Rising real estate prices across the country are putting first-time home buyers in a bind.
While historically low interest rates make mortgage financing incredibly easy, few people can actually afford to take advantage of these loans because home prices are too high. Part of the problem has to do with soaring lumber prices, which drive up the price of construction. There’s also a labor shortage for builders, which means many potential buyers are scrambling to find used homes, driving up those prices.
Those who can afford to buy a home struggle to find one to sell before someone else buys it. Another dimension of the problem is that these first-time buyers not only compete with each other, they also face competition from large investment firms that buy homes to turn into single-family rentals, preventing many Americans from becoming owners.
A new Wall Street Journal report details “the rise of big investors as a powerful new force in the U.S. housing market.” The story covers the example of Fundrise LLC, an online real estate investment platform that bought 124 homes in Conroe, Texas, for $32 million, paying construction company DR Horton Inc.” about double what she typically earns selling homes to the middle class” – illustrating how home builders can make more money selling homes to investment companies rather than to Americans in the middle class who want to own their first home.
The report goes on to detail how “yield-seeking investors are snapping up single-family homes to rent or resell,” contributing to the scarcity of homes for sale and driving up prices for everyone.
According to an estimate by John Burns Real Estate Consulting, as many as 1 in 5 homes sold in major real estate markets across the country are purchased by someone who will never move in. As a result, the consultancy expects prices to continue to rise, climbing 12% this year and at least 6% more in 2022.
“You now have permanent capital competing with a young couple trying to buy a house,” said company CEO John Burns. “It’s going to make American housing permanently more expensive.”
Burns notes that there are more than 200 major corporations and investment firms competing with families and first-time homebuyers, including financial titans JP Morgan Asset Management and BlackRock Inc.
Significant changes are occurring in the housing market due to the involvement of large investors. Record house prices, driven by companies paying far more than ordinary people can afford for those homes, or perhaps even more than the homes are worth, could lead to a market bubble.
The Journal report compares the speculative bubble created by these investors to the real estate bubble that began in 2004 and 2005 and ended with the 2008 financial crisis.
Additionally, many of the homes purchased by these companies are not sold to potential owners. Entire neighborhoods bought up by Wall Street are turned into rentals, leaving few options for those who want to own a home.
With prices rising and big corporations outbidding the middle class for the few homes available, how will families ever afford to own a home?