The lack of supply of single-family homes has pushed up housing prices in many markets across the country — but would-be homebuyers are finding they are being outbid not just by other home seekers, but by hedge funds.
“In the current neighborhood, I’ve been surprised at how many homes have sold recently and sold to investment groups,” said Nathan Saunders, a homebuyer from the Dallas area.
While Saunders grew up in Dallas, finding a house there where he and his wife could raise their two-year-old son was a grueling process, he told NBC News.
“My wife and I have been looking for a house for roughly the past year,” he said, adding that the couple has made multiple offers. “On each of those we had contractors or investment groups outbidding us on the properties,” he said.
These buyers often come armed with the kind of financial firepower ordinary Americans can’t hope to match, housing experts say.
“Historically, the vast majority of these investors have been mom-and-pop landlords, but after the 2008 bust… we saw institutional investors and other funds enter this market,” said Karan Kaul, senior research associate for the Housing Finance Policy Center at the Urban Institute.
“If you’re a first time homebuyer and you’re depending on a mortgage that takes two months to close and you’re competing against someone who’s making a cash offer, you’re at a disadvantage right off the bat,” Kaul said.
“I can drive through the neighborhood and I know exactly which ones are rentals, because the lawns are unkempt.”
David M. Dworkin, president and CEO of the National Housing Conference, said cash offers typically make up about 25 percent of the market, but over the past year, it soared up to nearly one in three. “This is having its worst impact on first-time homebuyers, who generally are more dependent on mortgage financing and have limited budgets,” he said. “It’s hurting millennials… it’s also hurting people of color who are trying to become homeowners,” he said.
Kaul said competition from investment entities is a symptom of a much bigger problem in the housing market. “The reason why we have this supply crisis right now goes well beyond investors. We just haven’t produced enough housing in the past 10 years,” he said.
That supply crunch is unlikely to ease in the near future. Although housing starts rose more than expected in June, building permits — which foreshadow starts — surprised economists by falling roughly 5 percent, a steeper drop than anticipated.
In locations where big tech companies have recently expanded, an influx of workers moving in from pricier enclaves exacerbates the challenge. Especially in smaller cities, the sheer number of new arrivals can strain the availability of local inventory. “There are very clear, significant growing pains when that happens,” Dworkin said.
“In addition to competing with investors, who are often cash buyers, people are competing against individuals who are moving from markets where real estate may be more expensive,” said Jami Mumley, a realtor with North Texas Top Team Realtors. “Those folks who are coming can often pay cash for a house… Right now, it’s just very disheartening for buyers.”
“When you have an investor coming in and outbidding them by thousands and thousands of dollars, it’s hard to compete with that,” said Suzanne Athey, a real estate broker with Re/Max Dallas Suburbs & Remarkable Property Management who worked to help the Saunders family find a home. In addition, she said, investment entities are often willing to buy houses sight unseen, waive inspections and appraisal contingencies.
The appraisal contingency waiver, which stipulates that a buyer is locked into the offer price even if the lender determines that the house isn’t worth that much, is the most common of those waivers, according to the National Association of Realtors. It also is of particular concern to housing policy experts, who say widespread use of this practice can encourage bubbles
“The appraisal is one of the controls we have on markets overheating above their value. The reason we have appraisals is to ensure the market isn’t overbidding homes beyond what they’re worth,” Dworkin said.
A deluge of investor dollars into a neighborhood magnifies this distortion. “If you’re buying as an investment property or to flip it, that’s very disruptive to markets,” he said. The practice doesn’t just affect would-be homebuyers, but also people who live in neighborhoods that are undergoing a transformation from owner-occupied to investor-owned rentals.
Marcos Cartagena still lives in the Phoenix-area house he grew up in, but he worries that the area is getting too expensive for his college-aged daughter to put down roots, thanks to the number of investor-owned rental properties that have driven up housing prices.
In one Phoenix neighborhood, housing that had typically attracted solidly middle-class families is being ‘snapped up’ by investors from out of state.
“All these old neighbors are dying off or going to homes. Their children aren’t here in the state any more and they sell the house for top dollar,” he said. “They sell to investors, they don’t sell to people looking to live there,” he said.
In recent years, Cartagena said much of the neighborhood — 1950s housing stock that had typically attracted solidly middle-class families — had been snapped up by investors from out of state, including the house next door.
“They were asking for the highest rent in the area we’ve ever seen. Our mortgage is under $1,000 a month… and even recently you could rent a home for like $1,500,” he said. The new owners, he said, converted a great room added by a previous owner into a fourth bedroom and charged $2,400 a month — too high for even a double-income family to afford.
Instead, the house was rented by a group of adults, which created parking and traffic issues, Cartagena said.
“You can tell which homes have rentals because you see more cars parked on the streets,” he said. “They’ve always allowed on street parking, but that was for guests. This is an everyday occurrence and the streets aren’t that wide,” he said. His former next-door neighbor’s house, he said, regularly has five cars parked on or in front of the property.
In addition, Cartagena said some of the ever-multiplying investor-owned properties were poorly managed and maintained. Even though rents had risen significantly, he learned from talking to some of the new residents that they were responsible for landscaping — a cost it seemed few could bear on top of the expense of renting. “I can drive through the neighborhood and I know exactly which ones are rentals, because the lawns are unkempt,” he said.
Ultimately appealing to a sense of neighborhood cohesion is what gave Saunders and his family a happy ending to their months-long quest. After placing an offer on yet another property earlier this month, Saunders wrote the sellers a letter, enclosing a picture of his toddler and detailing the family’s dream of settling in, renovating and investing the time and money to turn the house into a home.
It worked. Saunders and his wife had bid $30,000 over the asking price, but Athey, their realtor, told them they weren’t even close to the top offer — and Saunders knew he was in the running against corporate interests. “It was shocking to hear our offer was finally accepted,” he said.
Saunders said he believes the seller was willing to take less money because his family was looking to put down roots, not drive returns.
“I do believe that kind of has something to do with it,” he said.