A bidding war broke out this winter at a new subdivision north of Houston. But the prize this time was the entire subdivision, not just a single suburban house, illustrating the rise of big investors as a potent new force in the U.S. housing market.
D.R. Horton Inc. built 124 houses in Conroe, Texas, rented them out and then put the whole community, Amber Pines at Fosters Ridge, on the block. A Who’s Who of investors and home-rental firms flocked to the December sale. The winning $32 million bid came from an online property-investing platform, Fundrise LLC, which manages more than $1 billion on behalf of about 150,000 individuals.
The country’s most prolific home builder booked roughly twice what it typically makes selling houses to the middle class—an encouraging debut in the business of selling entire neighborhoods to investors.
“We certainly wouldn’t expect every single-family community we sell to sell at a 50% gross margin,” the builder’s finance chief, Bill Wheat, said at a recent investor conference.
From individuals with smartphones and a few thousand dollars to pensions and private-equity firms with billions, yield-chasing investors are snapping up single-family houses to rent out or flip. They are competing for houses with ordinary Americans, who are armed with the cheapest mortgage financing ever, and driving up home prices.
“You now have permanent capital competing with a young couple trying to buy a house,” said John Burns, whose eponymous real estate consulting firm estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in. “That’s going to make U.S. housing permanently more expensive,” he said.
The consulting firm found Houston to be a favorite haunt of investors who have lately accounted for 24% of home purchases there. Investors’ slice of the housing market grows—as it does in other boomtowns, such as Miami, Phoenix and Las Vegas—among properties priced below $300,000 and in decent school districts.
“Limited housing supply, low rates, a global reach for yield, and what we’re calling the institutionalization of real-estate investors has set the stage for another speculative investor-driven home price bubble,” the firm concluded.
The bubble has room to grow before it bursts, according to John Burns Real Estate Consulting. But it is inflating fast. The firm expects home prices to climb 12% this year—on top of last year’s 11% rise—and increase at least 6% in 2022, a period of appreciation reminiscent of 2004 and 2005.
That boom was different, fueled by loose lending that enabled individuals to speculate on home prices by racking up mortgages they could repay only if home prices kept climbing. The money party ended a few years later when home prices stopped rising. The ensuing crash wiped out $11 trillion in U.S. household wealth and brought the global financial system to the brink of collapse.
Financiers stepped in starting in 2011 and gobbled up foreclosed homes at steep discounts. They dispatched buyers to courthouse auctions with duffel bags of cash. Smartphones and tablet computers—new then—enabled them to orchestrate the land grab and manage tens of thousands of far-flung properties thereafter.
, but it reappeared at the original price.
