Housing observers have been well aware of this side effect, but a new report brings the diverging fortunes of these two types of homebuyers into sharp focus.
It also suggests that first-time buyers are facing more competition than ever from investors, and that market conditions aren’t likely to help their situation.
‘A double-edged sword’
“A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword,” said Daren Blomquist, senior vice president of Attom Data Solutions, which released the report in partnership with Clear Capital.
“Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth.”
Blomquist added in an interview that “it’s safe to say a higher number of first-time homebuyers would be participating” if not for steep competition from investors.
“They’re really going after the same inventory,” he said.
A 21-year high for non-owner occupied homes
The share of non-owner occupied homes purchased — a proxy for investors’ marketshare — hit a 21-year high going back as far as Attom Data Solutions has tracked the data, reaching 37 percent in 2017. That’s up from 32 percent in 2015 and 28 percent in 2009.
Demand from investors has helped return home prices to just below their housing-boom peak, even as the homeownership rate has dropped to around a 50-year low, the report noted.
Institutional investors, such as Blackstone’s Invitation Homes, helped kickstart this recovery, beginning to purchase and rent out homes as early as 2009. At the height of their feeding frenzy, they bought nearly one out of 10 homes purchased in the first quarter of 2013, according to Attom Data Solutions.
Such landlords have pulled back in the last two years and only represent around 2 percent of sales today. But more than enough smaller investors have taken their place, actually expanding investors’ total share of home purchases.
FHA mortgage shares flatlining
First-time homebuyers, however, have never really stepped up to the plate.
The share of homes purchased with mortgages insured by the Federal Housing Administration (FHA) — which are often used by first-time homebuyers — waned as activity from institutional investors peaked.
And while FHA buyers’ marketshare briefly rallied to 22.3 percent in 2015 after the FHA reduced mortgage insurance premiums, it appears to have flatlined, the report said.
FHA buyers’ marketshare dropped from a high of 34.9 percent in 2010 to 21.7 percent in 2016, while investors’ marketshare moved in the opposite direction, rising from 29.5 percent to 36.6 percent.
The situation isn’t likely to reverse course because rising home prices and interest rates will further chip away at affordability, “locking an increasing number of would-be first time homebuyers out of the housing market,” the report said.
Growing demand for rentals
The report also linked a recent surge in home flipping — which has received a boost from new high-tech lenders — to growing demand for rental properties.
“The strong demand from buy-and-hold rental investors in these markets has also helped to fuel the markets for flippers who rehab older, outdated housing inventory into turn-key rentals for the passive buy-and-hold investors to purchase for their portfolios,” the report said.
In Nashville, for example, 30.6 percent of all homes flipped in the third quarter of 2016 were sold to all-cash buyers — likely rental investors.
That share has averaged 33 percent since the first quarter of 2012, compared to an average of 18.7 percent between the first quarter of 2005 and the third quarter of 2007.
“While the home flipping boom 10 years ago in Nashville — and many markets nationwide — was driven by demand from owner-occupant buyers with easy access to no-document loans, the flipping boom this time around is much more heavily driven by other investors tapping into the hot rental market grounded in ongoing low homeownership rates,” the report said.
The investor frenzy and accompanying lag in first-time buyer activity has left the market “in a precarious position,” according to the study.
“[F]uture growth in the housing market will continue to be largely in the laps of landlords — particularly in markets like Dallas and Nashville that have been more heavily dependent on investors thus far in the recovery,” the report said.
“In short, markets will likely be forced to dance with the one who brought them to the housing boom party — and hope their dance partner has strong legs.”