The Impact of Large Investors on the Portfolio Optimization of Single-Family Houses in Housing Markets

Abstract

As a consequence of the real estate market crash after 2008, large investors invested a significant amount of wealth into single-family houses to construct a portfolio of rental dwellings, whose income is securitized in the capital. In some local housing markets, these investors own remarkable numbers of single-family houses. Furthermore, their trading activities have resulted in a new investment strategy, which exacerbates property wealth concentration and polarization. This new investment strategy and its portfolio optimization inspire curiosity about its influence on housing markets. This paper first aims to find an optimal portfolio strategy by employing an expected utility optimization from the terminal wealth, which adopts a stochastic model that includes a variety of economic states to estimate house prices. Second, it aims to analyze the effect of large investors on the housing market. The results show the investment strategies of large investors depend on the balance among economic state, maintenance cost, rental income, interest rate and investment willingness of large investors to housing and their effect depends on the state of the economy.

Optimal Portfolios for Large Investors in Housing Markets Under Stress Scenarios: A Worst-Case Approach

“…Following the crisis, large investors, such as private equity firms, institutional investors, and real estate investment trusts, developed a new business type that relies on constructing a portfolio of single-family housing units for rental income purposes. These large investors are especially the biggest buyers in struggling local housing markets where, generally, housing prices increase faster than in healthy housing markets Yilmaz et al (2023). Consequently, after the sub-prime mortgage crisis, large investors have dominated local housing markets in return for benefiting from the leading edge of rising house prices and the rental income in their portfolio Allen et al (2018).…”

“…While educated strategies can mitigate risk, investors must recognize that no algorithm or mathematical model can shield them from housing markets' inherent volatility and idiosyncrasies. Despite these, housing prices are assumed to follow a geometric Brownian motion in classical calendar times in many studies (e.g., Kau et al (1993Kau et al ( , 1995; Yilmaz andSelcuk-Kestel (2018, 2019); Yilmaz et al (2023Yilmaz et al ( , 2022; Sharp et al (2009); Azevedo-Pereira et al (2003)). However, these studies neglect sudden price falls by an unknown factor during crash times.…”

Application of Mean-Variance Model in the U.S. Capital Market

“…Under the background of the pandemic, researchers studied how to use portfolio selection to select Electronic Company Stocks to achieve the optimal portfolio [16]. In the real estate market, Yilmaz, Korn and Selcuk-Kestel [15] researched the optimal portfolio in the housing markets. During the period of COVID-19, some researchers use portfolio to think about the connection among a number of different fields, such as fine wine, copper, shipping and commodities and so on.…”