Across the country, investors are
taking advantage of the nation's foreclosure crisis to purchase homes at
bargain prices, often beating out potential homeowners who remain sidelined. According to the Center for American Progress
(CAP), in July, cash-on-hand investors bought about 55 percent of the homes
sold in Las Vegas and numerous properties in other major metropolitan areas
such as Miami, Phoenix, and Prince George's County, Maryland.
Sarah Edelman, a policy analyst for CAP, points out in Cash for Homes: Policy Implications of an Investor-Led
Housing Recovery, published on CAP's website that it is not unusual for
investors to buy inexpensive properties in a housing downturn. This time, however, the nation is seeing a
heavy volume of such purchases from a broader range of investors. This time it is not just individual investors who might own a handful of
properties but also hedge funds, private equity firms, real-estate investment
trusts, and other financial entities.
Institutional investors may buy
distressed properties at any point in the foreclosure pipeline - through short
sales, at auctions or trustee sales, from bank inventories or by buying
portfolios of distressed loans from servicers.
Edelman said some investors are working with financial institutions to
create new rental income-based securities and if they are successful will have
access to even more cash to buy properties.
Investors can play an important role
in the recovery, absorbing excess inventory, establishing a price floor, and
jumpstarting appreciation. They can also
offer quality, affordable rental opportunities to those shut out of home
ownership. But Edelman says they can
also destroy communities by allowing properties to sit empty, failing to bring
rental properties up to code, and neglecting tenants' needs. When investors buy large quantities of
properties in a single area it can cause prices to overheat and increase market
volatility and if they sell numerous properties at once it can spin neighborhoods
again into decline. She says investors can and should play a role in the recovery
but there are serious risks to leaving neighborhood recovery solely in their
hands. Policymakers must monitor and manage the activity to make sure investors
are acting responsibly and playing a stabilizing role in the communities.
Investors pursue different strategies
for their investments and each may employ different ones depending on economic
conditions, location, and existing opportunities. Some buy and sell homes (flipping them)
without ever renting them. This is less
common today than before the crash but may be rebounded; the number of homes
flipped in 2011 increased by 12 percent and has returned to pre-crash levels in
California. Edelman quotes one study in
which homes flipped in 2011 brought investors an average profit of $37,375. Where flippers actually improve the property
before selling it they can jump start revitalization of an area. But if
improvements are cheap and merely cosmetic then flipping can accelerate an area's
Many investors today buy and hold,
generally for three to five years.
Morgan Stanley expects this market to grow from $17 billion to $100
billion in the next five years. Again,
if the investor is not making enough from rentals to justify maintaining the
property, this can further hurt the community.
Some investors, once realizing that a property is going to underperform,
may even abandon the property, delaying neighborhood recovery.
Edelman says that while we can
speculate, we do not know how well institutional investors will fare as
landlords and neighbors. She quotes The
Wall Street Journal that "investors and analysts have raised concerns about
how quickly firms have purchased thousands of homes, and whether they have the
management track record and expertise to oversee the maintenance of properties
across the country."
Managing scattered-site rentals is
likely to be more costly and more challenging than managing a typical
multifamily apartment building because of larger staffs needed to cover a
geographic area. There may also be
multiple layers of property-management subcontractors between the investors
that own the property and the tenant who lives in the property. Investor may also leave the property
management to the tenants who may lack the motivation to comply with
maintenance requirements or with demands of homeowner's associations, some of
which are putting new limits on renting within their areas.
There is also the concern that
investor purchases (especially with cash) could crowd out too many potential
homeowners who will live and take root in a neighborhood. This can hinder neighborhoods struggling to
recover from the foreclosure crisis by preventing these communities from
reclaiming lost wealth. If owners are
not located in the communities where they invest, when they resell most likely they
will take their profit with them.
What's more, it is not clear that
those who invest in houses will show an equal commitment to the surrounding
neighborhoods. While investors may recognize that amenities such as parks and
good schools will improve their property's value, they may not be as engaged in
the future of the neighborhood.
Edelman lays out four strategies for
insuring a lasting housing recovery that strengthens the national economy while
creating affordable homeownership opportunities for qualified buyers:
homeowners stay in their homes. Preventing as many as
possible of the more than 2 million foreclosures still looming is the first
step toward a strong housing recovery.
playing field for owner-occupants and mission-driven organizations. Households and community groups that are unable to access
credit are struggling to compete with cash investors to buy homes. With better
access to financing, buyers who are more rooted in the community than the
average investor would be better positioned to own properties in their
and manage investors. Ensuring that investors take care
of their properties is key to leveraging investment for the benefit of the
community. Local officials should pay
particular attention to how well institutional investors care for their
properties. Federal regulators must pay attention to the activities of
institutional investors, particularly if a new market develops for securities
backed by these investor-owned properties.
Get the mortgage
market working again. The
ability to secure a mortgage for a home has become elusive to many Americans.
The nation urgently needs housing finance reform to make sure that we have a
well-functioning secondary market that can serve all communities.