Last month I sent out my analysis of market conditions, and received questions back about the tight inventory, so I decided to share my opinion on what causes this. Here’s what I sent out to my clients last week:
Introduction
One of the least understood factors in the short supply has been the action of investors, who helped create the short supply, but also helped the housing market to recover.
These questions came up from my March Bulletin last month when I offered my analysis of market conditions. I mentioned that NAR’s economist Lawrence Yun was hoping to see large investors return some of their rental properties back into the housing market for sale, which would help loosen the inventory. I posted this analysis on my website by the way, so you can revisit it here if you want.
— Stephanie
How it Happened
Following the financial collapse of 2007 and 2008, as the Great Recession began and the housing market stalled, as we all remember there were many foreclosures, and distressed properties for sale, often at below-market prices, in short-sales.
Institutional investors who understood the value of real estate bought some of this distressed inventory in large batches. Some of the distress was physical deterioration, but much of it was simply financial distress, with the owner upside-down on the property, owing more on the house than its sale price could cover.
Institutional investors such as Blackstone Group picked a lot of properties off the market at attractive prices. The value of this real estate in a stalled market couldn’t be realized by reselling the house, but it could be realized by renting it. The point is that housing always has value.
In my view, it was a good thing for the housing market that so many investors picked up these bargain properties. The human tragedy had already happened and couldn’t be reversed, but we still had a collapsed market trying to recover.
Investor activity helped the housing market recover by taking properties off the market, maintaining a demand for property, and keeping buyers in the market. Ultimately this activity took most of the distressed property off the market, and we began to see resale housing come into short supply.
I remember well how the buyer’s market turned into a seller’s market around the beginning of 2012, and how I coached my clients in this change, which happened relatively quickly. We had reached the point that much of the distressed property had been bought, there were no more bargains left, and homeowners were still focused on repairing their equity position.
This is when the housing market started back on the road to a normal market. It was a very slow-moving market, but with normal property values, which started to go back up again. Home prices rose because of short supply, and because this is what houses do, with a gradual and constant appreciation over time.
As the economy has been regaining its strength, we’ve seen new construction happening, with new housing created. It’s been a strong rental market in the last few years, and this continues to be the case. But rents are starting to level out because enough new multi-family housing has been built that we have competition coming into the rental market now.
This is what Lawrence Yun noted in his forecast, along with the possibility that as rents stabilize, investors holding single-family homes might start reselling them. When it’s a landlord’s market and rents are continually rising, it’s hard to think about selling. When this stops happening, the incentives can change.
Many people are not sure what they think about institutional investors buying up distressed properties in batches, but as I’ve said, this helped to keep the market alive in a period of very little activity. Wall Street still doesn’t hold many single-family homes – perhaps a few hundred thousand. In comparison, there are 90 million single-family homes in the US, and 16 million of these are rentals, mostly held by individuals or small companies.
Real estate always has value; it’s just a matter of how best to realize that value. In a more active housing market, we would see fix and flip happen, with people buying properties, bringing them to optimal market value, and selling them in a fairly short period of time. But in recent years we’ve seen a lot more fix and hold, and this is because the rents have been so attractive.
Rents may now be at the top level the market can bear, and home prices may have regained their value, and are now settling to their standard gradual appreciation. It will take some time for the tight inventory in the home resale market to loosen up, but we’re definitely headed in that direction.
© Stephanie Passman
