Investors Pull Back, Giving Homebuyers a Better Shot at the Market

The housing shortage isn’t news to anyone who’s tried to buy a home in recent years.

There are many factors that have affected inventory levels. Supply chain issues and labor shortages from COVID, elevated materials costs, are just a few of the contributing factors.

Another underlying reason for the shortage is the activity of real estate investors. Investors add extra demand to the housing market without contributing any new supply, with institutional investors creating the biggest effect.

Fortunately, after reaching an all-time high in January, investor activity in the housing market decreased in the second quarter for the first time in two years. In fact, investor purchases dropped from nearly 30% in January, to 23.4% in June 2024, according to CoreLogic economist Thomas Malone.

What is institutional real estate investing?

People often think of institutional real estate as being exclusively Class A properties, usually in top-tier markets. Expensive office buildings in San Francisco or downtown Manhattan, for example, often come to mind.

But institutional investing isn’t limited to just trophy office spaces. Unlike mom-and-pop real estate investors who may buy a single-family home here and there, institutional investors will invest millions, sometimes billions, of dollars to buy 100 or more homes in a single city, building a portfolio of rental properties to generate profit.

You see, a single-family home would not be considered an institutional-quality product—but a portfolio of 5,000 single-family rental homes would be. The defining difference between traditional investment property and institutional-quality real estate then, is all about scale.

How institutional investors impact the housing market

High home prices and mortgage rates have made homeownership unattainable for many Americans, driving up demand for rentals. Investors, many of whom can pay in cash to sidestep high mortgage rates, are capitalizing on this increased demand.

The problem is that by purchasing existing homes rather than building new ones, investors increase competition for available properties, which can drive up prices. This heightened demand, without a corresponding increase in supply, puts additional pressure on an already limited housing inventory.

Also, investors target lower-priced starter homes to boost their returns. In fact, investors accounted for 29% of purchases in the low-price tier, 22% in the mid-priced category, and 21% in the high-price range in June 2024.

First-time homebuyers feel the impact of investors buying up the more “affordable” homes more than any other homebuyers. This is because first timers typically search within the same price range and now face heightened competition from these investors.

The good news for homebuyers

As a homebuyer, if you’re frustrated by today’s housing market, you’re not alone.

Fortunately, the investor share began declining in March 2024 and hit a two-year low in June. According to CoreLogic, although the investor rate will likely remain at pre-pandemic levels, the expectation is that investor purchases will continue to decline through the remainder of 2024 into 2025.

Also, most real estate investors are either small investors with fewer than 10 properties or medium investors with up to 100 properties. The large, mega investors make up a small portion of total purchases. On average, small investors account for around 18% of the market, while mega investors represent only about 1%.

As institutional investors scale back single-family real estate investing, we should see an increase in housing supply. Increased inventory along with the possibility of mortgage rates continuing to fall, could be exactly what homebuyers need to enter the housing market.

Ways traditional homebuyers can compete with investors

Some housing markets are being impacted more than others by institutional investors. California and Florida, for example, are the most affected in the U.S.

If you live in a market with a high number of real estate investors, there are things you can do to help level the playing field.

Simulate an all-cash offer. All-cash offers, quick closings, and accepting homes “as-is” are why home sellers find investor offers appealing. Even though you may not be able to afford an all-cash offer, there are workarounds for this. Companies such as Flyhomes, Ribbon, and Offerpad will finance what equates to an all-cash offer on your behalf, helping your bid stand out.

Find a great real estate agent. Having a skilled buyer’s agent is especially important in a competitive market. You need someone who can notify you of new listings as soon as they’re available, or even before. Good agents will also know how to make your offer stand out. Ask your friends and colleagues for referrals when choosing a real estate agent. Then interview agents to find out how they plan to find homes within your budget, and how they can help you craft competitive offers that can compete with investors.

Limit your contingencies. Remember, investors rarely make offers with contingencies. The most common home contingencies include a contingency for home inspections, appraisals, and financing. Be sure to discuss eliminating any of these with your real estate agent. Some may help you win the deal but with substantial risk. Waiving these contingencies makes your offer more competitive, but you risk losing your deposit if the deal falls through.

Get pre-qualified. In any type of housing market, a mortgage loan prequalification or preapproval demonstrates to sellers that you’re a serious buyer. In a competitive market, most sellers won’t even consider an offer without a pre-qualification letter unless it’s an all-cash deal.

Be prepared to make a higher offer. Investors tend to make low cash offers so they can turn a profit. Mortgaged buyers can sometimes win simply by outbidding them. Instead of a low-ball offer, consider starting at your highest and best-price offer. It may elevate your offer over a competing investor.

The bottom line for the housing market and institutional investing

Real estate has seen a lot of volatility over the past few years and it’s unclear how much longer we’ll see this unpredictable landscape.

But as institutional investing continues to decrease, housing inventory should increase. This, combined with the recent trend of declining mortgage rates, means home affordability may be turning around, and we could see a positive shift in the housing market soon.