Damn the Developers?

Regular old home buyers are having a hard time finding places they can afford. Are investors to blame?

Robert Galbraith / Reuters

During the recession, buying a house was an unlikely prospect for many Americans who were facing serious financial hardships as their largest assets lost value and job loss spread. But for investors—both large and small—the decimated market provided opportunity.

After the bust, there was little activity in the housing sector as most Americans tried desperately to just hold on to their homes. Rampant foreclosures and short sales meant that investors could scoop up properties at super-low prices, spruce them up, and then rent them out at market rates. It was a different sort of market activity, but activity nonetheless, and some credit investors with reviving home buying. “In the deepest days of the housing crisis, investors were playing an important role in helping to stabilize the housing stock by purchasing it and putting it back into occupancy,” says Chris Herbert, the managing director of the Joint Center on Housing Studies at Harvard.

But as the economy and housing market have recovered, property prices have risen—thanks in part to those same investors, whose purchases have helped push home values higher. That makes competition for the remaining cheap properties intense. And when it comes to competition, investors often have leg up over traditional homebuyers.

A recent article in the Wall Street Journal highlighted how some investors are using algorithms to quickly parse housing data and formulate bids on undervalued properties, site unseen. While doing so is a cool technological feat, it can spell trouble for normal people trying to navigate the often complex home-buying process in order to make offers on similar homes. And algorithms aren't the only benefit that more sophisticated investors have. “Investors are winning over the first-time buyers in some bidding processes because investors are all cash,” says Lawrence Yun, a chief economist at the National Association of Realtors. For a seller that means a smoother deal: no waiting around on financing, loan approvals or other inconveniences that traditional buyers bring to the table.

For their part, some investors contend that the homes they purchase don’t put them in direct competition with first-time buyers. Invitation Homes, an investing and leasing company owned by Blackstone says that they typically funnel another 10 to 12 percent of the purchase price into renovations in order to make a property market-ready—an investment that most first-time home buyers wouldn't be able to afford. Many investors also contend that compared to the number of homes that are bought and sold nationwide, their activity is just a drop in the bucket.

When looking at the big picture, that's true. Nationwide, large institutional investors made up only 4.3 percent of the single-family home purchases in the market during 2014, according to RealtyTrac a real-estate data firm. And overall investment activity is dwindling as home values return to normal and there are fewer deals to be had. Dallas Tanner, the chief investment officer at Invitation Homes says that the group currently buys about $25 to $30 million a week of single-family properties, that's down from their 2012-2013 peak when the group spent upward of $160 million each week.

But like all things in real estate, it’s also a matter of location. Lots of investor activity is concentrated in markets where homes are still available at reasonable enough prices that purchasers can turn a profit. According to a February 2015 report from RealtyTrac, "There were 35 zip codes nationwide where at least 50 single-family homes were purchased by institutional investors in the fourth quarter, with institutional investor purchases representing from 17 percent to 74 percent of all single-family home sales in those zip codes.” Places like: Atlanta, Phoenix, Las Vegas, and Memphis. Those are also places that first-time buyers have the best bet of stretching their dollar far enough to purchase a home. Herbert, of the JCHS, says that that in some places, developers may in fact be pushing out normal home buyers, “For certain property segments, they may be creating competition.”

But bidding wars aren't the only reason that some are concerned about the stake that investors have in the market. In some areas, investors buying up homes and turning them into rental properties means a shifting demographic for neighborhoods—from long-term residents to a flurry of short-term renters—which can be an unappealing prospect for some. Herbert says that groups like the Allston Brighton Community Development Corporation near Boston have been taking matters into their own hands, investing in a different way. The group buys property in the community, which is near the bustling college town of Cambridge, and creates home-buying opportunities and affordable rental options. That allows more long-term residents to make the neighborhood their home, rather than just students who would likely pay more, but feel less invested in their temporary homes and the surrounding community.

There's some concern over the role of investors outside of the single-family home sector, too. Programs like the Tenderloin Neighborhood Development Corporation (TNDC) in San Francisco—a group that provides affordable housing for Bay Area residents—has found it increasingly difficult to purchase property and land for their own development. "It seems as if there's no such thing as that hidden gem," Donald Falk, the CEO of the TNDC, explained. "It is very difficult. One broker told me, 'Any property that comes on the market, there are brokers and investors crawling all over it.'" That makes Falk and the TNDC even more committed to their mission, to acquire property and keep developing it and renting it out at affordable rates that long-time residents—and people like them—can afford. "We're in the middle of what could be a massive, long-term displacement crisis. The very nature of the people who live in San Francisco will be significantly different 10 years from now," Falk says. "We have to buy land and hold it for a long time for low-income people."

But he says that the sky-high prices make them reconsider immediate strategies for expanding their property holdings and developing additional affordable units in hopes that eventually prices will come down. "It is not possible to grow forever. It's a cycle. It's going to change. It has to change."