Impact of Institutional Buyers on Home Sales and Single-Family Rentals

The home sales and rental markets continue to suffer from a huge undersupply of both for-sale and for-own units. As of March, the inventory of existing-homes on the market was equivalent to just two months of supply, well below the desired level of six months. The median existing-home sales price continues to increase at a double digit pace of 15% year-over-year. At the same time, asking rents on multifamily properties are up 11% year-over-year as of March¹ while rents on single-family properties are up 13% year-over-year as of February.² Low interest rates during 2020-2021, with the 10-year T-note hovering at below 2% in 2020 and 2021, have led investors to seek higher returns elsewhere, and real estate is one such asset. In March 2022, inflation surged to 8.5%, creating further incentive for investors to seek assets that offer a hedge against inflation, such as residential rentals where rents are adjusted annually. These conditions have made the real estate market attractive to institutional investors seeking to purchase properties to turn into rentals.

This study estimates the market share of institutional buyers to total home sales using property deed records from Black Knight and compares the median price of institutional buyers to the median price of all buyers. It looks at the factors that attract institutional investors to a particular market using data from the American Community Survey. It analyzes the motivation for home sellers to sell to institutional buyers, the impact of institutional investors on home prices and rents, and the quality of service offered by institutional landlords relative to “mom-and-pop” landlords based on a survey REALTORS®.

Key Finding 1

Institutional buyers made up 13% of the residential sales market in 2021, with the median purchase price of institutional buyers typically 26% lower than the states’ median purchase prices.

We defined institutional buyers as companies, corporations, or limited liability companies (LLCs). Using deed records data, we found that institutional buyers purchased 13.2% of residential properties in 2021, up from 11.8% in 2020. Institutional investors made up a higher share of the market in counties where the number of homes available for sale was become tighter: in counties where the investor share was higher than the national average, listings were down 7% year-over-year as of March 2022, and in counties where the investor share was lower than the national average, listings were down just 4% year-over-year. Texas led all states with the highest share of institutional buyers (28%), followed by Georgia (19%), Oklahoma (18%), Alabama (18%), and Mississippi (17%).

Using deed records, we also found that the median price of properties purchased by institutional buyers in 2021 was typically 26% lower than the state median prices. The difference could be due to differences in quality of homes being purchased, as suggested by the NAR survey where 42% of respondents reported that institutional investors were purchasing homes that needed repair. States with a higher share of institutional buyers than nationally had a lower price difference of 20% while states with a lower share of institutional buyers had a price difference of 30%, which indicates that more competition among institutional investors tends to push up their price offers.

While the purchase of existing-homes by institutional investors takes away available stock for homeowners, the construction of single-family built-for-rent housing adds to the rental housing stock. Based on the U.S. Census Bureau data on housing starts, we estimate that single-family built-for-rent housing rose to 5.2% in 2021, with rising market shares in the South Region, at 5.6%, and in the West Region, at 4.5%. While built-for- rent housing increases the supply of rental housing, the scarcity of developed lots and construction labor also reduces the available resources of the construction of homes for owner occupancy.

Key Finding 2

Institutional buyers tend to purchase in markets with rising household formation, strong housing and rental markets, high income markets, but also with a high density of minority groups especially Black households, with twice as many Black households in markets with higher share of institutional buyers.

We analyzed ten factors that we hypothesized are likely to attract institutional investors to a market area. We found that institutional buyers are attracted to areas with:

1. Higher household formation
2. High density of minority groups especially Black households
3. High density of renters
4. High density of the Millennial age group
5. High income and education
6. Many people moving into the area
7. Fast rent growth
8. Fast home appreciation
9. Fast home sales growth
10. Lower rental vacancy rate

Specifically, in areas with a higher share of institutional buyers than the national average, there are twice as many Black households as areas with a lower share of institutional buyers. In areas with higher share of institutional investors, renter accounts for 30% of households on average compared to 27% in areas with lower share of institutional investors. The implication is that while institutional buyers who purchase existing-homes to convert to rental provide rental housing, this takes stock away for future homeowners.

Key Finding 3

According to REALTORS®, institutional investors have a larger market presence due and offer cash and services that home sellers prefer. However, their offer price is about the same as non-institutional buyers and they offer the same or faster service than mom-and pop landlords.

NAR Research Group conducted a survey of REALTORS® to local market information about institutional buyers and collected responses from 3,644 members.

• The survey revealed that the main impact of institutional investors is on market competition.
• On average, respondents reported that institutional buyers accounted for 15% of single-family purchases in 2021.
• The major reason home owners sold to institutional investors was because they offered cash, purchased the property 'as is' or offered a guaranteed purchase.
• Forty-two percent of properties purchased were converted to single-family rentals and 45% were resold. This indicates that institutional purchase subtracts from the available housing for homeownership.
• On average, the offer price of institutional buyers was about the same as non-institutional buyers, with offer prices at times below the market price or at times above the market price, given that institutional investors purchase a mix of properties, with 42% in need of repair.
• The services offered by institutional buyers was about the same or faster than non-institutional buyers.
• Fifty-nine percent of REALTORS® reported institutional buyers involved a traditional seller’s agent during the transaction.

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¹ CoStar®
² CoreLogic®