Institutional Investment, Asset Illiquidity and Post‐Crash Housing Market Dynamics

Abstract

We examine institutional investors’ entry into the equity side of the single‐family detached housing market using an asset illiquidity framework. We find that institutional investors purchased owner‐occupied houses after the real estate crisis for approximately 6.3–11.8% less than owner‐occupiers. The large discount was in addition to distressed sale and cash purchase discounts which, when combined, highlight the low liquidation value for owner‐occupied housing. The results suggest that asset illiquidity is an important cost of leverage in the owner‐occupied housing market.

Tracing the source of liquidity for distressed housing markets

“…On the one hand, institutional investors' purchases of distressed properties can create a positive spillover effect on nearby home values by providing liquidity and reducing the supply of properties available for sale—that is, the supply effect . On the other hand, institutional investors' purchases can also create negative price externalities by forcing deeper discounts using their stronger bargaining power (e.g., Allen et al., 2018; Smith & Liu, 2020). In the case of real estate assets, neighboring property values can also be affected through the hedonic preference of living close to a property purchased by institutional investors.…”

“…Allen et al. (2018) and Smith and Liu (2020) show that institutional investors were able to purchase homes at a deeper discount than single‐purchaser buyers. Using policy shocks such as the First Look Program and the Quantitative Easing program, Lambie‐Hanson et al.…”

“…For example, Mills et al (2019) examine factors that drive the entry of institutional investors in the SFR market. Allen et al (2018) and Smith and Liu (2020) show that institutional investors were able to purchase homes at a deeper discount than single-purchaser buyers. Using policy shocks such as the First Look Program and the Quantitative Easing program, Lambie-Hanson et al ( 2019) and Garriga et al (2020) find that the presence of institutional investors in local real estate markets are associated with lower homeownership and lower home affordability, respectively.…”

How and Why U.S. Single-Family Housing Became an Investor Asset Class

“…31 In Atlanta, where Invitation Homes accounted for over one-third of all institutional purchases of distressed single-family properties between 2011 and 2014, institutional investors paid 6 to 12 percent less than individuals making equivalent purchases in the same period. 32 In Florida, the range of discounts was comparable. 33 In May 2013, meanwhile, Blackstone reported that the average price paid for the approximately twenty-five thousand single-family homes it had acquired nationwide by that juncture had been just $153,000, versus an estimated average 2006 value for those homes of $303,000-a stunning measure of market distress and cash-buyer power.…”

The Impact of Rental Housing on Neighborhood Racial and Social Integration

“…The lion's share of the investment in single-family rentals has originated from institutional investors(Smith and Liu, 2017;Mills et al, 2016) Mills et al (2016). conclude that these investors are in for the long haul and do not intend to liquidate their rental holdings anytime soon.…”