Institutional Investors Buying Up Properties Are Putting Inflationary Pressure On Rents And Home Prices

Inflation is being driven by certain sectors of the economy, for the purposes of this post, we will look at housing costs.

U.S. News and other media outlets recently reported, Rents Reach ‘Insane’ Levels Across US With No End in Sight:

Rents have exploded across the country, causing many to dig deep into their savings, downsize to subpar units or fall behind on payments and risk eviction now that a federal moratorium has ended.

In the 50 largest U.S. metro areas, median rent rose an astounding 19.3% from December 2020 to December 2021, according to a Realtor.com analysis of properties with two or fewer bedrooms. And nowhere was the jump bigger than in the Miami metro area, where the median rent exploded to $2,850, 49.8% higher than the previous year.

Other cities across Florida — Tampa, Orlando and Jacksonville — and the Sun Belt destinations of San Diego, Las Vegas, Austin, Texas, and Memphis, Tennessee, all saw spikes of more than 25% during that time period.

“According to Realtor.com’s monthly rental data report, Phoenix ranked No. 10 for monthly rental increases in November, putting it behind first place winner Miami. The median rent in the Valley is now $1,785, which is a 27.6% year-over-year increase from November 2020. Median rent for a studio apartment in the area was just $919 in November 2019; it’s now up to $1,400.” Phoenix rent skyrockets to impossible heights.

Rising rents are an increasing driver of high inflation that has become one of the nation’s top economic problems. Labor Department data, which covers existing rents as well as new listings, shows much smaller increases, but these are also picking up. Rental costs rose 0.5% in January from December, the Labor Department said last week. That may seem small, but it was the biggest increase in 20 years, and will likely accelerate.

Economists worry about the impact of rent increases on inflation because the big jumps in new leases feed into the U.S. consumer price index, which is used to measure inflation.

Inflation jumped 7.5% in January from a year earlier, the biggest increase in four decades. While many economists expect that to decrease as pandemic-disrupted supply chains unravel, rising rents could keep inflation high through the end of the year since housing costs make up one-third of the consumer price index.

Experts say many factors are responsible for astronomical rents, including a nationwide housing shortage, extremely low rental vacancies and unrelenting demand as young adults continue to enter the crowded market.

Noah Berlatsky summarizes: “Republicans have responded to rising inflation by calling for a reduction in spending. They’ve been joined by conservative Vichy Democrats like West Virginia Senator Joe Manchin. All of them argue that government efforts to fight the pandemic have flooded the economy with dollars, and that this has caused price increases.”

The Covid relief bills included a rent subsidy and mortgage subsidy program to keep people in their homes after the economy was shut down. There was also an eviction/foreclosure moratorium. These programs were administered by state governments (in many cases badly administered), and were allowed to expire by September 2021.

These programs were intended to preserve the status quo: you owe money for rent or your mortgage payment, and the federal government paid it. This was money already owed and would have been paid but for shutting down the economy for the Coronavirus pandemic. This spending is not a case of demand exceeding supply, which is the classic driver of inflation.

What gets almost entirely overlooked in the cost of housing is the emerging role of institutional investors, i.e., the investor class aka The Predator Class, as Dick Meyer dubbed them before the last housing crisis.

Reuters reported last year, Selling out: America’s local landlords. Moving in: Big investors:

Beset by COVID-19 and its fallout, local landlords are offloading their properties to cash-rich institutional investors, and America’s real-estate market may never be the same.

[M]any of America’s landlords have gone a year and a half without being paid by tenants, who’ve been protected by several state and local eviction moratoria as well as an umbrella federal ban enacted 11 months ago.

The owners have been waiting for $46 billion to help them survive without that income. The funds were approved by Congress months ago, but bureaucracy creaks; only $3 billion has reached them so far, according to U.S. Treasury Department data.

Like I said, these programs were administered by state governments (in many cases badly administered).

Now the eviction ban is about to end … Yet thousands of local landlords have already quit the business. And a growing number, like Tyson and Murano, are on their way out.

Taking their place: institutional investors, broadly defined in the industry as firms owning more than 1,000 units.

These bigger players have bulk-bought properties during the pandemic, according to industry data and Reuters interviews with more than three dozen landlords, real estate brokers, landlord associations and property acquisition firms in major cities.

Such investors and their advocates say they provide long-term stability to the market at a time of upheaval, and are trying to fill the gap in rental properties needed by Americans as many small landlords are exiting in financial trouble.

Yet many housing campaigners say the growing presence of big investors in the market will inevitably mean higher rents and less affordable housing available to the types of tenants whose health and incomes have been hit hardest by the pandemic.

* * *

About 23% of small landlords, owning between one and three single-family homes, planned to sell at least one property due to difficulties caused by the eviction ban, according to a February survey of 1,000 such owners by the National Rental Home Council, a Washington D.C.-based trade advocacy group.

This could reshape the market in the United States, where local landlords provide the bulk of rental properties and affordable homes. They range from small “mom-and-pop” owners with a few units to medium players with dozens.

During the first half of 2021, $77 billion in institutional money has poured into the rental home market, according to residential brokerage Redfin.

This month, for example, Tricon Residential (TCN.TO) announced it would be spending $5 billion to buy an additional 18,000 homes together with a Texas pension fund and other large investors.

“There is an incredible demand and a shortage of supply for high-quality rental homes – in fact, we receive over 5,000 calls weekly to rent our homes, with only 250 homes available at any time,” said Kevin Baldridge, Tricon’s chief operating officer,

Housing promises lucrative returns, particularly in terms of rising home prices, at a time of low global yields, according to John Burns Real Estate Consulting. Institutional investors are reallocating money from fixed-income investments, it said.

“Every day, there is a new press release on an existing or new investor group raising billions to buy properties,” said Rick Palacios, Jr., John Burns’ director of research.

“The big buyers are happy to take these properties off local landlords’ hands.”

* * *

Some are now facing displacement after the local owner of the property sold it to an investment firm this summer after an all-cash bidding war.

Three tenants told Reuters that residents there were told by the firm in July that it plans to make renovations that could raise rents from $900 for a two or three-bedroom apartment to as much as $2,100. They said residents in about 40 units, all on month-to-month leases, had received notices to vacate by Sept. 30.

The firm now managing the property, Devenscrest Management, said it was revitalizing a long-neglected neighborhood, and investing millions of dollars in repairs and renovations.

* * *

The increasing interest of institutional investors has already helped push up both rents and home prices during the pandemic, according to John Burns, though other factors like lack of inventory and low interest rates have also been drivers.

Rents are up 7% nationally from a year ago, according to housing tracker Zillow. Average home prices rose 16.6% in the year ending May, according to the CoreLogic Chase-Shiller index, the highest annual growth since it started in 1987.

Even before COVID-19 struck, America was plagued by a lack of affordable homes, defined by the government as one that a household can rent for 30% or less of their income. A quarter of American renters pay more than half their incomes on rent, the Harvard Joint Center for Housing Studies says.

Now, in the aftermath of the pandemic eviction bans, an estimated 6.5 million tenants owed $27.5 billion in back rent and utilities as of the middle of July, according to Mark Zandi, chief economist at Moody’s Analytics.

Robert Pinnegar, chief executive of the National Apartment Association, a landlord trade group, said the economics of small owners meant they were already operating on thin profit margins of around 10% before the pandemic upended life.

“Eviction moratoria have not only left renters strapped with insurmountable debt but have left small owners to unfairly hold the bag,” he added.

In May of last year, Institutional buyers are flooding single-family market:

Investors dropped a record $77 billion on homes in the past six months, according to Business Insider, citing a Redfin report. That compares to the $55 billion spent on homes in the second and third quarters of 2020, when buying dropped as Covid cases surged and cities imposed restrictions.

Overall, the number of homes acquired by investors jumped 2.7% in the first quarter compared to the same period last year.

The massive purchases have added to the nationwide housing crunch amid what has been a red-hot market.

Investors are most focused on single-family homes, which made up the biggest share of acquisitions and first-quarter growth, year over year. Nearly 39,000 of the 55,000 homes investors bought in Q1 were single-family properties, up 4.8% from last year.

Among the investors cited in the Redfin report were Invitation Homes and American Homes 4 Rent, both single-family-rental behemoths. Redfin’s report also included iBuyer Opendoor snapped up 3,594 homes in Q1, Business Insider reported. Others like Offerpad and Zillow, have taken to gobbling up houses, sight unseen.

Redfin chief economist Daryl Fairweather said he expects the buying momentum to accelerate.

“Investors took a huge pause during the pandemic, and they still haven’t made up for all the homes they didn’t purchase during that period,” she told the publication.

With a larger institutional presence, an already tight housing market could grow tighter. Single-family-rental companies can also overshadow smaller buyers with all cash deals and a more aggressive approach to closing.

On Friday, Axios reported, Big investors are hogging American homes:

Investors are draining an increasingly large share of American homes from the market, leaving traditional homebuyers with fewer options, at higher prices.

Why it matters: Homeownership is the single most important way Americans build wealth. Families are now increasingly facing off with cash-rich institutional investors bidding for houses, as they try to climb onto the property ladder.

Driving the news: The share of American homes sold to investors hit a record high of 18.4% in the fourth quarter of 2021, according to a recent report from real estate firm Redfin.

• • • These investors bought roughly 80,000 homes worth $50 billion during the last three months of the year.

Worth noting: Investors are an especially heavy presence in markets that have seen some of the highest price spikes in the country.

• • • In Las Vegas and Phoenix, where prices are were up 28% and 25% last year, investors bought roughly 30% of the houses sold in the fourth quarter, Redfin found.

What they’re saying: “Ordinary folks are feeling the pinch,” says Redfin economist Sheharyar Bokhari, who decided to research the role of investors after hearing anecdotes about individual house hunters increasingly losing out to them.

Context: The highly symbolic — politically sensitive — American housing market has transformed in the years since the financial crisis of 2008.

• • • Large institutional investors have been pumping cash into a market that used to be highly localized and dominated by owner-occupiers and small-time landlords.
    • At the same time, a decade’s dearth of homebuilding in the aftermath of the housing bust has created a structural shortage of houses.

State of play: Over the last two years, the pandemic triggered a home-buying boom amid record-low mortgage rates and house-bound families’ desires for home offices and more space. Affordability has fallen sharply, as prices have surged.

What we’re watching: Homebuilding. While the surge of investors into the market is adding to the strains on housing affordability, the fundamental problem is a shortage of supply, especially in the denser markets where the best jobs are.

Now a Backlash Grows Against Institutional Housing Investors:

Backlash is growing over the rising number of institutional investors entering the housing market as they search for yield in an inflationary economy awash in capital.

According to a recent article in GlobeSt.com, Ohio Democratic U.S. Senator Sherrod Brown, who chairs the Committee on Banking, Housing and Urban Affairs, said investors and asset management institutions are taking advantage of an allegedly “captive” housing supply situation to increase their returns.

GlobeSt.com quotes Brown as saying, “Private equity firms, corporate landlords and investors saw a shortage, and they saw a captive market. They see these [single-family houses] as nothing more than annual return on equity,” during a Committee hearing.

Brown also referred to the growing presence of institutional investors looking to capitalize on the current nationwide market forces of high demand and short supply, fueled by labor shortages, supply chain issues and inflated materials prices as a “land grab.”

The article noted Blackstone Group left the single-family rental market in 2019 and then reentered with a $6B deal to buy Home Partners of America, which held a portfolio of more than 17,000 units.

Debt and equity staked in single-family rentals by investors totaled roughly $30B in 2021, and around 100,000 SFR units started construction around the country last year.

This report goes on to explain that there are apologists for these institutional investors (the old “Wall Street can do no wrong” canard).

However appealing the specter of an institutional monster standing like some evil capitalist ogre or boogeyman on the flattened backs of the American homebuyer may be, and however much political hay can be made from painting that image, it has already been shown to be more comforting myth than cold market reality.

An article in Vox last year covered BlackRock’s activity in the sector and the resulting demonization of investors inflating housing prices that has, “yanked the dream of homeownership out of the desperate, clutching hands of millions.”

Vox then went on to point out the comparatively small role institutional investors play in housing market, particularly in single-family, making up only an estimated 20% of sales. While concerns about cash buyers reducing opportunities for traditional mortgage-based buyers have a basis in reality, the article notes the real issue driving up prices is not “iBuyers” and asset funds.

Simply stated, “The idea that institutional investors are somehow largely to blame for the current housing market catastrophe is wrong and obscures the real problem. Housing prices have been skyrocketing due to historically low supply, low mortgage rates, and the largest generation in American history entering the market looking for starter homes.”

Institutional investors are a significant contributing factor if not “largely to blame.” 30% of the Phoenix housing market is hardly insignificant or marginal.

And pushback from the institutional investors themselves, i.e., the practioners of rentier capitalism (the monopolization of access to any kind of property (physical, financial, intellectual, etc.) and gaining significant amounts of profit without contribution to society).

It’s easy to rail against heavily capitalized institutions potentially making an already difficult and multifaceted problem more cumbersome. What is not easy is addressing the real underlying issues of monetary policy [low mortgage rates], inflation [pandemic related], three decades of under-promoted skilled trade education, global supply chain constriction [pandmic related], and bureaucratic impediments to new supply delivery. [Like what? They do not say.]

I’m surprised they do not include immigration reform, because so many construction workers during the last construction boom were undocumented workers who came from Central America.

Rather than inventing boogeymen to keep voters afraid and direct their anger and frustration elsewhere, perhaps Sen. Brown and other leaders at the local, state and national levels could better serve their constituents by trying to slay the real monsters in the room.

Me thinks thou dost protest too much. “Inventing boogeymen” is claiming that government assistance to working Americans during the pandemic is the cause of inflation, rather than the profiteering, price fixing and price gouging by companies taking advantage of shortages caused by supply chain disruptions during the pandemic.

It is indisputable that even during a global pandemic, the rich have gotten richer at the expense of everyone else. U.S. Billionaires Got 62 percent Richer During Pandemic. They’re Now Up $1.8 Trillion. (August 2021). “The great good fortune of these billionaires over the past 17 months is all the more appalling when contrasted with the devastating impact of coronavirus on working people. Over 86 million Americans have lost jobs, almost 38 million have been sickened by the virus, and over 625,000 have died from it.”

The death toll will soon surpass 1 million (it already has if excess deaths attributable to Covid are included).