Wall Street is Far Ahead of the Real Estate Curve

Much of the nation spent the last two years holed up, staring at the TV waiting for instructions from Anthony Fauci. Meanwhile, the Atlanta real estate market exploded and subtle fundamental changes began to appear. Zillow crashed in spectacular fashion, other iBuyers dabbled grew their presence a bit more and institutional investors decided they really love homes. Atlanta has always been an investor darling, but over the last couple of years, activity has exponentially increased. "They" know something...Wall Street is far ahead of the real estate curve and what they anticipate seems to be coming into focus. They're on a massive buying spree and tightening the chokehold; the impact on home buyers, especially in the Atlanta market, is brutal. Their activity foretells a worrisome trend; they seem to be all-in on the idea that America is becoming a renter nation. Ownership rates peaked at 69.2% in 2004, bottomed at 63.7% in 2016, and are slowly climbing back sitting at 65.5% in 2021. Data lags, few economists expect the rate to increase; in fact anecdotally Wall Street seems to be spot on.

The Feeding Grounds

The last housing crash devastated the county, the damage in Atlanta was arguably among the worst in the nation. Many investors and speculators (liberally used) were investigated for widespread fraud, misuse of grants, and general abuse of the programs designed to encourage homeownership. Atlanta spread in all directions, especially south and east, and when the crash came the market was obliterated. Investors remain very active in most of the same areas and the similarities of the last crash have many worried. Even in this market, distressed homes are present but often not broadly advertised. Major investment firms are being offered bulk packages of these homes to speed disposition. These don’t hit the market and are offered directly to institutional investors. They may sell some through conventional means but often they either move them to rentals or sell them to firms that do the same. There are distressed homes in any market, however as before, Wall Street has an inside track on these.

Battered and Bruised Buyers

First time and first move up buyers are dizzy, they continue to be pounded like a piñata by sugar crazed kids tripping on Skittles and Kool-Aid. How can they compete with institutional buyers with cash, willing to pay over list and waive all contingencies? Some larger investors buy bulk packages of distressed homes; these never get in front of home buyers. If “conventional” buyers are struggling, how competitive can VA, FHA or USDA buyers be? Around the Atlanta area, it’s not just the lower end markets struggling; in some area investors are busy above 450-500K levels. In 2021, Atlanta led the nation in investor activity; 1 in 4 homes sold to investors and over the 4^th Qtr of ‘2021 they took almost 1 in 3…the investor appetite seems insatiable.

Battered and Bruised Renters

Which knee would you like hit with this bat? That’s about how it’s shaping up for renters as they are faced with soaring rents and fierce buyer competition. Either way they turn it’s a Louisville Slugger. The “cancel rent” movement and eviction bans during the shutdown stressed operating expenses. The government handouts intended to assist landlords were either pilfered or languished at the state level; few received assistance. This destroyed many smaller individual investors as the majority of landlords are small investors with 1 to 5 homes.  Rents subsequently skyrocketed and that’s not entirely a surprise; the handouts triggered record inflation. Some landlords may have decided to recover losses over the shutdown or simply followed prices with their rents. Renters trying to buy before mortgage rate increases are finding little luck, the prospect of renting for the foreseeable future is becoming a stark reality for many.

Build to Rent

While some investors buy and flip, many are becoming landlords. Not buying apartments but rather building entire single-family communities to target renters. This isn’t unique to Atlanta but the area remains the most popular market for this endeavor. Some offer “rent to buy” options where eventually the renter has the option to purchase the home. That success rate is about zero to this point. To a large extent, these firms are betting that many occupants will never get off the rental hamster wheel. They cannot buy when rates are historically low, as rates and prices rise they have no option other than to rent. Bring them into a new home, hook them, and increase the rent over time.

When the market crashed over a decade ago, large Wall Street backed entities bought massive amounts of distressed real estate. They were critical in absorbing the insane volume and getting the nation out of the crater, they also made mountains of money. Most assumed these homes would be cleaned up, rented for a time, and then sold. That really didn’t happen; most firms spun off property management arms and maintained them as rentals. National players like Invitation Homes (80K+ homes), BlackRock and BlackStone continue to buy homes as do regional and local companies. There are many players – backed by billions of dollars – betting heavily that the home rental business will remain very profitable. At this time, they may be right.

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