Today's low interest rate environment makes borrowing money easy, but finding a home to purchase isn't as easy. The competitive market is making it exceedingly challenging to buy a home if you don't have a competitive advantage. Low inventory is pushing prices up, meaning Americans are battling affordability concerns, and real estate investors and private equity firms aren't making it any easier. In fact, 1 in 5 homes were sold to investors in 2020, a number that will likely increase as competition intensifies in 2021.
Private equity firms are taking over
Investors are typically backed by cash, allowing them to bypass common challenges associated with a traditional sale, including financing approval, appraisal contingencies, and higher closing costs, and gain a competitive edge. This means buyers are having to pay more while also waiving other contingencies simply to keep up.
According to a recent Redfin report, 17.6% of homebuyers using the service have waived appraisal contingency, 13.2% have waived financing contingency, 13.2% have waived inspection contingencies, and 34% are bidding over asking price. Despite these efforts, many are still getting beat out.
Now Americans are also facing the added challenge of bulk sales by large real estate investment firms. Fundrise, a real estate crowdfunding platform, recently purchased 124 newly developed houses in a residential community subdivision in Houston for a total of $32 million. These homes didn't even have a chance to hit the market for traditional buyers. Madison Realty Capital, a private equity firm specializing in real estate debt, just issued a $110 million loan for the development of 700 homes, 220 of which are supposed to be sold directly to equity firms.
How this impacts the market
In 2019, real estate private equity firms raised $179.4 billion and after a cautious 2020, investment firms have a lot of cash sitting idle. Low interest rates mean borrowing costs are down, but now the firms are facing inflationary pressures, meaning putting money to work is critical. Investors who are buying these homes are purchasing them for long-term rental opportunities. Their lower cost of borrowing allows them to buy properties for lower yields while keeping up with inflation. While all aren't willing to pay the current prices, many are.
The good news is that large investment firms like these still own just a small percentage of the marketplace. Estimates believe corporations own only a small percentage of all real estate, and the percentage of corporate-owned real estate will likely increase in the future as the affordability gap grows.
While this isn't welcome news for homebuyers and smaller investors in this market, it does mean rental real estate will likely have more inventory in the near future, which is a positive thing, considering the lack of affordable housing in the market today.