Institutional investors prop up the housing market

Wall street investors are buying up houses in the region as they are in many other parts of the country and theyre changing the dynamic in residential real estate.

Investment in the Puget Sound region has been strongest in Pierce County, where institutional investors accounted for 19 percent of all purchases last September, compared to about 5 percent in King and Snohomish counties. Institutional investors are targeting Pierce County because it offers more distressed properties at lower prices than in King and Snohomish counties, as well as a robust source of renters affiliated with Joint Base Lewis-McChord.

The good news is that these investments have helped prop up a housing market still recovering from the Great Recession. And since most of the homes are being turned into rentals, its also good news for tenants, who may find it easier to locate homes.

But those same institutional investments could have a downside, making it tough for first-time home buyers who are having difficulties qualifying for mortgages and who are now competing with large institutions that typically pay cash for their purchases. Additionally, since such investments must be liquidated within a set period to pay back investors, those houses could come back on the market in a surge, potentially depressing housing prices in the future.

The game plan is simple: Investors buy homes at prices below replacement cost, fix them up and rent them out with an eye toward selling them in five years to eight years when housing prices recover and there are more buyers with strong credit.

The high cost of housing has kept investors out of many communities. Institutional investment in the Seattle metropolitan area, for example, was far below the national level, accounting for just 8 percent of all sales of single-family houses in September, compared to 14 percent nationwide and 19 percent in Pierce County, according to RealtyTrac, an Irvine, California-based research firm. The company defines an institutional investor as any entity buying 10 or more homes annually.

In top-ranked atlanta, institutional investment has accounted for 29 percent of sales, and in some submarkets as much as 50 percent, says RealtyTrac Vice President Daren Blomquist. Only three other cities saw institutional investment top 20 percent of sales: Las Vegas, 27 percent; St. Louis, 25 percent; and Jacksonville, Florida, 23 percent.

In Pierce County, where institutional investment sales represent nearly one of every five transactions, the trend is substantial enough to affect home prices. Twenty percent is a tipping point, says Blomquist. Then you really see home prices accelerate.

The reason is that institutional investors are willing to pay more than the typical home buyer. They are not buying based on

what they can afford, Blomquist explains, and they are not buying based on low prices and the potential profit off appreciation. They are buying solely based on what they can get off the rent. It lets them justify a higher price than an owner-occupant would pay or a buy-and-flip investor would pay.

One consequence is that institutional investors are squeezing first-time buyers, forcing them to pay more or buy in neighborhoods farther away from their jobs. What they are doing to the first-time buyer is they are killing or putting a dent in their American dream, says Bobbie Petrone Chipman, principal managing broker in the Puyallup office of John L. Scott Inc.

As interest rates for homebuyers rise, institutional investors could be inflicting a double negative whammy by reducing the pool of buyers who will trade their starter homes for larger houses, says Glenn Crellin, associate director of research at the Runstad Center for Real Estate Studies at the University of Washington.

The shift toward renting appears to be substantial. Nationwide, home ownership in August was the lowest it has been in the past 50 years. According to the U.S. Census Bureau, 65.5 percent of the homes in America houses, condominiums and apartments were occupied by owners. Add in roughly 4 million homeowners who are 90 days or more delinquent on their mortgages, and home ownership could slide closer to 62 percent, according to a recent report by the Urban Land Institute.

On a philosophical level, there may be something to debate on whether its good for the country and economy to move to a renter-heavy housing market, Blomquist says, noting that owning a home has been one of the primary methods of building personal wealth for many. As well, Too much of a transient population does affect the ability of communities to maintain a progressive approach, says Puyallup City Manager William McDonald. It impacts the willingness to vote and to get involved in volunteer work.

To be sure, many feel institutional investors have helped with the resurgence of the housing market. The investors cleaned up excess inventory in late 2010 and through 2011, then the local homebuyers came in on top of them, says J. Lennox Scott, CEO of John L. Scott Inc. in Issaquah. Thats why weve seen such a strong recovery in the housing market.

If institutional investors hadnt stepped in, Blomquist adds, the housing recovery would have been slower and more measured. Investors put this recovery on steroids by adding a completely new element of demand that did not exist in the single-family housing market before, he says.

Driving the trend are big investors, such as the California State Teachers Retirement System, which view real estate as a significant component in their investment strategy. Compared to office, industrial and retail real estate, The return on the rent yields you get on homes is significantly higher than you get from other asset classes, while the operating expenses are significantly lower, says Jeff Pintar, CEO of Pintar Investment Co., an investment adviser and property management firm in San Juan Capistrano, California, that works with institutional investors.

An institutional investor is looking for gross yields on rental property (annual rental income divided by purchase price) of 10 percent or higher, Blomquist says. Some of these investors are turning to the securities market through bond offerings or setting up publicly traded real estate investment trusts.

Its a trend welcomed by Pintar. His firm invests in several markets across the country on behalf of institutional investors and its own fund. Securitizing these portfolios gives more individual investors an opportunity to participate in the rebound of the housing market, he suggests.

In recent months, rising prices and a tightening of the supply of homes for sale have slowed institutional investment in the Seattle area. Theyre done with the low-hanging fruit, says Dick Beeson, principal managing broker at RE/MAX Professionals in Tacoma. They are not as competitive as they were.

However, institutional investors have plenty of cash to spend. Its still a great time to be acquiring homes with a long-term perspective, notes Pintar. Is it as good a time today as it was a year and a half ago? No. But is it a better time than a year and a half from today? Yes, if you believe the future value of these assets will continue to increase.