GROWING INVESTOR PRESENCE PLACES NEW BURDEN ON BUYERS

You're a first-time homebuyer who has found the perfect house within budget – only to be outbid by $10,000 to an LLC. What in the H-E-L-L … C is going on?! Investors continue to snap up homes and convert them into rentals, frustrating traditional buyers.

Large corporations, hedge funds and smaller investor groups (including those darn LLCs) recognize the value of real estate. With rental income providing steady cash flow and favorable tax treatment over time, it’s easy to see why. In Q2, 15% of all U.S. home sales went to investors, with 64% of those deals paid in cash – leaving everyday buyers disadvantaged.

The situation is rooted in a supply issue: Fewer single-family units were built in the 2010s than in any decade since the 1960s, driving up property values and creating a perfect storm for speculation. Millennials, the largest generation in U.S. history, are especially impacted, struggling with rising prices, high student debt and slow wage growth. (The median student loan debt among home buyers aged 31-40 is $33K, according to a report, The Future of Housing: Our Outlook for Single and Multi-family Investments, by MetLife.)

Despite a brief pandemic-driven buying spree, Millennials are still the largest share of renters in the nation and lag previous generations in homeownership rates.

On top of high prices, Millennials and other buyers now face stiff competition from deep-pocketed investors who are grabbing an increasing share of single-family homes. Adding to the pressure, many investors are shifting toward the growing build-to-rent market. This trend has doubled since 2019, with built-to-rent homes making up 10% of new construction (8% in the PNW).

The U.S. housing supply increased by 1.6M units in the past year, according to Freddie Mac, primarily driven by rental properties. Thirty-five percent of Americans rent their home; of that group, 31% live in single-family residences – and the figures are rising.

The shift towards renting, especially among Millennials and Gen Z, raises the question: Are we witnessing a long-term move away from the American Dream of homeownership? The answer appears to be “yes.”

MetLife estimates institutional investors alone – owners of at least 10 properties – will have more than 40% of all single-family homes by 2030. One report showed investors purchased one in every six U.S. homes in Q2, with 69% of purchases being single-family residences.

Small investors – owners of nine or fewer properties – still hold the largest share, 63%, of the investor pool. In fact, institutional buyers make up only about 4% of the market share for new single-family sales compared with 18% for so-called mom-and-pop investors.

Virtually no institutional investors are in the PNW, according to John Burns Research and Consulting (chart). Of those that are in Seattle metro, Kohlberg Kravis Roberts and locally owned Timberlane Partners are at the top, according to commercial brokerage and financing group Berkadia.

In some areas, like California and Las Vegas, investor activity has surged by nearly 30% year-on-year, putting even more pressure on traditional buyers to find a home.

While investors are adding to supply, there are concerns about the “rentalization” of America’s housing stock.

The key to resolving this issue is not penalizing investors but creating smarter housing policies. Both major political parties offer solutions focusing on increasing housing construction. Proposals range from tax incentives for building affordable homes to repurposing federal land for development.

Leaders in Washington state made strides by adjusting zoning laws to allow for denser development and funding first-time buyer programs. This should ensure investors and prospective homeowners can thrive in a housing market designed to serve the broader needs of society.

However, demand currently far outweighs supply. A recent report estimates the Seattle metro area will need 17,000 new units annually for the next 20 years, yet only 3,100 permits were issued last year.

While there’s hope on the horizon with the anticipated addition of about 11,500 rental units in 2024, the challenges for Seattle area homebuyers – especially first-timers – remain difficult. Zoning reforms and incentives are essential but must be enacted quickly to give aspiring homeowners a fighting chance.

Looking for an assessment of the local housing market? Check out my story from Oct. 15: Expanding Supply, Easing Prices Bring Relief to King County Housing Market

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