Are Institutional Buyers Driving Real Estate Markets

Posted by Chris Clothier on Fri, Nov 15, 2013

This is a question we get asked on a weeklyreal estate investing basis and I suspect most of the questions are coming up because of mis-information being put out by opportunists.  People who are selling get-rick quick ideas or promoting a shiny new idea or product as a quick-fix for new real estate investors.  When most of the questions are coming from a place of fear, you can almost always bet that bad information is the cause of the question.  For real estate investing, my answer is to ask a different question!

Certain Markets Picked Clean By Funds

It is no secret that there have been certain markets across the country where hosing inventories have been picked clean by large institutional funds buying single-family homes.  They have contributed heavily to markets where prices have increased dramatically in a short period of time and inventories of available properties have dwindled.  But if you look closely, even in those markets, the buying is contained to relatively small areas inside markets. 

At the same time, as the funds have entered into market places, they have brought with them a sped up process or a faster transition from a traditional buy, fix and sell to a homeowner model to a buy, fix and rent to a tenant model.  This has led to inventory being purchased much quicker than in the past and has led to many sales of properties that in the past would have continued to sit and wait for an eventual end-user buyer.  For individual investors, many homes did not make sense for resale on the retail market, but they do make sense for long-term buy & hold models.

But when you look deeper into the numbers and get away from sensational headlines, it becomes clear that even in markets where funds are heavily saturated, their ability to drive a market is limited at best.  When you look at the U.S. housing market, which is where many national news headlines focus, institutional funds ability to drive the market is non-existent.

Operating In Small Areas In Limited Markets

It is estimated that a vast majority of the institutional funds are buying properties in limited areas and have so far been able to acquire just fewer than 80,000 single-family homes.  That is a big number – don’t get me wrong.  But it represents just over 1.5% of the yearly sales that are now estimated to occur by the National Association of Realtors (NAR).  Over 5 million single-family homes are sold each year and even in concentrated areas, what institutional funds have accomplished is a clean up of inventory in mostly middle class to upper middle class neighborhoods and allowed for a faster price recovery.

I think the bigger question when it comes to institutions driving markets is, what will happen to consumer demand when the funds begin to taper their buying in certain markets or altogether across the country.  Considering that there are only 7 major funds still buying a majority of the homes, many analysts believe that they will be out of the acquisition mode entirely by mid to end of 2014.  Are consumers going to be able to fill that void?  Will there be enough consumer demand to prevent a fall in pricing in certain markets?

These are the questions that most of us should be considering.  Not questions about the impact they will have while they are buying.  The impact will be felt while they are buying, but in very limited scope and area.  I think it is much easier to determine what comes next by monitoring markets where there is little to no fund activity.  If those markets show progressive signs such as fewer days on market, lower discounts and fewer foreclosure sales, then it may be safe to assume that consumer demand will fill whatever buying needs a market has after institutions stop buying.

What is happening in your market?  Are funds dictating the direction where you live?  Are you worried about the impact of institutional buyers?  We would love to read your opinion…

 

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Topics: Memphis real estate, invest in real estate, foreclosures, real estate hedge funds, institutional real estate