Home purchases by institutional buyers reached a record high in September and all-cash buyers accounted for almost half of sales as investors responded to rising demand from renters.
Institutional purchases accounted for 14 percent of sales, according to a report today from RealtyTrac. That was the highest share since the real estate data firm began in 2011 to track transactions by that group, which it defines as buyers of 10 or more homes a year. All-cash sales rose to 49 percent from 40 percent in August and 30 percent a year earlier, a sign that rising mortgage rates since May have kept some people out of the market and that smaller investors are stepping up purchases.
"Both investors and traditional buyers are trying to snap up cheap homes before prices go higher, but the investors have the advantage of paying cash and not having to go through a convoluted mortgage process," said Michael Hanson, a former Federal Reserve economist now working for Bank of America Corp. in New York. "People are being bid out of some markets because of investor demand."
Wall Street's influence on the residential real estate market is growing as the biggest investors, Blackstone Group LP and American Homes 4 Rent, have together bought about 60,000 homes across the country to benefit from low prices and rental demand from millions of former home owners who have lost properties through foreclosures.
The homeownership rate declined to 65 percent in the first half of this year from a peak of 69.2 percent in June 2004. The level is expected to stabilize at about 63 percent, adding more than 2 million households to the rental population, according to Morgan Stanley analyst Haendel St. Juste.
Families are still able to live in single-family homes with a yard for their kids to play in, said Daren Blomquist, a RealtyTrac vice president. However, they're sending their money to investor-landlords, rather than paying off a mortgage.
"The pendulum is swinging too far from the direction we saw during the run-up to the mortgage crisis," Blomquist said in an interview. "Then, we tried to make everyone an owner. Now, we have people who have the income to pay a mortgage and have the desire to own a home who are stuck being renters."
Blackstone has led hedge funds, private-equity firms and real estate investment trusts raising about $20 billion to purchase as many as 200,000 homes to rent after home prices plunged 35 percent from the 2006 peak.
The ability of investors and cash buyers to outbid traditional home purchasers has grown after a spike in mortgages rates that began in May. The average fixed rate for a 30-year home loan jumped almost a percentage point to a two-year high of 4.58 percent in mid-October, according to data from Freddie Mac.
The average rate for a 30-year fixed mortgage dropped to 4.13 percent this week. It's risen from 3.35 percent in May.
"There's a tremendous pressure on inventory in the areas that are being dominated by investors," said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage website. "People end up wanting to buy a home, but they can't. All the homes have been converted into rentals."
Daryl Dennis spends his days helping investors do that. A general contractor for Waypoint Homes, an Oakland, California- based real estate fund that buys more than 50 homes a month in the metro Atlanta market, Dennis oversees plumbers, painters and landscapers on about 20 single-family projects a month.
"The investors are ruling the market," said Dennis, interviewed by phone while on the job at a project in Canton, Georgia, outside Atlanta. "The little guy can't win if he's up against a deep-pocket investor."
The biggest chance for profit comes from buying bank-owned properties that often are sold in bulk, Dennis said. About 10 percent of September sales nationwide were properties that had been repossessed in foreclosures, according to the RealtyTrac report.
Las Vegas had the highest share of those sales, at 21 percent. In the California cities of Riverside and San Bernardino the share was 20 percent of the market, in Cleveland it was 19 percent and in Phoenix it was 18 percent, according to the report.
Atlanta was the top market for institutional investors, who accounted for 29 percent of all home purchases there in September, according to the RealtyTrac report. Las Vegas was second at 27 percent, followed by St. Louis at 25 percent, Jacksonville, Florida, at 23 percent, and Charlotte, North Carolina at 17 percent.
Adam Luesse is an investor in St. Louis who paid cash for five houses he turned into rentals. He also buys properties to renovate and resell at a profit, called flipping. He planned to list his latest flip, a two-bedroom home on the west side of the city, for sale today for $140,000.
"When financing became difficult, that pushed the entire lower tier of buyers into rentals," Luesse said. "They either don't have the down payment or they don't have the credit score."
Nationally, the median monthly rent was at an all-time high of $735 in the second quarter, according to U.S. government data. The rental vacancy rate, which measures the number of empty units, fell to 8.2 percent, the lowest since the first quarter of 2001.
The median price of a distressed residential property, meaning a property in foreclosure or a home already seized by a bank, was $112,000 in September, a discount of 41 percent from the $189,000 median price of a non-distressed property, according to the RealtyTrac report.
About 49 percent of homes were bought with cash, up from 40 percent in August and 30 percent a year earlier, the report said.
Investor demand for foreclosed homes has driven up prices at a pace not seen since the boom that ended in mid-2006. The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006.
While real estate values nationally are still 21 percent below their peak, investors' mass purchases are helping push up values in cities hardest hit by the property crash, with a 27.5 percent surge in Las Vegas and gains of 18.5 percent in Atlanta in July from a year earlier.
"The housing market is tilting in favor of deep-pocket institutional investors, especially in cities that were hard-hit with foreclosures," said RealtyTrac's Blomquist "These guys will pay as much as they need to get a property and that's squeezing out families looking for a home to live in."