Q&A with CFO David Keiran: Investors and home price increases

Senné CFO David Keiran answers questions relating to the rise in investor interest in the housing market.

How active are investors in the market and what led to their rise in recent years?

During the Pandemic, supply chain disruptions significantly reduced the delivery of new housing inventory due to construction delays, labor shortages and increased building costs. With limited new supply and increasing buyer demand, which fueled buyer competition and spiking home prices, the result caused renters to stay put in their rental units which made apartment investing very attractive for well-capitalized buyers due to increased occupancy rates and rising rents due to inflation.

In June 2022, the national median listing price for a single-family home was $450,000, which was an increase of 17% from the same time in 2021 and over 31% from June 2020. With home prices steadily increasing, along with mortgage interest rates, prospective homebuyers started pulling out of the market which was evidenced by mortgage applications dropping to the lowest level in 22 years at the end of June. Inflation, high mortgage rates and record-high home prices quickly reduced housing affordability, especially for renters looking to enter the homeownership market.

A typical monthly mortgage payment is 75% higher today than it was in June 2019 and unfortunately, earnings are not keeping up with inflation. Year over year, through the end of June 2022, wages grew, on average, 6.7% falling behind the 9.1% increase in inflation year over year. With active Fed policy initiatives to reduce inflation, interest rates should continue to rise for the foreseeable future further hampering the first-time homeownership process, which should keep rental apartment occupancy high.

Over the past 10 years multifamily prices have risen over 200%, greater than any other real estate sector in the U.S. With this convergence of events, both high net worth and institutional investors opted to invest more heavily in residential investments to take advantage of rising prices, high occupancy, steady current cash flow and tax sheltering as an alternative to investing in more volatile cash-intensive investments such as commercial office buildings which have suffered decreased occupancy as of late due to decreased demand from companies allowing remote work. While residential investments should continue to enjoy strong occupancy rates, even in recessionary times, office investments will be more volatile as companies continue to downsize.

Residential investment can also have a lower buy-in for investors. While it may be difficult to fund the purchase of a warehouse, retail or office investment, investors can buy anything from a single-family home with one tenant (which have also seen a lot of investment from institutional buyers) to a 400-unit class A apartment complex offered through a syndicator. The result is a much larger pool of potential buyers and greater competition which further fuels price increases. Although cap rates will rise in the near future to provide a risk spread over bonds, multifamily is considered to be the only property type that can successfully weather a recession.

Is there any concern that investors have distorted the market — competing with buyers who plan to live in the properties?

There has been a recent trend of institutional and high-net-worth investors buying up single-family homes, especially in the sunbelt states that have benefited from significant migration of remote workers looking to upgrade their lifestyles. With a continued shortage of new homes nationwide and rising interest rates, it is hard for an individual to compete with these cash-rich buyers especially now that many of them have shifted their investment strategy to be more heavily weighted to single-family residential investments that can produce strong current cash flow. This has contributed to a further decrease in available housing stock which continues to push up demand and pricing making homes less affordable for an individual looking to buy a place to live. This situation could be further exacerbated as we move into the Recession especially if we see pricing declines making the residential asset class even more attractive to well-capitalized investors.

What impact, if any, have investors had on both home prices and rent?

It is kind of a catch-22. By all accounts, investors have played a significant role in fueling the red-hot U.S. housing market by pushing home prices up to record highs during the pandemic housing frenzy. Approximately 28% of single-family homes nationwide were purchased by investors in the first quarter of 2022, often at the lower end of the market where first-time homebuyers look to enter the homeownership market. The buyers range from big, company-backed investors to everyday Americans entering the rental business. 

According to a recent Harvard University report, “A majority of this activity was driven by small to midsize investors, but a significant percentage was indeed driven by the big boys. Investors with large portfolios of at least 100 properties drove much of this growth, nearly doubling their share of investor purchases from 14% in September 2020 to 26% in September 2021,” the report states.

This has contributed to greater buyer competition resulting in increasing home prices which have further delayed first-time home buyer purchases due to lack of inventory, rising prices and the inflationary impact of far greater interest rates which have reduced affordability. As a result, more renters that may have traditionally entered the home buying market are staying in their rentals.

This in turn has fueled increasing demand for rentals which has continued to push up rents, especially in markets like Boston and New York City where we have seen big employment gains and the sunbelt states that have seen major demographic shifts due to the mobility of remote workers looking to upgrade their working environments. 

Today, 65% of the residents of Boston are renters where, according to RentCafe, the average price of an 811-square-foot apartment now exceeds $3,772 per month. At today’s prevailing interest rate of 7.33% for a 30-year fixed rate mortgage, assuming a 20% down payment, that rental payment equates to the same payment that an owner would make on a $666,000 home purchase. Unfortunately, with a medium sale price of homes in Boston exceeding $800,000 home ownership has become less of a reality for many would-be buyers in Boston. However, if buyers are willing to increase their commute time by moving farther out into the suburbs, they still may be able to find an attractive alternative and enjoy the benefits of homeownership.