This week, we’re going to deviate from our typical conversation and offer up our own version of a mortgage trends report! However, it’s a topic that could become increasingly important, even though few are discussing it—yet.

Wall Street versus First-Time Homebuyers

We came across an interesting read at NBC News recently. The Biden Administration, in its efforts to make home buying easier for first-time homebuyers who have no home equity to start with, has observed that institutional investors, in addressing the shortage of inventory, are buying up single-family homes and converting them into rental properties in huge numbers. The trend began during the Great Recession amidst record foreclosure volume, but continues today. In the article, we learn from one of the leading mortgage data providers that almost a quarter—ALMOST A QUARTER—of single-family home purchases in June, 2021 were made by investors!

A Trend That Could Hurt Mortgage Lenders

If you think about that for a moment, it’s not good news for anyone but the investors. These are cash purchases by and large. They’re not only taking inventory out of the residential housing market and putting it into the CRE inventory (multi-family, often times). They’re also taking mortgage lending out of the equation. Mortgage customer retention rates are not the strong point of our industry to begin with, so first-time homebuyers are an important market. This information means that, in essence, Wall Street is competing with a segment of the homebuying market that traditionally has fewer, not more, resources than the typical homebuyer.

This is a trend that certainly bears watching. 

A Shift of Investor Focus

The article goes on to make another interesting observation:

“The challenge isn’t just how many homes investors are buying today, but what types of homes. Wall Street is effectively competing for the same inventory as most first-time homebuyers: Starter homes that are being sold at a modest discount compared with surrounding properties, usually because they need a certain amount of renovation or repair.” 

The investors have the upper hand in competition with individual homebuyers, in part, because they are also better equipped to obtain renovation financing, apparently. So they’re targeting homes that sit slightly below the mean housing price in their neighborhoods, and then refurnishing them to rent at profit.

A Trend With Room to Grow

The trend is likely to grow, it would seem. Investors, tracking the increased, post-pandemic demand for larger living spaces (to accommodate home schooling or home offices, for example) are going after homes that traditionally are sold, rather than rented. That also means investors are putting less effort into urban core high rises or multi-family properties, turning instead to free-standing, single family houses. 

Combine that with a declining inventory as builders continue to watch from the sidelines, and you’ve got a recipe that not only fails to serve first-time homebuyers, but one which could in turn bite the mortgage industry instead. We’ll keep an eye on this story as the year goes on.

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