Investors bought 27% of US homes in Q1, as traditional buyers struggle to afford

If you understand the underlying reasons for why an investor would buy an actively depreciating asset, then you understand why OP suggests--correctly in my opinion--that this is a non-story.

We have a housing shortage. As long as it looks like the shortage will continue, investors--people--will buy depreciating assets in the hopes that population growth will cause them to be worth more tomorrow than they are today. If it's not Private Equity, it'll be rental companies. If it's not rental companies, it'll be mom & pop landlords. If it's not mom & pop landlords, it'll be people looking for a second home or pied-a-terre with upside potential. The problem is the perpetual shortage clearly indicating increasing economic rents, instead of a trend toward the cost of production.

This is a housing crisis but most Americans are treating it like a housing whoopsie. One in which we ought to fight about the best way to build more housing instead of pointing a firehouse of development incentives, to the point of literally subsidizing private development and public development.

It's basic economics, but our electorate will tie itself in knots to make the housing crisis fit their niche political narrative.

This is a very important thing to point out. So often, issues that affect normal people negatively are only afforded a little bit of coverage once in a while. If the trend persists and it is still negatively affecting the citizenship, it deserves to be in the news.

> Of those, mom-and-pop investors, or those who own between 1 and 5 homes, account for 85% of all investor-owned residential properties, while those with between 6 and 10 properties account for another 5%.

There’s nothing wrong with investing by buying homes.

Just pay a 75% tax when you do.

If you can find places to make money with those taxes, have at it.

But you’ll stop messing with normal people’s attempts to buy a house for the most part.

Distorting markets like that tend to have unforeseen deleterious side effects that just make things worse.

For example: rent control

Private equity shouldn't be able to own housing. It should be like new highways and tolls, you get to charge until you make up for your investment, but then people who live there or the government should own it.

Want to keep your toll business? Build more housing.

If you want cash poor people to compete with cash rich private equity in the housing market without banning PE completely, you need to make it cheaper for cash poor people to borrow money. That too isn’t a particularly radical policy proposal. A lot of countries across the world do it with positive outcomes.

Even Adam Smith fulminated against landlords, who he saw as parasitical free riders.

Yep, pass that, free up a few percentage points of inventory, good wealth transfer to the rest of existing entrenched investor base. They might even come leased!

[dead]

Hence Romania.

When we were buying a house, we made offers on around 30 properties, and about 10 of them lost out to lower dollar value cash offers. In a hot real estate market, nobody wants to deal with any contingencies.

According to my friend, the issue is that financed deals frequently fall apart at the last minute.

Cash is more secure, when you turn down a bunch of offers for one that goes belly-up, at the end.

The leverage cash gives you is convenience. A normal buyer will have very specific times they can do the transaction (since they need to almost finish selling their house before they can buy yours). Showing up with cash offers means that the buyer can be done right now.

It is very regional. An older house on 5 acres (2 hectare / 20k square meters) could go for $300k. $500k could get you a really nice house. Picking a random rural area in a random midwest state found this beauty: https://www.landsearch.com/properties/16167-160th-st-letts-i...

The homes investors would look to pick up to flip and sell or rent would go in the $80-120 range in this area, I'd think.

In Long Island, cheap houses are a half mil.

I suspect that the Bay Area is even worse.

My neighborhood is like this. It's been underresourced and neglected for decades, but is well connected to transit and is adjacent to more prestigious neighborhoods.

The buildings being bought are 2-4 unit apartment rental buildings, and quite old, so 300-500k is typical. Then they're downzoned into single family homes or possibly two condos and resold for about double the price I think.

Obviously the ones using (and then losing) them as rental housing and the ones buying are completely different groups.

> That’s fascinating to me. Generally, the homes people buy to live in aren’t optimal investment properties. Why not sell and buy something optimized for return and growth?

Great question and one I wrestled with until hearing Paula Pant's perspective:

You _really_ know the house you already own. You have a much better understanding of its issues and capital expenses in the next 1-5 years, than a house you are purchasing with an inspection. You know the yard, the neighbors, the city regs, the roof, the plumbing, the weird dog two doors down, and the weirder neighbor three doors down. The mom and pop investor have a much greater risk-of-ruin on a single property than an institutional investor, so this knowledge is extremely valuable.

The second reason is you most likely purchased that house with a non-investment mortgage, so you get priced in a bit to converting to an investment property after the living in it. My non-owner occupied mortgages for my investment properties required 30-35% down and had a much higher interest rate. Converting your existing home avoids all that.

Thirdly, taxes. Selling a house triggers a taxable event and with investment properties will heavily push the seller towards a 1031 exchange to avoid a hefty tax bill that year. A 1031 basically requires you to pick 3 specific properties when your property closes with a requirement to purchase one of those three in the immediate six months or face a capital gains bill is a hard bill to swallow. Depending on the state in the United States, purchasing a new property will also reset your property tax bill, while an existing property can have property taxes well below the current rate based solely on property values when purchased.

That's the first order analysis. It's correct within its assumptions, but it neglects leverage.

But if you bought a place before the pandemic you could lock in a ridiculously low interest rate for 30 years.

Now you have the value of the mortgage (leverage) locked at an interest rate lower than inflation. Let's say rent covers expenses and mortgage. The return on an initial $50k down on a 250k property might be around $10k/year, or 20%.

Tell me, where does one get an investment returning 20% annum?

Real estate is the easiest and safest way to leverage your investment.

Why wouldn’t it be a good house to rent? It’s usually not tourist rental (airbnb), it’s long term living rental (annual lease). Anyone who doesn’t own has to rent an apartment or house.

Theres also a chunk of people who “don’t believe in debt” so even when they have kids and live in a house they rent until they can pay cash. Or there’s young people who get together in a group of 4 and rent a house to share etc etc.

Land rents are pretty great in the US at least. Landowners get bailed out by taxpayers when times are hard in many instances. Plus laws are generally designed to protect land rents.

because of your existing mortgage rate

upvoted then realized you are promoting LVT. this is why i think LVT is a terrible idea: https://news.ycombinator.com/item?id=44532444

land value is only a small part of housing costs.

  > this is a better solution

If loads of housing is built and the price of housing starts dropping, firms won't want to invest in housing because they'll lose money. Unfortunately, a lot of politically active home owners also want to keep the price of housing from dropping so this is a harder thing for local governments to put into practice.

You're fixated on price. Look at rent instead. Private equity cannot create new tenants. The number of tenants is fixed. That's why rental inflation is significantly better in Texas compared to California. Private equity is not a relevant variable here.

Because if you get zoning out of the way, we can keep building, and keep building, and keep building.

Let them keep buying. But if we build enough, they won't be able to rent it all out. Are they going to keep buying to control the rent-able supply forever? No, they'll run out of money before we run out of buildable land. (Maybe not before we run out of wood, shingles, and labor though...)

They don't have the cash. Housing is a huge market.

Downvote all you want, but math is math.

Yea really weird. 1 home usually doesn’t even mean you are an investor: you just own one home and live in it. And then 5 homes? That’s not what anyone would think of as “mom and pop.” That’s a very large real estate investment business.

I’d just ignore people with one home because they are not investors. Have one “mom and pop” bucket for people with 2 homes, one rented out, and then another bucket for businesses with 3+ homes, 2+ rented out.

> But if 27% is pure corporate investment pushing up the prices - yes, it's bad.

But it's not "pure corporate". Quite the opposite. From the article:

> mom-and-pop investors, or those who own between 1 and 5 homes, account for 85% of all investor-owned residential properties, while those with between 6 and 10 properties account for another 5%.

I really don't see anything wrong with mom and pop buying a second or third home to rent out for extra income.

And I don't see anything inherently wrong with 27% either. If there aren't enough rental homes, then an increase in the share of investors is exactly what you need to achieve the "reasonable balance" you're talking about. And then there's nothing bad about it -- it's exactly what's best.

1. I mean, investors invest to make money. You make money by renting. Otherwise you're just throwing money away, which isn't what investors like to do.

2. In general, rent payments are less than mortgage payments for the same property (though this can vary in specific cases due to a number of factors). So the point is the renters get to save more money than they would with a mortgage.

And the problem with buying and selling is the realtor fee on both ends. You can't buy and sell a house every year or two. You'd go broke real quick.

> Can't your friend buy and then sell when they are ready to move?

They can, but because of realtors these 2 transactions will end up costing 12% of the cost of the house.

Yes, currently.

~6 months (in an RV, not a more hospitable mobile home). I’ve had worse apartments. Not through winter, though. Millions of people have more experience than me (I’m sure) but a couple days is a pretty low bar.

I’d definitely say it wasn’t ideal, the waste situation was certainly not great without a septic tank hook-up! But it is a something that can be iterated on. NIMBYs, on the other hand, there just isn’t any traction there at all.