larger construction time, leading to higher costs.
In conclusion, with the current bull run in the housing market, everybody is taking advantage and trying to book maximum profit. Sellers are attempting to capitalize on a strong market by pricing their houses higher than they have earlier planned to sell, resulting in further assessment problems for retail buyers. Median prices are expected to climb between 3 and 8 percent in 2021, according to economists at Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and the National Association of Realtors.
As a result, house prices have risen at a slower pace than they did during the housing bubble of 2008. The current housing boom is fuelled primarily by demand exceeding supply, as well as factors such as extremely low-interest rates, people looking for larger spaces so they can work from home, stimulus funds that have increased purchasing power, a bullish stock market, and institutional investors who are aggressively looking to buyout entire neighborhoods and make a quick buck.