Is Institutional Capital Crowding Out Homebuyers? This Expert Says No.

Last week the Wall Street Journal suggested that with all the institutional capital flowing into the US housing market, there could well be a backlash as more and more home buyers are outbought by the money. However, Gary Beasley, CEO and co-founder of Roofstock, tells CNBC that this narrative of Wall Street taking over the housing market is not accurate.

In fact, Beasley says there has always been a lot of investor interest in the asset class, though historically, it has been more mom and pop driven. Today, he says about 20% or 21% of homes today are purchased by investors. “But the vast majority of those are small investors,” he said.

Out of 90,000 homes a month purchased by investors, around 4,000 are bought by larger investors. The majority are still purchased by mom and pops. He says there is a lot of noise about private capital flowing in and potentially crowding out smaller investors, but it’s just not necessarily backed up by the fact.

“If you look back, the same thing happened during the last financial crisis, when arguably there was more institutional capital flowing in,” Beasley says.

Boosting the Housing Market 

In fact Beasley told CNBC that private capital bolsters the housing market in many ways. 

He argues, for example, that private capital puts a floor on housing prices. “Prices have turned around since the beginning of 2012 when that capital was starting to flow in,” he says.

Beasley also says private capital being reinvested in older housing stock provides a lot of benefits. “The reality is where we have a real, real shortage of housing around the country, both new built and existing stock,” he says.

If investors put money into this housing and revitalizes it, that is a positive thing, he says. 

Other analysis, however, points to a crowding out of homebuyers on some level. Investor home purchases hit record levels in the second quarter and have officially surpassed pandemic levels, with investors snapping up $49 billion in properties, according to a new report from Redfin.

“With investors throwing money at the housing market, some homebuyers are finding it tough to compete,” said Redfin Senior Economist Sheharyar Bokhari. “Investors frequently pay with all cash, which means they often have a much higher chance of winning bidding wars than buyers who take out mortgages.”

A Strong Case 

It is unlikely these investment flows will pull back—the case for investors of all stripes to invest in housing is a strong one, although the yields for these rental homes vary by price point.

“Generally, the higher the price point of the home, the lower the yield,” Beasley says. “I think when you see the types of homes that are on our marketplace, the yield range is about 5% on average, unlevered. When you put some leverage on that and get some home price appreciation, you see the total return profile being quite good. So yields have probably compressed 50 to 100 basis points in the last year, but the total returns have been similar or better because of home price appreciation.”

While there is some risk to investors that home price appreciation stops, it’s very hard to call the top. Even if appreciation does stall, rents are still rising.

“Single-family homes relative to all the other real estate asset classes have some very attractive supply-demand characteristics,” Beasley says.