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Wall Street, Main Street, Your Street: How Investors Impact the Single-Family Housing Market

Sean Brunson

University of North Carolina at Charlotte

November 2019

Home Price Indices

110 120 130 140 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Case−Shiller Zillow

Popular Press

“Affordable Housing Crisis Spreads Throughout World” – Wall Street Journal (2019) “America’s Housing Affordability Crisis Only Getting Worse” – Forbes (2019) “America’s Housing Affordability Crisis Spreads to the Heartland” – Bloomberg (2019) “Investors Are Buying More of the U.S. Housing Market Than Ever Before” – Wall Street Journal (2019) “1st-Time Homebuyers Are Getting Squeezed Out By Investors” – NPR (2019)

Overview

Empirically examine the entrance of institutional investors in the single-family housing market before and after the 2007-2009 recession Using home sale transactions for the Charlotte region between the years 2005-2017, find that institutional investors paid a discount of about 8.13%-11.19% per transaction Additionally, find that an increase in investor home purchases had a positive statistical impact on individual home prices but only a moderate economic impact

Economic Policy/Proposals

Executive Order Establishing a White House Council on Eliminating Regulatory Barriers to Affordable Housing – Donald Trump (2019) American Housing and Economic Mobility Act – Elizabeth Warren (2019) People First Housing – Julian Castro (2019) Assembly Bill 1482 – California (2019)

Previous Literature

A small, but growing literature, has started to document this activity given that it is a fairly new occurrence:

Transaction level: Allen et al. (2018) and Smith and Liu (2018) Aggregate level: Garriga, Gete, and Tsouderou (2019), Lambi-Hanson, Li, and Slonkosky (2019), and Mills, Molloy, and Zarutskie (2019)

Was It Just a Demand Shock?

Could be that investors were just consolidating the existing single-family rental market Could be that preferences shifted from owning to renting Could be that investors were actually outbidding owner-occupiers

Data

Data comes from Metrostudy, which maintains one of the most comprehensive U.S. housing databases

Restrict our study to the detached single-family housing market

Each observation contains the sale price, sale date, address, sale type, loan amount (if applicable), and other housing characteristics Most importantly, each observation contains the name of the seller, purchaser, and lender

Identifying Investors

We identify investors and non-investors in the Charlotte housing market using the names of the seller and purchaser Define investors as non-individuals that are not banks, mortgage/credit lenders, relocation companies, building companies, nor government entities This leaves us with companies we believe have purchased homes for investment purposes

Many of the company names include words such as “investment” or “asset management”

Identifying Institutional Investors

Define an institutional investor as an investor that has filed as a publicly traded company, has filed as a REIT with the SEC, or has filed a Form D with the SEC These institutional investors include companies such as Invitation Homes, American Homes 4 Rent, and Colony Starwood Homes Many of these institutions are similar to those used in Mills, Molloy, and Zarutskie (2019) and Smith and Liu (2018)

Summary Statistics

Variables All Investors Non-Investors Institutional Investor Non-Institutional Investor Total Observations 336,878 14,850 322,028 7,365 7,485 Has Mortgage 82.55% 12.42% 85.78% 0.00% 24.65% Purchased By Investor 14,850 Type of Sale New 82,321 1.65% 25.49% 1.94% 1.36% Regular Resale 230,655 81.46% 67.87% 86.83% 76.18% REO Sale 23,902 16.89% 6.64% 11.23% 22.46% Sale Characteristics Sale Price $256,231.98 $167,710.56 $260,314.06 $171,191.88 $164,285.06 Age 18.67 25.68 18.34 13.85 37.33 Bathrooms 2.40 2.17 2.41 2.33 2.01 Bedrooms 3.48 3.25 3.49 3.40 3.11 Lot Acres 0.49 0.36 0.50 0.22 0.50 Sqft Finished 2,343.47 1,909.81 2,363.47 2,059.06 1,762.96 Loan Characteristics Loan Amount $221,303.80 $19,381.16 $190,208.84 $0.00 $38,451.61

Investor Purchases (2005)

Investor Purchases (2006)

Investor Purchases (2007)

Investor Purchases (2008)

Investor Purchases (2009)

Investor Purchases (2010)

Investor Purchases (2011)

Investor Purchases (2012)

Investor Purchases (2013)

Investor Purchases (2014)

Investor Purchases (2015)

Investor Purchases (2016)

Investor Purchases (2017)

Homes Bought by Investors from Owner-Occupiers

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Institutional Investor Non−Institutional Investor

Rental Units that are Single-Family Units

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Was It Just a Demand Shock?

Could be that investors were just consolidating the existing single-family rental market – No Could be that preferences shifted from owning to renting Could be that investors were actually outbidding owner-occupiers

Homeownership Rate

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Was It Just a Demand Shock?

Could be that investors were just consolidating the existing single-family rental market – No Could be that preferences shifted from owning to renting – No Could be that investors were actually outbidding owner-occupiers

Methodology

pi,t = β0 + βXi,t + δ1PurchasedByi,t + δ2REOi,t+ δ3NoMortgagei,t + δ4RIAC,[t−1,t−6] + ZCi + QYt + ǫi,t (1)

Main Results

Baseline τ = 0.25 τ = 0.50 τ = 0.75 Variable Model 1 Model 2 Model 1 Model 2 Model 1 Model 2 Model 1 Model 2 Purchased By Investor

• 0.091***
• 0.096***
• 0.11***
• 0.128***

(-31.398) (-18.774) (-101.694) (-71.106) Purchased By Non-Institutional Investor

• 0.291***
• 0.35***
• 0.308***
• 0.233***

(-78.627) (-65.573) (-76.828) (-69.865) Purchased By Institutional Investor

• 0.114***
• 0.081***
• 0.098***
• 0.112***

(-30.762) (-26.137) (-37.761) (-49.252) Recent Investor Activity 0.006*** 0.006*** 0.004*** 0.003*** 0.005*** 0.005*** 0.006*** 0.006*** (10.327) (9.326) (5.405) (4.36) (10.838) (9.256) (11.71) (10.905) Intercept 11.087*** 11.069*** 10.931*** 10.975*** 11.13*** 11.123*** 11.208*** 11.221*** (353.919) (353) (149.634) (142.7) (242.498) (219.482) (323.216) (285.251) R2 0.775 0.774 0.55 0.55 0.584 0.585 0.607 0.608 N 319,423 319,423 319,423 319,423 319,423 319,423 319,423 319,423

Issues

The largest concern surrounds the type of homes that institutional investors buy Institutional investor’s main goal is to maximize returns and can accomplish this by buying homes at the lowest value Our results could be driven by the homes that the investor chose and not by investors themselves

American Homes 4 Rent

“We are focused on acquiring homes with a number of key property characteristics, including: (i) construction after 1990; (ii) three or more bedrooms; (iii) two or more bathrooms; (iv) a range

• f $100,000 estimated minimum valuation to $350,000 maximum

bid price; and (v) estimated renovation costs not in excess of 25%

• f estimated value. We target areas with above average median

household incomes, well-regarded school districts and access to desirable lifestyle amenities.”

Summary Statistics

Variables All Investors Non-Investors Institutional Investor Non-Institutional Investor Total Observations 336,878 14,850 322,028 7,365 7,485 Has Mortgage 82.55% 12.42% 85.78% 0.00% 24.65% Purchased By Investor 14,850 Type of Sale New 82,321 1.65% 25.49% 1.94% 1.36% Regular Resale 230,655 81.46% 67.87% 86.83% 76.18% REO Sale 23,902 16.89% 6.64% 11.23% 22.46% Sale Characteristics Sale Price $256,231.98 $167,710.56 $260,314.06 $171,191.88 $164,285.06 Age 18.67 25.68 18.34 13.85 37.33 Bathrooms 2.40 2.17 2.41 2.33 2.01 Bedrooms 3.48 3.25 3.49 3.40 3.11 Lot Acres 0.49 0.36 0.50 0.22 0.50 Sqft Finished 2,343.47 1,909.81 2,363.47 2,059.06 1,762.96 Loan Characteristics Loan Amount $221,303.80 $19,381.16 $190,208.84 $0.00 $38,451.61

Self Selection

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000

Sale Price Percentage of Homes Bought by Purchaser by Sale Price

Institutional Investor Non−Institutional Investor

Figure A

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000

Sale Price Percentage of Homes Bought by Purchaser by Sale Price

Institutional Investor Owner−Occupier

Figure B

Propensity Score Matching

To mitigate the endogeneity issue, we use Propensity Score Matching to match all of the treated units with all of the untreated units based

• n a set of observables.

By matching units based on a set of observables, we effectively remove any observable difference between treated and untreated units such that any difference in the outcome will be due to the treatment effect In our case, a treated unit is a home bought by an institutional investor, and an untreated unit is a home bought by an owner-occupier

Propensity Score Matching

For each zip code-year pair, run a logistic regression in which the dependent variable is equal to 1 if the home was bought by an institutional investor and 0 if the home was bought by an

• wner-occupier

Use nearest neighbor matching algorithm to match each of the treated homes with an untreated home based on the propsensity score

Propensity Score Matching – Matches

Do three separate matches:

Institutional investor home matched with any owner-occupier home Institutional investor home matched with an owner-occupier home with a mortgage Institutional investor home matched with an owner-occupier home without a mortgage.

Propensity Score Matching – Summary Statistics

Matched With All Individuals Matched With Individuals With Mortgage Matched With Individuals Without Mortgage Variable Institutional Investor Owner-Occupier Institutional Investor Owner-Occupier Institutional Investor Owner-Occupier Total 7,365 7,365 7,365 7,365 4,121 4,121 Age 13.85 13.74 13.85 13.81 14.61 19.38 Bathrooms 2.33 2.32 2.33 2.32 2.27 2.21 Bedrooms 3.40 3.38 3.40 3.40 3.42 3.34 Lot Acres 0.22 0.22 0.22 0.23 0.24 0.29 Sale Price $171,191.88 $192,391.62 $171,191.88 $194,766.73 $175,347.54 $199,204.75 Sqft Finished 2,059.06 2,046.87 2,059.06 2,054.61 2,062.24 2,044.04

Propensity Score Matching – Results

Variable Matched With All Individuals Matched With Individuals With Mortgage Matched With Individuals Without Mortgage Purchased By Institutional Investor

• 0.079***
• 0.102***
• 0.016*

(-15.047) (-20.239) (-1.754) Recent Investor Activity 0.002 0.004

• 0.004

(0.587) (1.526) (-0.899) Intercept 11.815*** 11.744*** 11.567*** (52.972) (54.909) (28.632) R2 0.436 0.444 0.426 F-Statistic 126.983 131.514 68.865 N 14,730 14,730 8,242

Was It Just a Demand Shock?

Could be that investors were just consolidating the existing single-family rental market – No Could be that preferences shifted from owning to renting – No Could be that investors were actually outbidding owner-occupiers – No

Conclusion

Empirically find that institutional investors paid a discount of about 8.13%-11.19% per transaction. Results also suggest that as more institutional investors bought single-family homes relative to owner-occupiers, owner-occupiers paid about 0.32%-0.59% higher for single-family homes than institutional investors.

However, this effect is fairly weak both statistically and economically

Overall, find little evidence that the entrance of institutional investors had a significant effect on rising home prices