In a dramatic turn of events, the pandemic-era housing boom that saw investors snapping up properties left and right has all but fizzled out, with institutional firms purchasing 90% fewer homes in Q1 2023 compared to the previous year. The heady days of historically low interest rates, easy access to capital, and skyrocketing house prices that fueled a buying frenzy among everyone from mom-and-pop landlords to big-time institutional investors such as Invitation Homes and American Homes 4 Rent, seems to have come to an abrupt halt.

This cooling down of the housing market, however, was not entirely unexpected. The investor frenzy began to wane in the spring of 2022 when interest rates started to climb. The dearth of homes for sale in 2023 only compounded the issue, leading to what industry insiders are calling an institutional home buying freeze. Even giants like Invitation Homes, which owns over 82,000 U.S. single-family homes, and American Homes 4 Rent, which owns nearly 59,000 homes, have become net sellers in the first half of 2023.

The Pandemic Housing Boom: Investors’ Frenzy and the Current Freeze

The Investors’ Frenzy

The pandemic housing boom offered an irresistible opportunity for investors, with historically low-interest rates, easy capital access, soaring rents, and skyrocketing house prices. Everyone from small landlords to Airbnb hosts and big institutional investors piled in. Invitation Homes, the owner of 82,837 U.S. single-family homes, was a net buyer of 1,523 homes in Q3 2021. Similarly, American Homes 4 Rent, which owns 58,693 U.S. single-family homes, was a net buyer of 1,292 homes during the same period.

The Current Freeze

However, this investor frenzy dwindled when interest rates began to spike in spring 2022. The combination of spiked interest rates and a lack of homes for sale in 2023 led to an institutional home buying freeze. According to John Burns Research and Consulting, institutional firms bought 90% fewer homes in Q1 2023 compared to Q1 2022. In the first half of 2023, both Invitation Homes and American Homes 4 Rent were net sellers. Yieldstreet, which owns around 700 homes, has not bought a single home in 2023 up to July.

Signs of a Possible Upswing

Despite the current freeze, there are signs of a potential upswing in the market. MetLife Single Family Rental Fund has secured $390 million in committed capital. In July, J.P. Morgan Asset Management announced a $625 million joint venture with American Homes 4 Rent to develop rental homes nationwide. Invitation Homes also acquired a portfolio of nearly 1,900 homes for approximately $650 million, positioning itself to become a net buyer once its third-quarter results are published.

Future of Institutional Homebuying

Noel Christopher, a leading thought leader in the single-family rental (SFR) and build-to-rent (BTR) space, believes that the institutional homebuying pause is temporary. He suggests that stabilization in the debt markets and an increase in supply of resale homes could potentially trigger another institutional homebuying surge. He also highlights the potential in allowing institutional investors to invest through local operators, leading to more professionally managed rental housing.

Institutional Homebuying: A Small but Scrutinized Piece of the Pie

Despite being a relatively small portion of investor-buying and the overall homebuying pie, institutional homebuying often gets scrutinized. Some critics argue that institutional firms are driving up home prices. However, Christopher argues that institutional investors are fulfilling a need and providing well-maintained, well-managed homes to renters. He further states that the housing finance system is flawed and heavily relies on private investors to build new and renovate old housing stock.

Key Takeaways

The pandemic housing boom saw a surge in institutional homebuying, followed by a freeze due to spiked interest rates and a lack of homes for sale. However, recent developments suggest a potential upswing. The future of institutional homebuying is dependent on factors such as market stabilization and increased supply of resale homes. Despite critics, institutional homebuying is fulfilling a need in the market, providing quality homes to renters. However, a shift in the housing finance system may change the reliance on private investors.