A unique residual of this housing recovery is the staying power of investors that bought at heavily discounted distressed prices that remain today as rentals – a phenomenon that is still occurring. As I wrote in a March 30, 2016 blog:
Single family dwellings as rentals are one of the surprising surviving trends from the real estate bubble implosion and ongoing recovery. In the past when markets slid, many homes did become rentals – but just for short periods of time until prices recovered and then were often sold to the people that rented them. That is not the case this cycle as an entire industry has grown to service investors of single-family properties.
A further iteration is the presence and staying power of institutional investors, which not only purchased heavily in the downturn, but remain active buyers in many markets today. However, as distressed properties have become fewer and fewer, investors have reduced their participation in home purchases. This is particularly true for institutional investors, which RealtyTrac defines as entities that purchased at least 10 single family residences (SFR) and condominiums in a calendar year. This group made up 2.6 percent of SFR + Condo sales in Q1 2016, down from 4.0 percent in Q4 2015 and 3.4 percent a year ago. Institutional investor’s share of residential purchases has now declined for 11 consecutive quarters on a year-over-year basis.
There remain, however, multiple markets where institutional investors still represent more than one in 20 housing acquisitions. To identify the top institutional investor markets active today, RealtyTrac examined the 110 metro areas that had at least 100 SFR + condo sales in Q1 2016.
So where were the top institutional investor markets in Q1 2016? In addition to the RealtyTrac data also added for each metro is the latest job growth for the 12-months ending March 2016. Job growth in seven-out-of-10 of these markets was subpar to the 1.99 percent level posted by the U.S. in the same period. Three-out of 10 had a job growth rate better than the U.S., which leads me to hypothesize that in those markets, housing values have still yet to recover in relationship to rents, yielding attractive returns to institutional investors.
To read the entire RealtyTrac study click http://www.realtytrac.com/news/home-prices-and-sales/q1-2016-cash-buyer-institutional-investor-housing-report/
To view the overlap from the recent blog on foreclosure discounts click See http://blog.stewart.com/stewart/2016/03/30/another-top-10-list-cities-with-the-biggest-single-family-foreclosure-discounts/
As long as interest rates remain low versus a historical perspective and strong rental demand continues to drive rents upwards, expect institutional investors to continue to hold their properties. When rental demand abates and housing prices stabilize, institutional investors may utilize homebuyers as a primary source for their exit strategy from these investments.
Ted