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Neal Templin: Will home buyers have to outbid institutional money?

Neal Templin, on

Published in Home and Consumer News

Coming out of the financial collapse a decade ago, when home foreclosures hit record numbers, Wall Street began buying up hundreds of thousands of single-family homes (SFH). Institutional money had long ago come to dominate ownership of U.S. apartments, but the SFH, which accounts for the great bulk of the more than $30 trillion in housing value in the country, hadn’t before drawn this level of interest.

And then, following the Wall Street buyers, real estate data companies like Zillow, RedFin and Opendoor spied opportunity and built up home-flipping operations designed to buy more quickly than mortgage-dependent families could and quickly spruce up properties to resell them at a profit. All of this is driven by proprietary algorithms to help the corporate flippers avoid getting stuck with money-losing homes.

Suddenly, it seemed the family home, the bedrock of American household wealth and symbol of middle class success, might become just one more Wall Street asset class — to be bought and sold like stocks and bonds. That could change the very nature of housing in the U.S., and send the percentage of households that are homeowners plunging.

The driving force behind this is an excess of capital in the U.S. and global economy. That’s part of why we have asset bubbles — stocks or homes being bid up wildly.

So far, for very specific reasons, both Wall Street and the corporate flippers have been stymied in becoming significant owners, or traders, of SFHs. That doesn’t mean they won’t figure out a way around the hurdles, just that they’ve been slowed for now.

For Wall Street investment funds, the hurdle is the one-off nature of home buying. You negotiate with an individual seller and, in most instances, pay a real estate agent, or middleman, a fee on the order of 5% of the transaction value.

To firms that buy billions of dollars of stocks and bonds and other financial instruments in an instant, and pay next to nothing in commissions, that’s unacceptable; a Wall Street firm paying a 5% fee to buy a bond would have to make an extraordinary profit just to break even.

The Wall Street funds were able to end-run that problem after the 2009 recession because banks had foreclosed on so many houses. The banks were happy to sell them, en masse, with no real estate agent fees. Today, Wall Street landlords like Invitation Homes, Americans Homes 4 Rent and Progress Residential own a total of around 250,000 rental homes. Some are owned by private equity, others by real estate investment trusts.

But, for now, Wall Street doesn’t have an easy opening to expand significantly on those holdings.


The corporate flippers have a separate problem. Their current algorithms aren’t that great at capturing the complexities of the real estate market, according to a working paper from the National Bureau of Economic Research entitled “Why is Intermediating Houses So Difficult?” Bottom line: The companies with house-valuating algorithms have trouble calculating the value of nearby parks or busy streets or oversized lots or any of the myriad factors that raise or lower the selling price of homes

They do better in situations where there is a cluster of similar homes in similar situations. The research found the presence of so-called iBuyers (which use an automated buying system to make quick offers on homes) was stronger in places where there is a ready supply of relatively new houses on small lots costing between $100,000 and $250,000. In Phoenix, for example, the market share of various iBuyers rose to 6% at the end of 2018 from 1% in 2015, the paper found.

Economists are interested in iBuyers because in theory they should make housing markets more liquid and efficient. Instead, the paper found iBuyers were most active in housing sectors that already were the most liquid and efficient.

“iBuyers choose to intermediate in houses with the highest underlying liquidity,” the paper said. “Even if they are present in a geographic market, iBuyers do not transact in houses whose probability of selling in less than three months is below 20%.”

The smaller players should be encouraged that Opendoor has racked up nearly $1 billion in losses in the past six years. Tellingly, the company is expanding into already-crowded lines of business — mortgage making, real estate brokerage — and trying to sell Wall Street analysts on the notion of one-stop shopping for home-transaction services. Maybe. But Sears, Roebuck and others with deep pockets tried that and failed.

If you’re trying to sell a house in a hurry, you might like the iBuyers. You can avoid a bunch of strangers in muddy shoes tramping through your home. And potentially close very fast. But there’s a cost. On average, the researchers found that sellers received 3.6% less by going through an iBuyer. That would be $18,000 on your $500,000 bungalow.

Then the iBuyers tend to be a bit pricey on the selling end. The research paper found their prices were roughly 1.6% above others in the market.

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