In the aftermath of the housing crisis, institutional investors comprised an increasing share of all homebuyers. The effects of this trend have been widely debated: Does institutional investment in a local market raise or depress surrounding home prices? How does it affect local rents? Do vacancies increase or decrease?
Until recently, the lack of accurate property-level data and the difficulty of identifying investor-owned properties prevented housing researchers from answering these questions.
But thanks to new research using property records data—presented at our recent data talk, Institutional Investors’ Impact on the Housing Market—we have some answers: institutional investors boosted local home prices and reduced vacancy rates, and there is no evidence they increased local rents.
A housing recovery without homeowners
During the housing boom of the early 2000s, US home prices and homeownership rates both peaked; the homeownership rate reached a high of 69.2 percent in 2004, and home prices nationally reached their highest level in 2007, almost immediately before the housing market crash. Housing prices started to recover around 2012, but homeownership rates continued to decline until 2016.
According to Lauren Lambie-Hanson, an advisor and research fellow at the Federal Reserve Bank of Philadelphia’s Consumer Finance Institute, this “housing recovery without homeowners” is partly caused by the increased market presence of institutional investors—corporate entities that invest in multiple properties, either for the purpose of flipping or renting.
Investors had a few key advantages in distressed markets, noted Lambie-Hanson. They weren’t as sensitive to financing constraints (like contractions in mortgage credit availability) as individual buyers, they had better institutional knowledge, and those who managed many properties were often able to realize economies of scale.
Following the wave of foreclosures wrought by the housing crisis, institutional investors swept in, sensing opportunities to rent out the properties or flip and sell them once home prices recovered.
Institutional investment boosted local home prices and reduced vacancy rates
Rohan Ganduri, assistant professor of finance at Emory University’s Goizueta Business School, and his coauthors analyzed the 20 largest institutional investors’ impacts on home prices in local markets.
Ganduri and colleagues found “institutional purchases of distressed properties have a positive spillover effect on neighboring home values.” Homes within a quarter mile (roughly five blocks) of an institutionally purchased home sold at a value 1.4 percent higher than properties a quarter- to a half-mile farther.
This effect was even stronger for certain types of neighboring properties, specifically those that were foreclosed upon (4.3 percent higher), similar in age (2.5 percent higher), or in the most distressed neighborhoods (7.4 percent higher).
Lambie-Hanson’s research corroborates this finding, demonstrating that a 1 percentage-point increase in institutional buyers leads to a 63 basis-point increase in real home prices.
What does this mean in the context of economic recovery? “The economic significance of this effect is that investors account for, or help explain, about 28 percent of the house price recovery,” Lambie-Hanson explained.
Her research also revealed that institutional investment led to reduced vacancy rates in counties with many distressed areas. Both researchers found institutional investment reduced the number of properties for sale in distressed areas, leading to fewer vacancies and increased home prices.
There’s no evidence that institutional investment led to higher rents or eviction rates
Some speculation around institutional investment suggests it increases rents and leads to higher eviction rates.
George Auerbach, a managing director and the head of research at Pretium, an investment management firm, made the point that vacancies are costly for any landlord, including institutional ones, so landlords strive to keep rent increases in line with the market. But a property’s rent may increase to reflect the relative quality of a newly renovated home.
Large institutional firms that offer single-family rentals have spent on average $21,000 in renovations after acquiring a home, said Auerbach. Lambie-Hanson noted that “there really isn’t any evidence in our research that institutional investors led to higher rents or greater eviction rates for our sample of counties tracked through the recovery.”
All in all, the recent availability of property-level data and innovations in its analysis demonstrate that institutional investors had an overall positive effect on housing markets during the recovery period.
What role will institutional investors play moving forward?
Of course, the housing market has changed significantly since the recovery era, and the market continues to evolve.
“There’s been a large shift in how institutional investors buy homes today versus in 2009 through 2014—certainly much less distress, many fewer blind pools,” said Auerbach. “How will that impact pricing differently going forward than it did in the postcrisis period?”
It merits future research. Understanding institutional investors’ potentially evolving role in housing markets is key to understanding changes in home prices, rents, homeownership rates, and vacancy rates, at both local and national levels.