According to recent data, 1 in 5 homes sold is to an “institutional investor”. An institutional investor may be a commercial bank, teacher’s pension fund, a mutual fund, an insurance company or a hedge fund. Institutional investors are viewed as more sophisticated than the average investor and, in some instances, are subject to less restrictive regulations. Institutional investors are the big fish on Wall Street.
Prior to the Great Recession (2009-2013) institutional investors weren’t interested in single-family homes. However, when the federal government chose to bail out the banks instead of homeowners, it left millions of Americans vulnerable to foreclosure. As a result of this decision, 6.3 million homes were foreclosed during the Great Recession, and Americans lost $11 trillion in household wealth.
A majority of those foreclosed homes were bundled & offered to institutional investors at deeply discounted prices. Institutional investors snapped them up, purchasing thousands of homes at a time. Voila, a new industry was born.
More than 10 years after the Great Recession, the institutional investors are demonstrating a growing appetite for single-family homes. So great is the financial power of these institutional investors that they are able to move markets, and influence the price of securities. These well-funded investors are having an impact on the housing market.
The focus of institutional investors has been entry-level homes, which placed institutional investors in direct competition with first-time homebuyers. With the nationwide supply of homes already lagging demand, the added pressure from institutional investors has helped drive home prices higher, further reducing home affordability for all buyers.
With a growing appetite for single-family homes, institutional investors have begun buying luxury homes in the higher-priced neighborhoods. And institutional investors are partnering with home builders to build new developments which are then converted to 100% rental communities.
The nation’s largest homebuilder, D.R. Horton, recently built 124 houses in a new subdivision near Houston. D.R. Horton rented every house, then promptly put the whole community up for sale. “A Who’s Who of investors and home-rental firms flocked to the December sale. The winning $32 million bid came from an online property-investing platform, Fundrise LLC.”
The increasing shortage of single-family homes is prompting new legislation in many states to relax zoning regulations, which would increase the supply of land. In the 2021 legislative session, Washington State legislators considered a bill which would ban exclusively single-family zoning. Had it passed, Mercer Island would have less control over what is built in single-family neighborhoods. (Seattle already allows three housing units on lots which previously allowed only one residence.)
The housing supply is not keeping pace with demand, and there is increasing pressure on the state legislature to take action. Mercer Island has among the largest single-family lots in the region, and that means a change in zoning laws at the state level will have a greater impact here in terms of density and quality of life.
Mercer Island is at a crossroads, and residents cannot afford to ignore housing trends. The future is now, and now is the time to take action to protect our neighborhoods and our quality of life. You cannot un-ring a bell.
(Ray Akers is a 4th generation resident of Mercer Island, and a licensed real estate broker for more than 30 years.)
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