Why Are Housing Prices So High? Survey Offers One Key Theory
Written by
Yaël Bizouati-Kennedy
Edited by
Chris Cluff
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Home prices have continued to climb in the past few months, and combined with stiff mortgage rates and low inventory — partly due to the “lock in” effect of owners wanting to stay put with the low mortgages they secured a few years back — this scenario is making the road to homeownership very difficult.
In fact, the latest S&P CoreLogic Case-Shiller Index — released May 28 — found that prices reached a record high in March.
And now, some blame an additional culprit for these skyrocketing prices: private equity firms.
A recent CivicScience survey found that 55% of Americans cite private equity as having a “significant impact” on housing prices in their area, with Americans living in Western states being 11 points more likely than those in the Midwest to attribute high housing costs to private equity investors.
How Do Private Equity Firms Impact Home Prices?
As Greg Clement, CEO of Realeflow, explained, private equity firms are sometimes seen as villains in the housing market.
“They swoop in with vast amounts of capital, buying up homes in bulk and transforming them into high-priced rentals,” he said. In turn, this practice significantly reduces the number of homes available for purchase by regular families, driving up demand and prices. Moreover, private equity firms are known for their aggressive renovation strategies, flipping houses to maximize profit margins, which in turn escalates property values and rental costs.
Another interesting factor in their favor: high interest rates.
“Private equity firms like high interest rates right now, as they are the only ones able to afford to buy. People who can pay cash don’t care about interest rates and that changes the game,” said Dutch Mendenhall, founder and CEO of RADD Companies.
“So they’re gathering these assets, then the rates go down and they are going to sell them back at high prices. It’s the divide in America between the super-wealthy and the average middle-class Americans. The trend of gathering assets is never going to stop,” he added.
Private Equity Firms Outbid Average Buyers
In addition, Mendenhall noted that with their deep pockets, private equity firms can outbid average buyers — often paying more than the market rate, which drives prices higher.
This phenomenon is also further aggravating the scarcity factor, which is already putting a lot of pressure on prices.
As Realtor.com economic research analyst Hannah Jones said, climbing home prices are a product of limited inventory relative to buyer demand. An increase in investor demand, on top of existing buyer demand, can up the ante and put additional strain on for-sale inventory, Jones concluded.
“Recent research suggests that investors only made up about 11% of home purchases last year, but buyers may find the possibility of competing with an investor to be daunting,” she said.
She added that investors are often more flexible and in a better financial position to compete — usually by offering cash deals or making an offer over asking price. Investors also generally purchase more homes than they sell, which worsens scarce inventory conditions, especially in markets with a large investor presence, Jones said.
Why Do Western States Feel Private Equity’s Purchasing Power the Most?
The Civic Science survey found that 61% of Americans living in the West cited private equity as having a significant impact on housing prices in their area. That figure can be compared to 55% of those polled in the South saying so, as well as 53% in the Northeast and 50% in the Midwest.
According to Mendenhall, there are several factors driving this trend.
First, high demand and low supply: The Western U.S. has seen significant population growth and a few economic booms, especially in tech areas such as California and Seattle. This has lead to high demand for housing, he said.
In addition, he noted that private equity firms target high-growth markets for better returns.
“The West, with its booming economies and rising property values, is a top target,” he added.
Finally, a combination of geographical constraints and strict regulations in many Western cities — regulations which limit new housing developments, making existing homes more valuable and attractive to investors — as well as a rapid increase in home values in the region, make it a lucrative spot for private equity looking for high returns.
Other experts echoed the above sentiment, such as Realeflow’s Clement, who deemed the West “ground zero for private equity’s tactics in the housing market.”
Will This Trend Continue?
Yes and no, according to Jeff Holzmann, COO of RREAF Holdings.
“The equilibrium is a moving target. Certain factors take a long time to change,” he said. “Supply can’t be adjusted overnight since it takes a long time to develop, build, and stabilize large real estate projects. But other factors such as demand may vary depending on fashion, political climate and even population mix. While the trend is currently projected to last, it will certainly come to an end — with possibly even a ‘correction period’ behind it.”
Macro-economic factors can also affect this trend. For instance, if the economy keeps growing in the West, demand for housing will likely stay high, continuing the trend. However, an economic downturn or a shift in migration patterns could change things, according to Mendenhall.
In addition, more regulation and policies to control housing prices — or limit private equity influence, which many cities and states are considering — could reduce their impact.
“So, the trend of private equity affecting housing prices is likely to continue, especially in high-demand areas like the Western U.S., unless there are major regulatory or economic changes,” Mendenhall said.
Yet, other experts also stressed the fact that other factors are also to blame for the high prices. Realtor.com’s Jones, for instance, said that while investor activity has likely had a noticeable impact in some areas, the overall lack of home supply relative to demand has likely had more of an impact on home prices.
“Home construction has lagged household formations and opened up a 7 million home gap over the last decade,” she said. “The homeowner vacancy rate has fallen significantly in this time frame as lower rates of construction mean fewer homes are sitting empty, and there is generally less slack in the housing market, which drives prices higher.”
More From GOBankingRates
