Cash Is King…Except Possibly In Housing

Potential Owner-Occupied Buyer Losing Out To Big Investor Groups

Credit: Flickr User, Bohman

While it is great news that home values have rebounded nicely the past two years one major factor they have come back as strong as they have has nothing to do with the image of families purchasing their dream homes. Institutional investors paying cash and scooping up “deals” has more to do with the recovering prices, especially in the areas like Florida, Arizona, Las Vegas and California where housing prices took the biggest hit. In 2013, analyst report that only 40% of home sales were by individuals using a mortgage. Hedge funds, private equity firms and other large investors accounted for over half, buying tens of thousands of distressed properties, often at bargain prices, and then putting them on the rental market. This flood of investment bulk-buying has many worried that the purchases are leaving middle-class and first-time buyers out in the cold.  

Companies like Blackstone Group, Colony Capital and Starwood Property Trust have spent billions over the last two years. They shut out the competition when a good deal surfaces by outbidding other prospective buyers and paying cash. In many cases, they are willing to offer more than the asking price to bolster local home prices in hopes of maximizing profits when they sell the home after prices rise. Many analyst feel that these big investors have artificially inflated prices and hurt home affordability. Homeowner advocates are concerned that this “profit-grab” is having a harmful impact on families, communities while creating a layer of new “investor landlords” with little regulatory oversight. Of course, government housing agencies are contributing to the problem by conducting bulk sales of foreclosed properties and distressed mortgages under their control. It’s easy to see how this phenomena is dramatically changing the landscape of our neighborhoods. 

The trend has cooled off in recent months, mostly because great values in the marketplace are dwindling with escalating home prices and fewer foreclosures. However, it may be quite some time before we see a return to more historical levels of owner-occupied homebuyers – somewhere around 75%. And it raises another question – when the hedge funds and other investors are ready to take their profits and sell, who will their buyers be?