When discussing housing affordability, we can’t help but look back at the 2008 housing crash and how affordability did a complete 180°. That left people who purchased property during the housing boom at over-evaluated prices with a drastic housing value decrease during the crash. The current housing affordability, however, is influenced by other factors that we need to understand. Ever since the Great Recession, we have seen an increase in residential housing investors, while during the same period, the number of homeowners has declined.
The housing market is a complex part of the market, with various stakeholders, each doing their part. Still, you can split these stakeholders into two categories: consumers and producers. Consumers demand housing for renting, buying, and investing while the producers supply this demand.
How these stakeholders impact housing affordability is easy to understand. High demand and low supply lead to housing appreciation, while low demand and high supply result in housing depreciation. Still, while all stakeholders play the same game, they don’t all have the same opportunities. When it comes to investors, the role they play in supply and demand impacts housing affordability for the other consumers. However, we first need to differentiate between the two types of real estate investors, then have a closer look at housing affordability to explain better how the two are correlated.
Real Estate Investors
In 2010, real estate investors made up 8% of the real estate purchases, climbing to 18% in 2021. During the past decade, we also saw an increase in single-family housing interest from investors. Still, for this article, we’ll focus separately on domestic real estate investors and foreign real estate investors.
Foreign Real Estate Investors
Foreign real estate investors, also known as real estate international trusts (REIT), are foreign individuals or corporations that purchase residential and commercial property and bring a massive source of investment into the country through an open economy. The real estate market felt the loss of foreign investors during the pandemic. If, before 2020, foreign investors purchased 20% of real estate investment opportunities, 2020 and 2021 came with a steep drop in foreign real estate investment. With limited international traveling and a focus on domestic concerns, foreign real estate investment values dropped to 7% (pre-recession level) in the US, only growing back in the second half of 2021. This period came with a sharp increase in foreign investment to $53 billion, accounting for the staggering majority of the total of $69 billion in real estate investments.
However, the types of properties purchased by foreign real estate investors have changed since the pre-pandemic. In 2019, foreign investors preferred office properties covering over 38% of their total investment value, especially focusing on metropolitan business centers. After the covid-era, we saw that foreign real estate investors focused on two major property types, each taking up 30% of their total investment value (multi-family homes and industrial properties).
This pattern isn’t only visible in the US and worldwide as migration patterns start to form (Asia to the US, the US to Europe, Canada or Mexico, etc). Globalization impacts the world’s economy as a whole, but locally, housing market prices are driven up due to foreign investor demand. Local housing affordability is affected by foreign buyers as they increase demand, limit supply, and make it unaffordable for local residents to buy or rent.
While Americans are attracted to exotic locations that promise a lower cost of living, global capital is invested in US real estate from other countries. Top foreign real estate investors in the US come from China (16%), Canada (14%), Mexico (9%), India (8%), the UK (4%), and Germany (3%).
Domestic Real Estate Investors
Looking only at domestic real estate investors, between January 2021 and 2022, we saw an increase in purchased residential properties from 18% to 22%. Buyers purchasing power decreased from 33% to 27%. A balanced real estate market has, on average, a share of 40% of home purchases bought by homebuyers. This is not the case currently.
Furthermore, domestic real estate investors tend to focus on properties in the low tier of the price range but also look into choosing the right location to invest. If you are looking for a property that you would want to rent out, you should check out these beautiful homes available via eXp Realty, see here to find them. This led to a significant increase in the share of single-family homes purchased by domestic real estate investors, further decreasing the housing supply that had yet to recover from a decade of housing shortages.
When it comes to purchasing power, we again see that the balance sways in favor of investors. While current home buyers are struggling to save money for a downpayment, investors can pay in cash due to capital gains, can get a lower price because they pay in full, can get access to lower interest rates due to their capital, and use already owned properties as collateral for new purchases.
Housing Affordability
In the section above, we can see how much purchasing power real estate investors have, whether domestic or foreign. The fact that they own more capital than typical homebuyers isn’t the issue. The issue that leads to decreased housing affordability is that they control a far more extensive section of the market than they should.
While new housing is being built, predominantly, luxury properties are a focus, while low-income properties are not. In 2021, out of the total of new housing being built, around 1,126,000 were new single-family homes, 12,000 were multi-family homes, and only 460,000 units were built in buildings with more than five units. There are homes on the market, but homebuyers can’t afford to outbid investors, leaving over a third of the country with no option but to rent.
Domestic and foreign real estate investors own rental properties and control much of what is available. And when you have a situation where someone can’t afford to save up to 20% for their down payment because they spend around 50% of their income on rent, the renter doesn’t have anywhere else to go. When in this situation, landlords, or institutional investors, press tenants into increasing their monthly rental expenses, and those renters have nowhere else to go, something has got to give.
Tennants can wind up evicted, and with eviction remaining on their record for years, finding new housing can be incredibly difficult. Furthermore, when renters apply for federal assistance, from all the cases that are approved, not to mention how many are filed, only 1 in 4 renters get that assistance. And when they become Section 8 recipients, properties listed as accepting Section 8 recipients still turn them away. What are renters and low-income households across the country left with? Well, not much else.
Conclusion
Massively increasing federal assistance funding and providing equality to representation in housing court, housing affordability should turn around in favor of low-income households and renters. Still, incomes will likely increase due to increasing unemployment, resulting in employers paying more. That should not be the only thing that changes in the face of severe inequality in housing opportunities. Housing should be a human right, and everyone should have access to it without being left with no more money for food, gas, or other necessities.
