As of March of this year, the inventory of existing homes stood at just two months of supply – four months shy of the target level of six months.
With home sales and rental markets both suffering from the under-supply of housing, the median home sale price continues to rise at a rate of 15% year-over-year, while asking rent is up 11% on multifamily properties and 13% on single-family rentals.
With 2022’s surge of inflation, investors are going after properties that offer a hedge against inflation: ideally, rental properties with rents adjusted on a yearly basis.
Not surprisingly, the increase in institutional buyers snapping up homes and converting them to rental properties is having a measurable impact on the availability of homes for non-institutional buyers.
So, what is the overall impact of these investors on the housing market? And what makes a particular area attractive to institutional buyers – and more deeply impacted by them?
The NAR Survey
The National Association of Realtors (NAR) conducted a survey on the Impact of Institutional Buyers on Home Sales and Single-Family Rentals to gather information on the role of institutional investors in the single-family rental and for-sale market in 2021.
The 50,000 Realtors® surveyed were primarily engaged in residential transactions, while the 80,000 NAR members surveyed were primarily involved in commercial transactions.
The NAR survey received 3,644 responses from across the country with three key findings.
Key Finding #1: Market Share and Median Price Differences
The first key finding focused on the share of the residential sales market represented by institutional buyers, which stood at up to 13% in 2021 (an increase for 84% of states), based on deed records data from Black Night. The states with the highest share of institutional buyers in 2021 were:
- Texas (28%)
- Georgia (19%)
- Oklahoma (18%)
- Alabama (18%)
- Mississippi (17%)
The study also revealed a median price difference between what institutional buyers pay and the state’s median purchase prices: institutional investors typically paid 26% less.
That difference could be due to differences in housing quality, since 42% of the respondents pointed out that institutional investors were buying homes in need of repair.
Key Finding #2: Key Factors Attracting Institutional Buyers
Based on the results of the survey, NAR identified 10 key market factors that attract institutional buyers:
- Fast household formation
- High density of minority groups
- High density of renters
- High density of Millennials
- High income and education
- More people moving in the area
- Fast home appreciation in affordable areas
- Fast rent growth
- Fast home sales growth
- Lower vacancy rate
Slides 18-27 for the NAR study illustrate these points more clearly, but we’ll highlight the key takeaways.
In areas where institutional buyers represented over 30% of the buying market…
- The number of households grew, on average, 11% over the past decade
- Black households represented 16% of the market
- Renters made up 30% of households
- Millennials made up 27% of households
- Households earned an average of $59,000, and 30% had at least a Bachelor’s degree
- 12% of residents moved within the past 12 months
- Housing prices rose more than 40% in the past ten years
- Rents increased more than 30% on average in the last ten years
- Home sales increased an average of 70% over the past decade
- The vacancy rate was 15% on average
Key Finding #3: Market Impact of Institutional Investors
So, what gives institutional buyers an edge over non-institutional ones?
For starters, they offer cash. They’re also more willing to purchase property “as is” or offer a guaranteed purchase.
While their offer price is generally about the same as those from non-instututional buyers, they also offer services attractive to home sellers – like leaseback and home repair – making their offer stand out even more.
While institutional investors offer the same or faster service than independent “mom and pop” landlords, 52% of Realtors® who responded to the survey, said rent for institutional investor properties was higher than for mom-and-pop rentals.
As for its impact on the supply of for-sale homes, 42% of properties purchased by institutional buyers were converted to single-family rentals – removing those properties as options for home buyers – while 45% were resold.
Now for the biggest takeaways from the NAR study on the impact of institutional buyers:
- The construction of built-for-rent properties increases the supply of rental housing.
- But it also reduces the supply of developed lots and construction labor for the building of properties for homeowners.
- Also, the purchase of existing homes by institutional buyers reduces available housing stock for homeowners, further tightening the housing market.
According to survey respondents, the biggest impact of institutional investors is on market competition. As long as institutional buyers sweeten the deal for sellers, non-institutional buyers face an even greater challenge when it comes to finding a home.
And that’s on top of the steady rise in home prices and the recent surge in mortgage rates.
Check out the NAR survey results for more information.