Apr152016

Real estate investors are NOT crowding out family homebuyers

The National Association of realtors perpetuates the myth that investors are scooping up family homes and leaving potential buyers out in the cold.

cash_cowMany investors use the OC Housing News to search for properties because it provides a detailed investment analysis of every home available for sale in Orange, Los Angeles, and Riverside Counties. The calculations also show the cost of ownership an owner-occupant would consider in their deliberations.

Right now, there isn’t much in Southern California for investors to get excited about. The major REO-to-rental funds bid prices up to where the cashflow returns are marginal, and mom-and-pop investors find the prices too high to make the numbers work too. Over the last few years, the Southern California housing market transitioned from an investor-dominated market to an owner-occupant dominated market.

However, when prices were depressed and investors were more active, it doesn’t mean owner-occupants couldn’t find a home due to the activity of these investors. In a head-to-head dual, owner-occupants will consistently outbid investors for the same property.

Investors are looking for bargains. They want to pay less than recent comparable prices, and they are constrained in their bids by their desire to earn a return on their investment. Investors generally don’t participate in bidding wars because they are not “in love” with a property, and they won’t overpay to obtain one.

In contrast to investors, family home shoppers are looking for a place to call home. They don’t want to overpay, but if they “fall in love” with a property, they will overpay to get what they want. It isn’t an investment to them, except perhaps an investment in their family’s emotional well-being. People buying family homes will engage in bidding wars, so when a family home shopper bids against an investor, the family home shopper will always bid more, assuming they can borrow the money necessary to close the deal.Mistaken_realtor

The NAr knows better

The National Association of realtors should know this, but they chose to demonize investors instead. I imagine this plays well to agents who lost deals when their clients overextended themselves and couldn’t raise their bids. If a family home buyer is trying to obtain a home over their budget, it wasn’t the investor’s fault that the owner-occupant wasn’t able to outbid the investor. The investor wasn’t participating in a bidding war; they were merely bidding a fair value for the property. In most instances, if the family home shopper was looking in their price range, if competing against an investor, they would win the prize.

Here’s Why Investors Continue to Beat Out First-Time Home Buyers

By Jonathan “Blowing” Smoke, April 12, 2016small_investors

Look out, first-time buyers. Your biggest competition is not other real estate newbies like yourselves, but mom and pop investors looking to establish a stream of rental income. Darn you, mom and pop! A recent report shows that these deep-pocketed investors are focusing on the most affordable segments of the market: smaller homes in both suburban and urban areas. …

In aggregate investors are focusing on the most affordable houses in the market, but when broken down to the individual property level, investors aren’t the ones winning the battles.

It’s like WWII tank battles. The German Panzers won nearly every battle with the American Sherman tank; however, with a 10:1 advantage in numbers, the Americans could lose all the battles and still win the war.

Similarly, the investors lose the individual battles, but since investors will bid on ten or more properties simultaneously, they get more deals than owner-occupants, and they ultimately move market pricing higher.why_bother

Not surprisingly, investor buyers have substantially higher incomes than both median-income households and primary residence buyers: The typical buyer of an investment home in 2015 had a median household income of $95,800. So part of the secret of their success is simple: They have the cash and credit to make it happen. Investment home buyers are less likely to finance their purchase with a mortgage. Furthermore, when they do, the vast majority put down more than 20%.

Just because investors can bid higher doesn’t mean they will bid higher. Investors are not constrained by financing, but they are constrained by their desire to make a return on their investment.

Think about it: if it were just about qualifying income and the desire to own rental properties, many more of Riverside County homes would be owned by Orange County investors. I am asked frequently if I know where people can invest in properties, but when they look at what’s available and what they would have to pay for it, they don’t go buy these properties even though they easily could.

In fact, the average investor mortgage had a down payment of 26% compared with an average of 11% for an owner-occupier, according to our analysis of 2015 purchase mortgage activity from Optimal Blue (an enterprise lending software company whose platform handles more than 25% of mortgages in the U.S.). Likewise, an investor has a qualification advantage of a lower debt-to-income ratio as well as much higher credit scores.

Unfortunately, it’s quite tough for the ordinary buyer—and especially a first-time buyer—to compete with that.

Actually, it’s quite easy for a first-time homebuyer to compete with that.flipper_underwater

Is a first-time homebuyer going to find a property 10% below recent comps that an investor is interested in purchasing? No, of course not. But while the investor won’t raise their bid above recent comps, the first-time homebuyer often will—if they can.

The only advantage the investor doesn’t have in the mortgage market is in their interest rate—owner-occupiers have an advantage of 50 basis points, on average. (A basis point is 0.01%.) Investors pay a higher mortgage rate because of the fact that they do not live in the home as a primary residence. …

The higher mortgage costs works to inhibit investment because it is a direct drain on cash returns.

And some investor buyers don’t have to deal with the mortgage process at all. Buyers who can pay cash have a big-time advantage in our limited inventory market, since they can make offers without a financing contingency. And no-contingency offers can close more rapidly.

All things being equal, the investor will win out, but the family home buyer who can bid higher generally will.

I don’t want to belabor the point, but I bought and sold a lot of properties in Las Vegas during a period with significant investor activity. Of the more than 50 homes I flipped, every resale went to an owner-occupant. The reason for this was simple: investors weren’t willing to pay as much as owner-occupants were. If investors really were crowding out owner-occupants, I would have resold at least some of these properties to investors. I didn’t.

When I read articles like this where the author obviously hasn’t been out in the real world buying and selling homes, I wonder if the idea that investors are crowding out family homebuyers is born out of ignorance, or if there is some other truth the NAr wants to obfuscate.

The ability to avoid financing or put down substantially more than a typical buyer who would use the home for a primary residence gives the investor the upper hand when competing for the limited supply of smaller and lower-priced homes. At the same time, this is also the segment of the market that we are not seeing homebuilders address. The stock of smaller and lower-priced homes is not growing, and with every investment purchase, there are fewer homes available to sell.

If this article is intentional obfuscation, it’s probably directed toward another myth the NAr promotes: the shortage of listings is due to something other than underwater owners.

(See: What would need to happen to increase for-sale home inventory?)

The NAr loathes to admit excessive mortgage debt from the bubble-era is a problem in housing today. They find many bogus reasons to explain the lack of MLS listings, but they consistently ignore the most obvious one: underwater owners don’t list because they don’t want to endure the consequences of a loss.

Whatever their motives, it’s time for realtors to stop peddling the nonsense about investors crowding out owner-occupants.

It isn’t happening.

The-Circle-of-Real-Estate

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