If you’ve tried to purchase a single-family home in the last 10 years, particularly during the housing recession from 2006-2012, you may have been bidding against a large private equity firm, institutional investor, or real estate investment trust. Huge organizations like these have spent billions to purchase as many as 200,000 single-family homes throughout the U.S., presumably to capture cash flow from renting the dwellings and from appreciation in property value.
My colleagues Jessica Rutherford and Ronald Rutherford of the University of South Florida, Marcus T. Allen of Florida Gulf Coast University, and I examined 72,128 real estate transactions involving single-family homes in Miami-Dade County, Florida, between January 2009 and September 2013.
We wanted to know whether large investors acquire single-family dwellings at prices higher or lower than single-purchase buyers, and whether their purchases lead to higher or lower prices for other dwellings in that market. The price impact and investment performance of large investors is important for the investment community and also interests academics and policy makers because the price impact of large investors might influence the speed and magnitude of recovery in housing markets, particularly in markets with a large percentage of distressed properties. Whether large investors improve home prices or suppress them further is also critical for the overall economy, given that recovery in housing markets is a leading indicator of economic growth.
We found that these entities were able to purchase houses at a discount of 9.5 percent, compared to individuals buying houses in the same timeframe and in the same housing market. Our analysis also indicates that, compared to single-purchase buyers, institutional investors (those averaging approximately 10 purchases during any given year during the sample period) purchased at an average discount of 7.7 percent, large investors (those making six to 28 purchases during the sample period) purchased at an average discount of 13.6 percent, medium investors (those making three to five purchase during the sample period) purchased at an average discount of 11.1 percent, and small investors (those making two purchases or one purchase as a LLC, LP, or other corporate entity) purchased at an average discount of eight percent, compared to single-purchase buyers.
Our findings support the contention that larger investors have buyer power in local housing markets relative to single-purchase buyers.
We suspect that’s because even though individual buyers may have more familiarity with the local real estate market and a more realistic sense of a home’s value, they don’t have the same advantages as large investors, like the ability to offer cash up front and avoid the mortgage approval process. Cash sales are attractive to sellers, because they know the deal can’t fall apart due to a mortgage contingency clause, and transactions can be fast-tracked, since there’s no need to wait for loan approval. In both cases, our research indicated that sellers are more willing to accept a lower price. Large investors may also have more effective tools for identifying properties to acquire, stronger negotiating skills, and more experience with the closing process.
Since large investors are purchasing at discounted prices relative to the prices paid by single-purchase buyers, our results suggests that single-purchasers, rather than investors, are more likely to be responsible for overall price recovery in this market.
We did find evidence that that property values rose in neighborhoods in which investment firms purchased real estate. In fact, a 10 percent increase in the number of houses purchased by investors in a census block caused a 0.20 percent increase in house prices in that market.
In many cases, large investors take distressed properties off the market, which may send the message to other buyers that those properties are undervalued, leading to more players entering the market and pushing up prices.
The entry of large investors into local housing markets appears to have some positive, short-term outcomes, such as improving property values by reducing the inventory of foreclosed homes, but more research needs to be done that examines how these purchases impact housing affordability and local rental markets. Additional concerns, such as what institutional investors will do with these properties over the long term and whether such investments will create another housing bubble, would benefit from further examination.
yavas is Robert E. Wangard Real Estate Chair; department chair of Real Estate; professor of real estate & urban land economics at the Wisconsin School of Business.