First-time Homebuyers Are Getting Outbid by Big Companies
Landlords, large and small, are lining up to buy homes as investment properties. A recent study found 1 in 5 homes sold in the U.S. in 2020 were bought by investors.
PASADENA, Calif. – Home shoppers aren't just competing against each other in bidding wars these days. Landlords, large and small, also are lining up to buy homes to use investment properties, according to a recent study by Irvine-based John Burns Real Estate Consulting highlighted by the Wall Street Journal.
About one in five homes sold in 2020 were purchased by investors, both nationwide and in Southern California, the study found. It could be institutional investor groups, publicly traded companies, pension funds, and even large foreign behemoths.
Locally, however, mom-and-pop ventures are responsible for most Southern California investor purchases because of the region's high home prices.
First-time homebuyers and other low-down-payment buyers (less than 20% down for example) cannot compete. The big boys come in with cash. They have the financial resources to win every bidding war. No contingencies. No fuss. No muss. Close fast as you can.
First-time homebuyers rightfully want a property inspection and need a mortgage. The mortgage typically requires an appraisal. Takes time. If the appraisal comes in short of the sales price the listing agent and the seller get to repeat the solicitation process because the buyer may not be able to cover the shortage with such few shekels.
Even before COVID-19 hit, I noticed fewer and fewer low-down-payment buyers capturing the prize. Plenty of dusty pre-approval letters sit on my desk. And sit.
Buyers get rejection fatigue. Many commission-compensated realty agents figure out they are throwing good time after bad as offer after offer gets turned down. The first-timer buyers who receive down payment help from mom or dad, for example, eventually get offers accepted after coming up with the 20%.
From all accounts, the single-family rental industry genesis took hold during the Great Recession. As 6.3 million families lost their homes to foreclosure between 2007 and 2013, according to Black Knight, large operators with a lot of cash were able to buy homes in bulk.
Large-scale operators have figured out how to operate at scale within the past five or 10 years. Technological advances include virtual showings, keyless entry and digital leases, according to a podcast interview posted by the National Rental Home Council, a non-profit trade association of the single-family rental industry.
That tells me this competition with consumer home purchasers is just going to get worse.
Depending on whom you ask and what their definition of large corporate landlords might be, somewhere less than 5% of single-family rentals are owned by large operators. Mark Zandi, chief economist of Moody's Analytics, thinks it's less than 5%. John Burns of Burns of John Burns Real Estate Consulting thinks it's less than 2%.
Orange County is a leading indicator. It is shocking to learn that 3.5% of all Orange County residential 1-4 unit parcels are owned by corporate entities with portfolios of 200 or more properties, according to ATTOM Data Solutions. That's nearly 30,000 residences out of 846,000 parcels behind the Orange Curtain are owned by these behemoths.
Los Angeles County and Riverside County both measure at 0.05%, and San Bernardino County is at 0.01%. Statewide it's 0.09%.
The U.S. has nearly 1 million residential properties (out of a 101 million total 1-4's, including attached condos) owned by the large operators, ATTOM figures show.
Roughly 35% of residential properties are renter-occupied. John Burns estimates there are a total of 15.2 million single-family and condo rentals across the U.S.
Virtually every economist looks at how homebuilding has failed to keep pace with demand. Freddie Mac Chief Economist Sam Khater recently wrote the U.S. housing shortage increased to 3.8 million units by the end of 2020.
Build 'em and they will come. Maybe not. An industry colleague in Tampa, Florida recently explained how an entire subdivision of more than 50 newly built homes was snatched up by an institutional investor. Talk about scale. Talk about cutting out the consumer competition.
This is a vicious cycle that just feeds on itself. The more properties acquired, the more upward pressure there is on home prices and rents. A million homes now. What's it going to be in five short years?
Besides the supply-side challenge, a lack of foresight and disappointing U.S. government policies may lead to the U.S. becoming a rental nation at the expense.
President Biden’s latest spending proposal includes a $15,000 tax credit for first-time buyers. That buyer might not be able to use the tax credit if he or she doesn't have a boatload of down payment money.
The American Dream has been real for so many as a form of stability and family wealth building. Consumers who want to own and can afford to own should be first in line. Competition should not apply in this case.
What policy changes can be made to slow down the large-scale landlord industry? Irvine CPA Marcello Sroka suggests an excise tax. He points to cigarette and alcohol excise taxes as ways to discourage certain behavior.
Such a tax would need to hurt enough to discourage them from buying and owning rentals.
Copyright © 2021 Pasadena Star-News, Jeff Lazerson. Lazerson is a mortgage broker.