No one is talking about the elephant in the room. iBuyers need to own up to their role in driving up home prices.
If the residential real estate market is a roller coaster, 2022 would be the part where you threw up in your mouth a little.
To say that the housing market is rough would be an understatement. Measures to curb inflation have driven interest rates to a 20 year high and inventory is nonexistent. Individual homebuyers are staying on the sidelines and current owner-occupants are in no rush to list their property for sale either.
I think that one group is largely to blame for the increase in real estate prices. - iBuyers. Strangely, no one is talking about them. iBuyers or institutional investors (buyers that are companies, corporations or LLCs) made up 13.2% all residential real estate sales in 2021, up from 11.8% in 2020, according to the NAR.
Institutional investors used to be limited to small mom and pop companies looking to buy homes to increase their investment portfolio, but now the industry has been engulfed by billion dollar corporations. Since these companies typically focus on single-family residential properties valued at $100,000 to $500,000, they tend to compete directly with first-time and lower income homebuyers.
Why do I blame iBuyers for the rise in home prices?
I don't blame all iBuyers. Most small institutional investors simply don't have the capacity to purchase large amounts of properties at once. Mega iBuyers, on the other hand, had billions of dollars to spend.
I believe that the presence of mega iBuyers have made an oversized contribution to rising home prices. Let me explain.
When an property is placed on the market which meets the iBuyer criteria, they would almost always make an offer. It is usually a cash offer, with minimal contingencies and a promise to close in as little as 15 days.
In order to compete, an individual homebuyer has to make better deal. Most homebuyers obtain a mortgage, so making a cash offer is a no-go. The majority of mortgages take at least 28 days to close, so buyers can't promise a shorter closing date. So what can they do? They can eliminate as many contingencies as possible and raise their offer price. This is perfectly acceptable as long as the property appraises (with exceptions). This process usually goes back and forth until the seller accepts the best offer - which is usually higher than the initial asking price.
Why is this a bad thing?
One word - scarcity. Things tend to become more valuable as they become less available. The US residential real estate market was already in the midst of a housing shortage which was only worsened by the pandemic.
If you combine the scarcity of properties with a glut of cash to spend, you get higher prices and a further reduction in inventory - which leads to even higher prices. And like the saying goes, "a rising tide lifts all ships." As the price of starter homes increase, so does the price of more expensive ones, reducing home affordability throughout the market.
Where do we go from here?
The tail can't wag the dog. The real estate market desperately needs inventory. There's only two ways go get it. Home builders have to produce more units or more existing inventory has to be available for sale.
In order for homebuilders to start building, they have to believe that there is enough demand for their product in order to make a profit. Inflation had driven up the cost of raw materials and labor is in short supply. This isn't a recipe to quickly add inventory.
In order to release existing inventory, there has to be a major event that causes a large dump of supply on the market. Something (like a major reduction in interest rates) could bring buyers back to the market, which could then coax current homeowners to sell. Or, institutional investors could release large portfolios of homes to the market in order to create more liquidity. Only time will tell if this will come to fruition.