Large Housing Investors: An Unforeseen Consequence

One of the largest catalysts of the Great Recession was a collapsing housing market. To be sure, prices had gone too high and some air had to be let out of the balloon. The subsequent collapse of CDO securities exacerbated the financial collapse that nearly sank the global economy. Once the long process of healing finally set in, one area that most analysts and economists anticipated would lead the recovery was the housing market. The only problem was that housing didn't get the memo. What went wrong? Why were so many folks off the mark regarding housing's eventual lethargic recovery and near stall? Enter the large institutional investors.

Large Institutional Investors Fill the Void

To take advantage of a market opportunity, which is what large institutional investors do, they came in with cannons loaded to the tune of billions of dollars. They bought wholesale large swaths of single family residences in the worst hit markets hoping for a bounce back. With access to cheap money and cheap inventory, the buying bonanza began. This phenomena helped the housing market stage an initial recovery. Prices started rising and with so many former owners looking to rent, properties could be rented for income purposes. But renting was never a long term goal for the large investors, as property management wasn't their business or goal. The inevitable buying ended once the cheap money ran out and the inventory eventually ran out. A big reason the inventory dried up was because all the while homebuilders had been sitting on the sidelines and to this day have not resumed past building patterns.

Squeezing Out the Few Little Guys

In economics there is a phenomena known as 'squeezing out'. This is when one form of capital displaces another form of capital. In the case of housing, the large investor has squeezed out the smaller more organic buyer. Large investors targeted the niche market that would normally have been available for the first time homebuyer. After driving up the value of this market, sopping up the inventory, in conjunction with rising interest rates, large investors contributed to a perfect storm that has all but eliminated a large part of the demand side of the market. This, combined with a still weak and slowly recovering economy, has resulted in a more anemic recovery in housing, confounding most analysts and economists.