After a few months of being trapped at home last year, Americans were moving in droves. The second half of last year saw the busiest months for the U.S. housing market in a decade. With historically low mortgage rates, a global building supply shortage, and high motivation to move, demand for existing homes was insatiable. We know what happens to prices when demand goes up and supply is fixed. The latest report from the National Association of Realtors shows a 19.1% increase in the median home sale price from a year ago. That is the highest yearly increase since the ’08 housing bubble.
On top of skyrocketing prices and bidding wars, average home-buyers had to compete with an unfamiliar force in the market as well: institutional money.
With interest rates and bond yields stuck at historical lows, institutional investors turned to buying up residential properties to ride the rising prices and make some money off of rent in the meantime. Home builder D.R. Horton out of Texas made waves when it put a whole new 124 home development of newly built houses up for sale to the highest bidder last December which resulted in an institutional bidding war as reported by the Wall Street Journal.
Institutional money in real estate isn’t a new concept and is common for larger properties that the average person has no interest in buying like a strip mall or apartment complex, but the idea of asset managers competing with you and me in our residential housing markets and driving up prices is a little unsettling. Institutions understandably bought private housing after the crash when they could get it for pennies on the dollar after the bubble burst, but to step in and be bidding up properties that regular folks are actually trying to buy is a new wrinkle.
Aside from forcing would be buyers to rent, many believe this behavior could lead to a permanent increase in home values. That’s great if you already have one, but could make purchasing homes very difficult for first time buyers.
Is this the latest injustice that needs to be fixed? Maybe, or it’s just good investing by these firms, buying hard assets in an inflationary period of economic recovery.
The elephant in the room of course is the classic question: “Is it a bubble!?!?”. The answer is maybe, but not as much for your average person. Prices are certainly being bid up, but with current lending guidelines we’re unlikely to see another catastrophe where home values drop below their mortgage balances and people end up underwater on their houses. What will happen to the institutions buying these droves of houses is another story if they keep getting into crazy bidding wars and running up prices on packaged communities.
How this plays out for the housing market will be interesting and raises the question that we’re asking across the board as we transition into this pandemic recovery. Is what we’re seeing temporary, or are these changes here to stay?