In 2020 and 2021, the American housing market was on fire.
Not only had home prices been on the rise for years, but the outbreak of COVID-19 put a hold on lots of new construction – making demand and prices soar. At the same time, it was cheaper to take out a loan as the Federal Reserve dropped interest rates to try to deal with the economic shock of the pandemic.
Large corporate landlords were among those who took advantage of this confluence of events. Every day, single homebuyers were having trouble competing with those big buyers.
Well, now it’s not just the everyday homebuyer having trouble making a purchase – it’s the big competitors, as well.
Ryan Dezember is a reporter with The Wall Street Journal who’s been covering the story. He joined Texas Standard to talk about what he’s found. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: You report that at one point during the pandemic, around one in four homes in Miami, Houston and Phoenix were being purchased by investors. How did this become such big business in 2020 and 2021?
Ryan Dezember: Well, if you remember, there was a big flight to the suburbs, right? People wanted out of apartments. They wanted yards and extra space for home offices. And, you know, that was always the case with people starting families and having children – the move from city centers to suburbs.
But that was really accelerated during COVID. You put rising home prices, rising rents and, of course, historically low financing both for individual buyers and for investors and big companies, and you had a real frenzy for suburban houses.
You know, these big companies started out after the foreclosure crisis scooping up homes from the courthouse steps after the 2008 crash. And, you know, it was such a lucrative business they just took to the open market to add more. And that really accelerated during that time.
One of the companies that you mentioned in your story is called Invitation. It owns more than 80,000 homes across the country. Apparently now they’ve started to sell off a lot of that property. What’s going on?
Well, they’re not selling huge numbers, but they’re trimming their portfolio. They’re going around and looking at houses that, because they’ve appreciated so much the yield – the income they can make renting them after expenses – divided by the value of the home is less than what they would get if they just had money in the bank or in treasuries.
So they’re trimming their portfolio. They’re selling those homes that have appreciated a lot. Cashing in, selling them into frenzies. There are so few homes for sale [that] when they list a home, they sell it very easily for a very high price. They’re putting the money in the bank, earning about a return and waiting for distress to hit the system again and buy mostly portfolios from other investors whose interest is too much.
I want to talk about the overarching trend, though, that seems to be going on. It’s more sell and cut and trim than it is “buy, buy, buy,” which was what we were seeing among some of these big home investment outfits, right?
Yeah, if you look around or you talk to people looking for houses, they’re having fits, trying to find homes for sale. There’s a lot of competition for the ones that are on the market – the bidding is driving up prices. And of course, mortgage rates haven’t been this high in a generation.
So just like the math isn’t working out for a lot of families, it’s not really working out for these investors, even though they have, you know, hundreds of millions and billions of dollars at their disposal. The numbers just don’t work for them to pay such a high price and then rent it. As high as rents have risen over recent years, they’re still not rising to the level of home prices. So the math just isn’t working for them right now.
Well, it doesn’t seem to be working for a lot of folks. I’m wondering, you write about a “magic number” for interest rates. And I think there are a lot of folks trying to get into a home wishing that it would be so. What’s this magic number? And I guess it differs if you’re an investor versus someone just trying to make that first home purchase.
Yeah, you know, the magic number is sort of what the Fed’s looking for to sort of slow down the economy and consumption in order to douse the inflation that we’ve had in recent years coming out of the pandemic.
So, you know, we saw yesterday the Fed decided to hold rates steady between five and a quarter percent. Of course, mortgage rates are going to be a few points higher than that, depending on the the loan applicant. But, you know, we may be at the magic number, somewhere around there, that is going to slow down home price appreciation and the attendant spending that comes when home prices are blowing people sort of the same way they look at their stock portfolio and they might feel rich when it’s really going up.
The same thing happens when they look at Zillow or these websites and see that their home has appreciated a lot. Even if they’re not tapping into that equity, it tends to make people feel rich and spend more. And that’s helping to drive the inflation that we’ve been dealing with.