To say, “The housing market is hot,” would be the understatement of the year. There is a lot of speculation that investors are driving up home prices. So, what’s the deal? Are investors responsible for the housing spike?
The main cause for the rapid rise in home prices is the very simple concept of supply and demand. According to a report from Compass, the supply of houses decreased by 53.3% in January 2022 in DFW compared to one year ago. According to a recent report from Realtor.com, the U.S. is short 5.24 million homes. How is this possible? Homes haven’t just disappeared.
Homebuilders became bearish after they were stung by the Great Financial Crisis (GFC), which slowed the development of new homes. Layer this on with the largest generation group in our country, Millennials, reaching a ripe home-buying age and growing their families, and the demand becomes exponential. This phenomenon was occurring prior to the COVID-19 pandemic, but as stay-at-home orders were issued and working from home became the new standard, space took a top spot as a premium commodity.
The need for quality rental property is only increasing. Lending requirements became tighter after the GFC. A lot of Americans don’t meet the credit score or down payment requirements to purchase a home. The need for good schools and space, however, doesn’t go away. The inventory of homes for rent is currently lower than the inventory of homes for purchase. Because of this, there is a real need for the single-family rental product.
But what is stopping investors from completely dominating this tight market? I can’t speak for other investors, but we can’t overpay. That is a bad business model and erodes returns for our investors.
Our fund acquires existing single-family homes in the North Texas area, so we have real-time data and feedback of current market conditions. We can close quickly with all cash, but we’re seeing that this only helps us about half of the time. There are still many sellers who are perfectly content with a longer closing as long as they feel like they have maximized their profit. We rarely compete with the consumer. Because this purchase is an emotional and personal decision in their lives, individuals are more willing to overpay for a property.
One of the benefits of an investor purchase is that they typically have access to more capital than the average home buyer. This means that they can invest in quality renovations to the homes. In theory, this should have a net positive effect on a neighborhood and community. Especially considering that 84% of the homes in the U.S. are 20 years old or older.
Ty Lee is managing director of Dallas-based Common Ground Capital.
