Retail Homebuyers Getting Outbid by Big Companies

About one in five homes sold in 2020 were purchased by investors in the USA, a trend which is being observed even outside the USA (such as Australia) where retail buyers are continuously finding it hard to compete with investors who don't need home inspections, appraisal contingencies, or a mortgage. Such corporations might be institutional investment organisations, publicly trading firms, pension funds, etc. Institutional investors are also described as non-lending entities that purchased at least 10 properties in a calendar year

Market Trend:

An interesting trend that has been observed is that the value of loans to first-time buyers dropped 7.8 percent in the month of June, down 14.7 percent from the January peak even though demand for housing increased along with house prices. This clearly shows that there are buyers in the market with deep pockets (aka institutional investors). In fact lending to investors is heading in the opposite direction, up 0.7 percent in the month and 40.5 percent higher than in January

An increase in the price of real estate in recent months has drawn new investors who are interested in future capital growth as well as low interest rates that may last until 2024. This has led homeownership further out of reach for some first-home hopefuls, who struggle to save enough to keep up with the increased deposit requirement.

In the USA 10.3% of all single-family house and condo purchases in the second quarter of 2021 in the major markets were to institutional investors. This represents a 234 percent increase year on year, up from 3.1 percent of all such transactions in the second quarter of 2020..

For example, in Charlotte during the second quarter, investors acquired 22.8% of the properties listed on the market with a total aggregate value of $782,143,504. This has also led to the median rental rate in the market increased by 5-7 percent year-over-year in the USA. The reason for this could be attributed to demand for rentals as retail buyers are getting priced out of the market and are resorting to renting homes thus leading to demand for rentals.

Can Institutional Investors Be Beneficial for The Market?

Investors often assist purchasers in large metropolitan areas with low inventory levels such as during April, 19 U.S .market out of 50 Metro Markets saw number of homes being added, with 399 homes in Atlanta, 239 homes in Dallas, 188 homes in Baltimore, 122 homes in Los Angeles and 93 homes in San Francisco experiencing the biggest boosts. Real estate investors played a key role in restocking housing markets in Atlanta, Dallas, Baltimore and Los Angeles and San Francisco.

Investors, on the other hand, have net negative affect in smaller markets with greater inventory. Within 31 metro U.S. cities, investors bought most of the inventory, leading to shortage for retail buyers; led by Phoenix where bulk purchase by investors lead shortage of 429 homes, shortage of 287 homes in Charlotte, shortage of 256 homes in Miami, shortage of 224 homes in Tampa and shortage of 221 homes in Chicago

Investors are also worsening the rental market in top 50 U.S. markets. According to Apartment List's August 2021 rent report for the city of Raleigh, rental rates have risen 14.3 percent over the past 12 months, with the average monthly rent for a two-bedroom apartment being $1,424. Charlotte's data indicates a 13.3% year-over-year increase in rental rates, while Durham's shows a 12.6% increase.

Many cities around the country have seen property prices rise as a result of a lack of single-family houses for sale. Future buyers, however, learn that they are being outbid not only by other property buyers, but also by hedge funds.

According to the Home Builders Association of Fargo-Moorhead, permits for all new dwelling starts in the metro region and neighbouring towns increased from 294 in May of 2020 to 545 in May of this year.

What Can Be Done?

While homebuilders are working tirelessly to complete homes, the sector has been hampered by a limited supply of building supplies and a severe scarcity of trained labour. Hence new ways have to be found out to help the retail buyers eased into the market. Few major roadblocks that builders face are stated below. If these can be alleviated then it can help bring down the cost and thus helping in reducing the overall price of the houses

Three Major Roadblocks That Builders Face:

• Regulatory Hurdles: Building regulations are important, but have become increasingly more inconsistent and difficult to follow. According to a 2011 poll conducted by the National Association of Home Builders, the combined effect of building standards, land use regulations, and environmental regulations increased the cost of a home by $65,224. After ten years, such standards and restrictions have expanded to add roughly $94,000 to the average new home's cost.
• There is a severe scarcity of building supplies, once again thanks to COVID. It started with lumber costs, which soared 200%, adding a cost of $36,000 to the average price of a home. Despite the fact that timber prices are on the decline, nearly any building material is difficult to obtain at the moment. There is a pressing need for government intervention in supply management at a time when COVID is subsidising and lumber prices are falling off.
• Skilled-Workforce Shortage: Residential construction jobs have grown 87,900 in a year, according to the National Home Builders Association. There were 266,000 available construction opportunities as of February of this year. Again, this might require government intervention as no skilled labour can lead to larger construction time leading to higher cost

In conclusion with the current bull run in the housing market, everybody is taking advantage and trying to book maximum profit. Sellers are attempting to capitalise on a strong market by pricing their houses higher than they have earlier planned out to sell, resulting in further assessment problems for retail buyers. Median prices are expected to climb between 3 and 8 percent in 2021 according to economists at Fannie Mae, Freddie Mac, the Mortgage Bankers Association and the National Association of Realtors. As a result, house prices have risen at a slower pace than they did during the housing bubble of 2008. The current housing boom is fuelled primarily by demand exceeding supply, as well as factors such as extremely low interest rates, people looking for larger spaces so they can work from home, stimulus funds that have increased purchasing power, a bullish stock market, and institutional investors who are aggressively looking to buyout entire neighbourhoods and make a quick buck.