Why are RE Investors Buying More Homes?

Redfin reported that in the 3 rd quarter RE investors purchased 18.2% of all homes sold in the 3 rd quarter. Year over year RE investors are purchasing 63% more homes in the last year. How does Redfin define a RE investor? The home is being purchased by a business entity such as an LLC or a Trust; but does NOT include investors who buy their investment properties in their own names. Thus, investor purchases are really much higher than 18%.
Three cities, Atlanta, Charlotte, and Phoenix, each reported investor home purchases > 30% in the 3 rd quarter. Here in metro Denver 17% of our home purchases were completed by RE investors. Here in Denver the median price paid by investors was $508,700.
So why are RE investors buying more rental properties? Here are several comments from a story in the Denver Post—

• “Investors are expecting rents to increase in the coming years,” said Redfin Chief Economist Daryl Fairweather.
• Troy Miller, Executive Director of ICOR here in town said, “Activity is very high because institutional buyers are chasing yield and are borrowing at close to nothing.” Troy also said he believes there are 5 to 7 active institutional buyers who are actively buying in metro Denver.
• Andrew Abrams, chairman of DMAR’s Market Trends Committee, said why individual investors are buying rentals. “From my conversations with them recently, they believe that the value of the Dollar is decreasing every day and that interest rates are historically low. To invest in an actual asset that has limited supply will help them leverage against a weaker Dollar.”
• Aldo Svaldi said this in his story, “More broadly, there is also a sense that higher home prices will prevent more households from buying a place, creating stronger demand for single-family rentals for years to come.”
• Eli Beracha, a RE professor at Florida International University, believes home prices will peak soon in many markets including Denver’s. He recommends that individual buyers to consider renting and reinvesting any savings. He believes individual buyers should wait to buy and let investors buy these homes.

• Andrew Abrams is encouraging FTHBs should pursue condos and town homes instead because institutional investors are not purchasing these types of properties.

My Comments—
Real Estate is one of the best hedges against inflation and you can still borrow money to buy RE at a negative real interest rate. What do you mean negative? In the last 12 months according to the CPI consumer prices on all goods have increased by 6.2% and RE investors can still borrow at rates of 3.50% to 4.50%. Thus making their real interest rate at minus 2.7% or minus 1.7%. I like Brian Wesbury believe that inflation will be 4% or much higher I am afraid for several years to come.
Second, Troy Miller is exactly correct and these institutional investors like Blackrock and other hedge funds who have “armies” of analysts looking for the best investment for their wealthy clients who demand much higher returns.
Third, Aldo’s quote from above is the buzz for institutional investors as they know they can outbid FTHBs and thus keep them as renters instead and start increasing rents for higher returns. Fourth, I agree with Andrew that FTHBs really need to consider buying a townhouse or condo instead. And I have been saying this all year.
Finally, Eli Beracha the RE Professor, may be very knowledgeable, but I don’t believe he has any wisdom. Why? Home prices don’t “cap out” or drop because prices have risen so much. That is my first point in my new class, “When Will Denver Home Prices Drop? Second, pricing of any asset is almost completely driven by supply and demand. Look at oil and gas prices, used car prices, food prices, etc. I will be teaching this class via Zoom on December 9th at 10 am until 11:30.