Investors helped the market — but may be hurting its future

Real estate investors have helped the market recover. But for the long-term health of the market, maybe they should stop now.

A balcony at Watergate at Landmark
A balcony at Watergate at Landmark

(To be clear: By “investors” I mean people and companies that buy single-family homes to turn them into rentals, not house-flippers.)

Here’s what’s worth watching: When all those foreclosures went on the market at deep discounts, investors began snapping them up. That was a good thing, because there was so much inventory out there that prices were staying low.

Once most of that distressed inventory was gone, though, conventional wisdom said that investors would ease off. Prices would go up and the great deals would be gone.

That may not be the case. Investors are still buying inventory — at least, that’s what economist Tom Lawler is seeing. With the Fed keeping interest rates low, it’s apparently still a good investment, at least for larger investors.

And that may not be good for the long-term of the market.

Investors aren’t planning to sell. Ever. The homes they’ve turned into rentals are going to stay as rentals — that’s inventory being taken out of the market. When someone is looking to move up or downsize, the pool of available homes is going to be smaller.

As economist/housing guy Bill McBride puts it (emphasis mine):

This investor buying is making it very difficult for first time buyers to find a home, and this is probably keeping some potential buyers as renters — and maybe pushing up some buyers to higher price points just to buy.

In the short run (the next few years), I don’t think these institutional buyers will have a negative impact on the market.  It seems unlikely they will be large sellers, and they will probably maintain the homes that they purchase. However this could impact the housing market in the future, especially the move-up market, since the move-up market usually needs previous first-time buyers to sell their first homes. Obviously institutional sellers will not be move-up buyers.

Even worse, potentially, is that by shrinking inventory and raising prices, investors might be creating a new housing bubble. (Click here for a Bloomberg article about that very issue.) That’s still speculation, though. Old Town

What isn’t speculation is that we’re already seeing an inventory shortage as sellers stay on the fence (possibly afraid to be selling at the bottom, or maybe they’re just underwater).

Those sellers will eventually enter the market, of course, but if too much single-family housing gets into the hands of investors, inventory shortage could be a long-term problem we’ll need to keep an eye on.

Posted by Andrew Kantor

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Will Nesbitt

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Will is the principal broker of Nesbitt Realty and Condo Alexandria. He is licensed in anywhere in the Commonwealth of Virginia, but focuses on those communities found in and around Alexandria, Arlington, Mount Vernon and Springfield/Franconia. Will has been involved in real estate management, sales and investment for more than twenty years. He is a veteran of the U.S. Army. While in the army, he studied Russian at Monterey's Defense Language Institute. He is also a "veteran of the dotcom wars" and built most of the sites associated with NesbittRealty.com Will currently resides in Belle Haven Estates just outside Old Town, overlooking New Alexandria. He is a former president of the Mount Vernon Youth Athletic Association and founded the Alexandria Fun with Friends Group. Will is the author of BattlestorM, a tabletop fantasy game, which was published by Ral Partha Publishing in the late '90's, and Arthur's Realm, a boardgame available at the Gamecrafter.