Independent homebuyers can’t compete with investors

Amid tight housing market, investors snap up homes in record numbers. Portland renters and prospective non-investment homebuyers are feeling the impact.

Like most major metropolitan areas in the United States, the Portland metro is experiencing inflation across the board. One of the biggest price increases affecting Portlanders’ wallets is the exploding cost of housing, leaving renters and homebuyers in a lurch.

Real estate investors purchasing homes is a major issue for prospective single-family home buyers. Investors are purchasing a significant number of homes, according to data from Redfin, a real estate brokerage that publicizes data on the housing market. Non-investment buyers struggle to compete with their resources.

Across the United States, real estate investors purchased nearly one in five, 18.4%, of all homes sold in the fourth quarter of 2021.

In Portland, investors purchased 12.6% of homes sold in that same period, a 46.3% increase from 2020, at a total value of $591,449,258, according to data from Redfin. The numbers are significantly higher across the Columbia River in Clark County, Washington, where investors were behind between 41% and 67% of all home purchases in 2021 depending on zip code.

Investors snapped up 67% of homes in Ridgefield, Washington and 68% of homes in Salmon Creek, Washington — both fast-growing communities 20 miles north of Portland. Real estate investors also had their eyes on Washougal, Washington and the Five Corners district of Vancouver, buying more than 50% of homes sold in those zip codes in 2021.

Exploding Costs

Oregon is one of the hardest-hit states in the nation when it comes to rising housing costs.

The figures in Oregon are well above the national average. Nationally, rents increased an average of 24.4% for a one-bedroom apartment, according to Rent.com’s March 2022 Rent Report, which analyzed data on multifamily rental units and compared them to numbers from March 2021.

In Portland, the average rent for a one-bedroom apartment was $2,155 in Feb. 2022, a 34.1% increase from a year before. In Vancouver, Washington, the average rent is $1,576, a 15% increase.

It’s not just renters who are affected by rising housing costs. Five years ago, in February 2017, the average cost of a single-family home in Portland was $361,000. As of February 2022, the cost jumped 34.7% to $552,000 according to Redfin data.

In Vancouver, Washington, Redfin data shows the average cost of a single-family home was $274,000 in 2017. In 2022, that same figure is $461,000, a 41% hike. Prices jumped 15.3% in the last year alone.

National problem

Real estate investors purchased a record 18.4% of homes across the United States in the last quarter of 2021, up from 12.6% a year earlier. The rising price of rent and real estate incentivizes investors to continue buying.

As individual buyers are priced out of the real estate market, they continue renting in a market where prices have also skyrocketed over the past two years.

“Whenever there’s a problem in the economy that’s hurting families and driving up prices, there’s a pretty good chance you’ll find a Wall Street scheme either causing it, or taking advantage of it and making it worse,” Sen. Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, said in a Feb. 10 hearing.

Real estate investors help drive the rising cost of rent. Investors buy homes with inflated offers that non-investment buyers struggle to compete with, then rent the homes or flip them for profit. As housing supply is low, not every person seeking a house is able to find or afford to buy one. Those who cannot compete in the housing market are forced to rent. As renters with few options are unable to afford to exit the rental market, landlords are able to continue increasing rent.

“Rents in communities from Atlanta to Boise to Columbus to Denver are growing far out of reach for families and workers,” Brown said. “While most of us see high rents and a lack of housing choices as a problem to solve, deep-pocketed investors see an opportunity for profit.”

And investors’ stake in the market is growing. Real estate investors purchased a record percentage of the homes bought in 2021, making up a record-high 26.9% of sales in October before dropping slightly to 21.4% in December, according to data from CoreLogic, a financial analysis firm.

Investment boom

Currently, about half of investor purchases are made by small firms with between three and ten properties, with mid-sized firms with under 100 properties making up 30%, and large firms with more than 100 properties making up 20% of purchases by real estate investors.

First-time homebuyers and other traditional, low down payment (less than 20% down) buyers often struggle to compete with the financial resources of real estate investment companies.

“While record-high home prices are problematic for individual homebuyers, they’re one reason why investor demand is stronger than ever,” Sheharyar Bokhari, an economist and researcher at Redfin, said.

Investors are known to purchase homes sight-unseen, waive inspections and appraisals and make all-cash offers well above the asking price. The appraisals and inspections non-investment buyers typically request take time, and investors offer the alluring option of a quick-close, cash sale without contingencies.

Investors seek to buy and sell homes in a short time, paving the way for a fast-growing subset of the investor market called instant buyers, or iBuyers, who offer a similar set of promises.

iBuyers rapidly buy and sell homes online for all-cash offers. iBuyer, also a website that hosts these types of transactions, allows sellers to input their addresses and matches them with “national iBuyers in your city, local iBuyers and investors, (and) consumers who buy direct and fast,” promising a cash offer for their home in minutes.

According to data from CoreLogic, the percentage of iBuyer purchases doubled nationally in 2021.

Local iBuyer companies in the Portland area, such as Cascade Home Buyers LLC and Spartan Redevelopment, are house flippers. A sale is considered a flip if the home is bought and sold within one year.

“Spartan Redevelopment specializes in the purchase, restoration, and resale of single-family homes in the Portland metropolitan and surrounding markets,” reads Spartan’s website.

Flippers aim to “buy low, sell high” and typically invest in low and middle-income neighborhoods, the same markets where first-time buyers are struggling to get a footing.

Amid increasing materials costs, profits for flippers decreased last year. To mitigate the loss in profits, according to a report by CNBC, flippers are known to sell to other real estate investors who then rent out the homes, as rentals don’t require high-end materials, subsequently further decreasing housing inventory.

Buyer frustrations

Street Roots spoke with multiple recent homebuyers in the Portland area. They expressed similar frustrations, describing the housing market as extremely competitive, with most homes selling for far above the asking price and yielding competing offers that waived contingencies.

“It was a difficult process,” Katrina Doughty recalls. “I made many offers and was far over-bid many times before I finally succeeded … I honestly could not have done this without my realtor.”

Numbers back those sentiments up. In June 2021, the percentage of homes that sold above the asking price rose to 70.2% — that figure was just 38.3% in June 2019.

Damon Motz-Storey just received the keys to their new home in Portland. Their parents work in real estate, so although they had some familiarity with the process, it wasn’t without difficulty.

With the knowledge that most homes are selling at above the asking price, Motz-Storey adjusted their price to reflect the likelihood they would have to bid high.

“It made me approach searching for houses differently,” they said. “Knowing that the uppermost limit to my budget was about $425,000, I would search for listings that were all under $400,000.”

They ended up paying nearly $28,000 over the asking price.

“It stung, but my realtor and other realtors told me that in this market, you should just expect to have to offer higher than the asking price, sometimes by a kind of staggering amount,” Motz-Storey said.

Following the advice of their realtor, Motz-Storey made an offer on a home in East Portland well above the asking price. Still, issues arose when the home was appraised for less than what they offered. Using a government-backed loan, Motz-Storey was unable to offer more than the home’s appraised value, forcing their realtor to negotiate with the sellers and appraiser to come to a resolution.

“All of my supports and access and privileges added up to being able to just barely get a house where the estimated monthly payment … is still a whopping $2,500 a month,” Motz-Storey said.

Still, Motz-Storey is relieved their housing search is over.

“Honestly the biggest thing for me is the comfort in knowing that so long as I keep enough income to pay the mortgage… there is no landlord to suddenly jack up the rent or decide to sell the house I’m in. That stability feels incredible,” Motz-Storey said.

The intense market is forcing individual buyers to make tough decisions to remain competitive.

Amy Roberto searched for a home in Portland for nearly two years before finally closing on a home last month.

“I spent almost half a million dollars on a house,” Roberto said. “Shit was stressful.”

She struggled to compete with multiple offers over the asking price. To maximize her chances of success, Roberto viewed her now-home and made an offer over the asking price the very next day, and also waived the seller’s obligation to repairs. The sellers accepted her offer the following day.

“We didn’t rush into anything and we really lucked out with the previous homeowners,” she said. “They have been super accommodating. I think in that regard we really lucked out.”

Low supply

Available housing inventory is also a major problem. Low inventory contributes to high prices and incentivizes investment, as there are not enough homes to meet the demand. Decreased construction caused by the COVID-19 pandemic exacerbated the problem.

The inventory of available single-family homes in Portland fell from 4,395 in February 2019 to 1,274 this February according to data from Redfin. Under current market conditions, there is only 0.9 months of housing supply in the Portland metro.

“The supply shortage is also an advantage for landlords, as many people who can’t find a home to buy are forced to rent instead,” Bokhari said. “Plus, investors who ‘flip’ homes see potential to turn a big profit as home prices soar.”

While low inventory is a boon for real estate investors and landlords, it compounds the misery of non-investment buyers and renters. Across the nation around one in 10 homes sit vacant, according to U.S. census data. Some vacancy is necessary to maintain an inventory of homes for rent and for sale. A “healthy” rental vacancy rate is 2-3% for homeowners and 7-8% for rentals, according to Bloomberg.

Extremely low vacancy rates work in real estate investors and landlords’ favor, as it indicates there’s a high level of desirability to live in the area, allowing them to increase prices as prospective buyers and tenants compete for the available inventory. High vacancy levels, over 10%, work in reverse, as there are more vacancies than prospective occupants, keeping prices steady.

The homeowner vacancy rate in Oregon was 1.3% in the fourth quarter of 2021, according to U.S census data. The Oregon rental vacancy rate was 3.3%.

There is a shortage of roughly three million homes across the United States, according to the government-sponsored mortgage loan company Freddie Mac. New housing construction dropped dramatically after the 2008 recession and failed to recover. Increasing cost of materials and construction labor worsened by the COVID-19 pandemic worsened the issue. Construction of new single-family “starter” homes (under 1,400 sq ft) is less than a fifth of what it was in the 1970’s and 1980’s. The crunch will worsen as millennials, now the largest demographic in the U.S., enter the homebuying market.

Despite skyrocketing housing costs and a worsening shortage of available housing nationwide, there are no large-scale efforts to alleviate the shortage at a federal level. As rents and home prices continue to climb, fears of a “renter’s economy” deepen as investors’ share of the market continues to grow.

“One of the reasons housing prices have gotten so out of control is that corporate America sensed an opportunity,” Sen. Brown said before the Committee on Banking, Housing and Urban Affairs. “Private equity firms and corporate landlords and investors saw a shortage, and they saw a captive market. They bought up properties, they raised rents, they cut services, they priced out family homebuyers, and they forced renters out of their homes.”

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