Real Estate News
Mom and pop landlord nation: Small time investors pick up the slack left by large institutional buyers in housing.
The bread and butter of any healthy housing market is having a good amount of first time home buyers. That is what drives new home building and also allows for the homeownership rate to go up. Most of the new household formation since the bubble burst was largely done through new rental households. Institutional investors pulled back from the market starting in 2014. Yet the homeownership rate continued to decline. So who stepped in to fill in this gap? Some of it was filled by first time buyers going in with low down payments thanks to FHA insured loans. But a large percentage was made up by mom and pop investors with a lust for HGTV and their dreams of becoming flippers or landlords. In most manias, once mom and pop are diving in with gusto you really need to think about what is going on. I know Taco Tuesday baby boomers are looking for a little “excitement” in their lives and putting habanero salsa on your Chipotle burrito isn’t going to cut it. So why not take the biggest risk by buying real estate when prices are near a new high?
The rise of the mom and pop landlord
Who knew rental Armageddon would be brought on by smiling and aging baby boomers? So we knew that institutional investors, those that buy at least 10 properties a year, had their fill of buying properties at a discount between 2009 and 2013. Essentially they were the only group with deep enough pockets (and bailouts) to buy up and amass a large portfolio of properties while others were getting kicked out of their homes and losing jobs. As institutional investors pulled back, mom and pop investors stepped in.
A recent report highlights this change in buying dynamic:
This is really telling here. So you will see the sharp drop off of institutional buying hitting in 2014. Basically big investors were running the numbers on crap shacks and they simply did not pan out. Also, the stock market was presenting many better opportunities for making money. However just at this point, you will notice the green line above picking up signaling that smaller investors were deciding to roll the dice and give their HGVT education a go.
In 2016 the number of smaller investors hit a short-term peak. 37% of all properties bought in 2016 came from mom and pop investors. That is a large number. And this is happening in expensive areas as well. Last year for example, there were many cases that I saw of a house being sold and then suddenly being put on the market for rent. In one case, the property sold for $800,000 and was then rented out for $2,800. This is an incredibly poor investment and that is why institutional investors are out but mom and pop are in it to “win it” because #YoLo housing.
This information is also is useful because it puts the brakes on the house humping cheerleaders thinking that everyone now has deep pockets and are out buying in mass. No, you simply have fewer people able to purchase more properties and inventory is still low. This is very telling regarding our nation where the top is getting very wealthy while the middle class is largely being pushed out. Even in SoCal for example, Orange County has now made a new peak in home prices largely due to new homes selling for $1 million or more. Yet Riverside and San Bernardino Counties are still way below their peaks reached from the last bubble. In other words, wealthy areas are booming and other areas are still lagging behind.
Of course mom and pop investors are the largest by sheer numbers: