Real Estate Loses Big Investors, Gains Confidence

by James McClister

Institutional investors leaving real estate, but Americans still confident housing is a good investment

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In the immediate wake of the economic downturn, the housing market took a plunge that was devastating for homeowners but ideal for the opportunistic. In the years following, ranks of investors flooded the market, buying up distressed and nearing distressed properties that proved easy profit. However, as runaway home prices have slowed and the market become less volatile, interest in real estate among investors waned and many left for the promise of bigger and quicker returns elsewhere. Despite the decrease in investor activity, Americans still agree real estate is the smartest investment.

In the first quarter of 2015, institutional investors – defined as entities purchasing at least 10 properties in a calendar year – accounted for 3.4 percent of single-family home sales, which, compared to a year ago, was down 2.8 percentage points, according to analysis from RealtyTrac. Just over 14,600 single-family homes were sold to institutional investors during the first three months of 2015; the lowest share of sales in four years.

The news of investors leaving is both good and bad, said RealtyTrac Vice President Daren Blomquist, who noted that at the beginning of the recession investors were responsible for as many as one in five sales.

“It created a floor for the housing market, helping it recover, but now it’s helping to push up prices so homes become unaffordable for some,” he said, referencing markets in South Florida and California where investor activity continues to surge.

Blomquist noted that smaller, mid-tier and “mom and pop” investors are “remaining active.”

Real Estate Still No. 1

The divide in attitude among institutional and smaller-time investors is being drawn along lines of security and return. Larger investors are looking for robust returns over the short term while smaller investors are searching for a safe venture that will mature over a longer period. A normalizing market is helping reassure consumers that real estate is indeed a safe bet.

In a survey from Bankrate and Princeton Survey Research Associates International, American consumers were questioned about the state of their finances and attitudes towards particular investment options. While the margin was relatively narrow, real estate managed to stand out as the favorite among the respondents.

Investing Graph

Twenty-seven percent of those surveyed said real estate would be the best way to invest their money if they didn’t intend to withdrawal from the invested sum for 10 years, compared to 23 percent who preferred cash investments and 17 percent who would choose the stock market.

Among the respondents, men were more likely to favor real estate than women, who preferred cash investments, and the typical age of those who favored real estate was between 30 and 49.

Millennial Confidence is Threatened

The survey illustrated a continued confidence in the strength of real estate, but also raised some questions in regards to future investment.

Because of tighter lending standards and student loan burdens, Millennials have largely kept out of the home buying market, despite many expressing interest in homeownership. The phenomenon has already disappointed several industry insiders who falsely predicted 2015 would be the year Millennials, the largest generation ever, broke into the housing market. And the results of the survey are unlikely to inspire further hope.

Thirty-three percent of respondents age 18 to 29, the majority of the group, favored cash investments, such as savings accounts and CDs, over the real estate market.

As wage growth continues to trail the pace of home price appreciation, the barrier between renting and homeownership is likely to strengthen. The affect on Millennials could ultimately be detrimental to the long-term health of the housing market.

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