Look out, first-time buyers. Your biggest competition is not other real estate newbies like yourselves, but mom and pop investors trying to begin a stream of rental income. Darn you, mom and pop! A recent report reveals that these deep-pocketed investors are focusing on the lowest priced segments of the market: smaller homes both in suburban and urban areas. The National Association of Realtors® released the 2016 Investment and Vacation Home Buyers Report a week ago, providing insight into consumer-driven home purchases. The report, which has been conducted annually since 2003, will be based upon a survey of U.S. consumers who purchased a house in 2015-whether it’s their primary residence, an investment home, or a vacation home.
Why Investors still are beating out First-Time Home Buyers
Not surprisingly, investor buyers have substantially higher incomes than both median-income households and primary residence buyers: The common buyer associated with an investment home in 2015 had a median household salary of $95,800. So part of the secret of their success is simple: They have the money and credit to get it done. Investment home buyers are less likely to finance their purchase using a mortgage. Furthermore, when they do, the vast majority put down more than 20%.
In fact, the typical investor mortgage had a down payment of 26% compared with an average of 11% for an owner-occupier, based on our analysis of 2015 purchase mortgage activity from Optimal Blue (an enterprise lending software company whose platform handles more than 25% of mortgages in the U.S.). Likewise, an investor has a qualification advantage of a lower debt-to-income ratio as well as much higher credit scores.
Unfortunately, it’s quite tough for the ordinary buyer-and especially a first-time buyer-to contend with that.
The only advantage the investor doesn’t have in the mortgage market is in their interest rate-owner-occupiers have an advantage of 50 basis points, on average. (A basis point is 0.01%.) Investors pay a greater mortgage rate because of the fact that they will not live in the house as a primary residence.
So, despite the fact that investors are generally more appealing to lenders-lower risk through higher down payments, lower DTIs, and higher FICO scores-they’re still paying higher rates (and therefore making lenders more money with less risk). It’s no surprise that these folks were less likely to report having problems in the mortgage application and approval process.
And some investor buyers don’t have to deal with the mortgage process at all. Buyers who can pay cash have a big-time advantage in this limited inventory market, since they may make offers without a financing contingency. And no-contingency offers can close a lot quicker.
Most owners of single-family rental housing in the united states are like the mom and pop investors described within this report. Their primary motivation: to get rental income from the property. Due to the near-zero interest rates, few investments can provide the type of income that rental properties can. And also the U.S. had a record number of renting households in 2015.
Demand for rental properties is probably going to remain strong for quite a while as the largest generation of all time (millennials) slowly ages into prime home-buying years amid our tight supply and tight credit environment. Meanwhile, older households continue to recover from the foreclosure crisis, which is the reason the homeownership rate today is near a 48-year low.
The ability to avoid financing or put down substantially greater than a typical buyer who would utilize the home for a primary residence provides the investor the upper hand when competing for the limited supply of smaller and lower-priced homes. At the same time, this is also the segment of the market that we are not seeing homebuilders address. The stock of smaller and lower-priced homes is not growing, and with every investment purchase, you will find fewer homes on the market to sell.
Looking forward, this year is likely to see a similar pattern of buyers against the backdrop of growth in sales. All buyers who are financing purchases with a mortgage have the added advantage of lower rates compared with this past year, yet credit remains very tight. Each step of purchasing a home today is much more difficult: qualifying for a mortgage, locating a home, and successfully bidding to get a contract.
The biggest challenges will remain the limited supply and tight credit issues that tilt the balance toward households with higher income and exceptional credit-these households are the most likely to buy a vacation or investment home.