Why Wall Street Firms Are Helping to Drive Housing Prices Higher
Home prices are up more than 13%, the fastest growth rate since 2005, according to the Case-Shiller Home Price Index. That marks the tenth straight month of accelerating home prices. The March gain, the latest month for which there is data for, is one of the largest in the index’s 30-year history. On the surface, increases in home prices are being driven by record-low supply, low interest rates, and incredibly strong competition. Cities like Phoenix, San Diego, and Seattle have all seen price increases north of 18% year-over-year.
Though, when digging down into the data to see who is really bidding on all of these single-family homes, it does not just seem to be newly married couples in search of the American dream or recent retirees looking for a safe place to park their nest egg, but an inordinate amount of institutional asset management firms. Wall Street money managers buying up single-family homes is not a new phenomenon. In the wake of the 2008 financial crisis, firms like Blackstone created Invitation Homes to buy distressed single-family houses around the United States and rented them out. Large retirement funds like the Alaska Permanent Fund Corporation and the asset management arms of banks like J.P. Morgan, have provided much of the backing to American Homes 4 Rent to go out and buy over 54,000 single-family homes and make them into rentals. [1]
Investing in single-family homes at an institutional level was a relatively niche property sector up until a few years ago. More recently, a plethora of firms have flooded the space, equipped with access to funding at some of the lowest costs of capital that exist in today’s marketplace. Cerberus Capital Management, a self-described global leader in alternative investing, and its partners bought up more than 200 single-family homes around the country in the first quarter of 2021. [2] Asset management firms like Cerberus, buy many of these homes through sites called iBuyers. According to Opendoor Technologies, one of the leading iBuyers in the country, an iBuyer is, “A company that uses technology to make an offer on your home instantly. iBuyers represent a dramatic shift in the way people are buying and selling homes, offering in many cases, a simpler, more convenient alternative to a traditional home sale.”
An iBuyer is really a euphemism for a pipeline to institutional asset managers from technology companies of single-family homes that never hit the market. What this is doing is taking away an already scare inventory of homes from traditional homebuyers and hand-delivering them to money managers. iBuyers, like Opendoor who is backed by some of the largest venture capital firms in the world such as General Atlantic and SoftBank, market themselves as a way for sellers to cash in on their homes without the hassle of having to market it. iBuyers generally will put in offers for homes sight unseen and offer all-cash and quick closing times that in many cases have terms that waive a due diligence period.
While this type of offer may seem attractive to a seller on the surface, in reality these offers are way below the market price of what a home is actually worth. Sellers almost always leave money on the table when opting to sell to an iBuyer instead of going through the traditional home-selling process. Wall Street money managers generally have access to lines of credit or funds from bond offerings that run into the billions of dollars to purchase homes. FirstKey Homes, a single-family investor backed by Cerberus, recently borrowed $2.5 Billion at a fixed interest rate of 1.99%.
These lines of credit and bond offerings allow for institutional grade single-family homebuyers to close quickly and with all-cash offers on many single-family homes at once. The average American homebuyer generally does not stand a chance when they get into a bidding war with a well-capitalized institutional investor. Many times, asset managers and iBuyers will hide behind the guise of a local realtor, so people in the community do not realize the true identity of who is bidding up the price of single-family housing.
It would be expedient to make an argument that institutional level single-family homebuyers are cheating people out of the American dream, but it is not that straightforward. Large institutional investors are oftentimes backed by pension funds, like the Alaska Permanent Fund Corporation backing American Homes 4 Rent. These pension funds work on behalf of firefighters, teachers, and police officers to ensure that they receive the pensions that they are entitled to for years of hard work. According to Goldman Sachs, pension funds in the United States have a shortfall of over $3 trillion. At the end of 2019, pension funds only held $4.8 trillion in assets which is less than 60% of pension funds liabilities. [3]
In order to help bridge this funding gap, pension funds need to make sure that they are investing in asset classes that offer the highest risk-adjusted returns. Single family homes fit perfectly into the type of strong cash flowing and appreciating investments that pension funds look to pour money into. There is also another argument to be made on whether or not having most of your wealth tied up in your home produces better long term financial results than renting. In Germany, a country with one of the strongest middle classes in the western world, only 51.1% of citizens own their homes [4] compared to 65.6% in the United States. [5]
America continues to deal with a housing shortage that is being accentuated by rising construction costs, accommodative monetary policy, and increasing demand. The housing shortage in the U.S. particularly effects working and lower class individuals, as a far majority of the new housing stock being built is targeted for white-collar workers. As America’s housing crisis continues to intensify, even more people are left without a quality and affordable place to live. The U.S. must decide how to grapple with its low housing inventory levels and make sure that the American dream of owning an affordable home is in reach for future generations.
The best way to do this is through private-public initiatives. That could involve the expansion of the low income tax credit to boost the existing supply of housing units or working with large lending institutions to make sure that they can offer the most competitive lending rates to new homebuyers, like they do to institutional grade single-family homebuying companies. A robust housing market, that is in reach to people across the economic spectrum, leads to stronger and more prosperous communities.
[1] https://www.millionacres.com/real-estate-investing/reits/american-homes-4-rent-reit-what-you-need-to-know/
[2] https://www.bloomberg.com/news/articles/2021-05-21/mega-landlords-are-snapping-up-zillow-homes-before-the-public-can-see-them?sref=BAeRoNCR
[3] https://www.thestreet.com/opinion/why-you-should-worry-about-the-pension-fund-crisis
[4] https://www.statista.com/statistics/246355/home-ownership-rate-in-europe/
[5] https://www.census.gov/housing/hvs/files/currenthvspress.pdf