In the 1970s, when inflation was out of control, the press was always looking for scapegoats to blame like “middlemen” and “greedy businessmen” when the cause was really at the feet of Fed and Government policy.
That is largely the situation today with respect to housing, as Fed and Government Policy – intended to help the housing market – often just makes things worse because of unintended consequences.
HEDGE FUNDS BOUGHT UP HOUSING
After the 2008 mortgage meltdown, huge hedge funds swooped in and bought up tens of billions of dollars worth of homes on the cheap and often in bulk.
This was highly unusual because large funds had never before focused on single-family rentals in this manner.
This article from The Atlantic explains what happened in great detail, in case readers want more info.
FUNDRISE BUYS ENTIRE SUBDIVISION
This recent WSJ article explains how Fundrise (a huge real estate investment fund) bought an entire D.R. Horton subdivision of 124 homes for $32 million to hold as rentals.
According to the article, there are over 200 major firms still snapping up inventory en masse, keeping inventory that much tighter and creating that much more competition for individual buyers.
These firms are bullish on housing because they can’t find better yields in other investment sectors and because these very sophisticated firms believe housing remains a great bet (something that should encourage all buyers).
BLAME THE FED
So – should we be really mad at these funds for keeping inventory so much tighter (at least in the southern states where they focus)?
When the Fed keeps rates so low, all investment funds do whatever they can to find sufficient yield and that is why so many firms are focused on residential housing.
Further, very low rates allow them to finance their purchases so cheaply that their incentives to buy housing are even stronger.
And finally and perhaps most importantly, these funds are holding on to their housing inventory (unlike more mobile individual buyers) because they do not believe they can find better yields if they sell their homes.
I might add too that these funds did a great service for the country after the 2008 meltdown by sopping up huge chunks of excess inventory that were keeping housing prices depressed.
Anyway – when everyone (especially mortgage companies like JVM 😊) is cheering for lower and lower rates, we should all remember that there are unintended consequences – like very low inventory.
Also, as I have mentioned in previous blogs, it is not just the funds hanging on to housing inventory; individual homeowners are also less likely to sell after they lock in very low fixed mortgage rates – because they don’t want to give them up.
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