The Great Financial Crisis changed a great many things in the financial system and the US economy. Given that the single family housing was in a part a driver of the GFC we shouldn’t be surprised that it too has been radically changed in the past decade.
Two big trends are currently at work in single-family housing market.
- Institutional investors are now a big player in the market for single family homes.
- The democratization of all manner of non-standard assets is now at work for single family homes.
Ben Casselman and Conor Dougherty in the New York Times look at how things have changed, using the Atlanta area, as an example of these trends at work. They write:
For decades, single-family homes were an investment primarily for people who wanted to live in them. Real estate investors were around, but they were mostly individuals or small partnerships. That changed with the Great Recession and its aftermath, when investors bought at least two million homes, and almost certainly far more than that, with prices depressed. Large-scale institutional investors bought tens of thousands of homes for less than they cost to build.
Many thought that this development was really borne out of the GFC and would eventually cool. Instead this trend has accelerated. Laura Kustisto writing at the WSJ notes:
Instead, demand for properties has intensified. While these purchases dipped slightly when the market started to recover in 2015 and 2016, they have rebounded to surpass the previous peak of six years ago.
Strong rental demand, technology that facilitates buying homes online and low interest rates that make other investments less appealing have fueled investor appetite.
There are now a growing number of startups that help facilitate this process of investor-owned homes. In some cases investors are now able to purchase a rental property, sight unseen, and need never visit the property. This is far removed from the hands-on, management needed to own a rental property just a decade ago.
Single family homes are just one example of the democratization of the investment process for so-called alternative assets. Accredited investors now have online access to all manner of assets ranging from fine art, collectible cars, commercial real estate, oil and gas properties and pre-IPO shares to name just a few.* It’s hard to see how this trend does not continue to expand and grow over time.**
Coming back the housing market. Technology and an investment-mindset is now changing how homes are being bought and sold, leaving the whole investment angle to the side. Companies like Zillow, Offerpad, Opendoor and others are now taking the place of brokers (and buyers) by purchasing homes directly from home sellers. They are particularly active in the Phoenix area.***
Ryan Dezember and Peter Rudegeair writing at the WSJ show these companies are changing the home selling (and buying) process. A process that has been particularly resistant to change. The standard (5-6%) home commission provides these companies with a well-defined margin against which they can attack the market. From the article:
Opendoor, now in 23 cities, is planning to launch in 27 more by 2020. Zillow aims to purchase 5,000 houses a month around the country and generate revenue at a rate of $20 billion annually within five years, applying the lessons it learned in Arizona
“It’s the dawn of e-commerce for real estate,” said Zillow Chief Executive Rich Barton. “Phoenix is ground zero.”
You may never likely invest in a single family home rental. Although you may already own shares in a publicly traded company, like Invitation Homes ($INVH) that does, in a fund or ETF, and you may not know it. However when you do go to buy (or sell) your next home you can be pretty sure that the process is going to be more streamlined and efficient than it was prior to the GFC.
As Marc Andreessen famously noted: “Software is eating the world” A few years ago I noted how it has come for investment management. And now it has now come for your local, friendly real estate agent.
*None of these links should be viewed as an implicit or explicit recommendation. No positions, etc.
**At one time I wanted to write a book about this trend. Even had a title, URL and everything…
***A good place to go for news in space is The Basis Point.