Real Estate Investor Slowdown

Real estate has been weird for the last couple of years, especially for real estate investors. We've had COVID, we've had this 5.5 million home deficit in the housing market, and then we've had this rise of institutional buyers in the marketplace. As a real estate investor, I've always been taught that you make a lot of your money at the purchase stage so you want to buy a home priced right.

All that's been thrown out the window over the last couple of years with this rise of institutional home buyers. They're buying homes at list price, often $20,000 to $30,000 above list price, and buying hundreds and even thousands of homes at a time. So why did they do this? It all came down to yield spreads and cap rates.

The cap rates continued to go down, but it didn't scare off institutional buyers. The reason for that was interest rates were so low and the cap rate was at a certain amount that they were actually still able to make a spread on the amount of money that they were borrowing, oftentimes, they were getting even below-market interest rates that were already so low that they were still making money in this market.

The other reason institutional buyers were placing their money in real estate is they're looking for a place to park their money for yields. They couldn't get their U.S. Treasury yields because they were so low at the time, now we've got a different scenario. A six-month Treasury yield is now up to 4.7%, so you now have this place where you can park your money with a decent yield. That's causing a lot of institutional buyers to slow down because they have other places to park their money and that 4.7% is close to a lot of the cap rates that they're getting on some of their institutional real estate buyers right now.

Now it’s a tale of two stories. You have institutional buyers that are starting to slow down because they can't just buy a thousand homes, pay $30,000 above list price, and expect to win in this market with Treasury yields where they're at. Then you also have the traditional investor that's bracing themselves for some potential deals for a short window of time as new construction is on sale and there may be some motivated sellers over the next 90 days.

Based on the headlines, it looks like the Fed is starting to achieve some of its goals in returning real estate to normalcy. However, the big challenge is the smart money is not buying it. The biggest challenge that we have in this country is undersupply and the Fed is not addressing the undersupply in this country so it looks like institutional buyers are going to be gearing up to buy again in the future based on this undersupply in the marketplace.

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