Can Hedge Funds or Institutional Investors Cause A Real Estate Market Crash?
Last Updated on March 29, 2023 by Mark Ferguson
Hedge funds and institutions began buying houses in huge numbers during the last real estate market crash. Many people thought the large companies and funds buying houses would fail miserably because of the difficulty of repairing and managing homes on a large scale. However, for the most part, the hedge funds and institutional buyers have done very well in the residential real estate market. These mass purchasers of homes are still buying homes now even as the markets have increased in value significantly. Many buyers find themselves competing against the large companies for houses and a common question I see is will these large buyers cause a housing market crash or decline if they decide to sell their inventory and leave the real estate market? No one knows for sure what the hedge funds will do but I can’t imagine they would shoot themselves in the foot by selling all of their properties at once. The large institutions may decide to sell some properties and take some profits, but I don’t think they would ever sell enough to cause a drop in the housing market and they may not even own enough houses to make an impact either.
Why did hedge funds start buying real estate?
At the end of the last housing crash, major funds like the Blackstone Group decided they should be buying tens of thousands of residential houses. They saw the low prices and the rents that could provide great yields compared to those lose prices. They bought properties from the MLS, from the foreclosure sales, and directly from banks as well.
At the end of the housing crisis, the government was putting tremendous pressure on banks not to foreclose on homes. One way the banks could avoid that government pressure was to sell the properties to someone else. Many banks and even HUD (department of housing and urban development (the government)) sold pools of foreclosed properties to hedge funds and institutional buyers. The funds could get massive price discounts by purchasing tens of thousands or even hundreds of thousands of homes at once in one transaction.
Some of the owners of these properties would fix them up and sell them, but many held them as investments. The hedge funds and institutional investors still own a lot of houses and they are still buying!
Will there be another housing crash?
What are hedge funds and how did they buy?
Hedge funds have been around for a long time, but they usually invest in stocks, not houses. Basically, a hedge fund takes money from investors, usually very rich investors, and invests that money for those investors. When hedge funds buy houses they use investor’s money to buy those houses. That money is cash. The hedge funds are not using loans or debt to buy the houses. This is important to know because the hedge funds obviously do not want to lose money but they also have a lot of flexibility with how they buy and sell since they use cash.
Blackstone verses Blackrock
A lot of people think that Blackrock and Blackstone are the same fund. However, Blackrock is the largest fund in the world and not the same as Blackstone. The government has partnered with Blackrock to buy bonds and invest, but they are not the same fund that was buying houses. You may have heard the stories that the government and Blackrock are trying to make every American a renter by purchasing all the homes but this is not true since Blackrock doesn’t buy homes!
Would the hedge funds ever sell their properties in bulk?
Many people are scared that the hedge funds would sell their properties all at once tanking the market. I guess it is possible that this could happen but is it likely?
The hedge funds are run by really smart people, in fact, many of them are run by billionaires. They did not become billionaires and trustworthy of other billionaires to invest their money by being dumb with money. If the hedge funds were to sell all of their houses at once it is possible they could hurt the market, at least the local markets where they own most of their homes.
Even the banks realized at the end of the last housing crash that it was not smart to sell all of their houses at once! That chopped their own legs out from beneath them since they knew they had more foreclosures and houses coming their way the worse the market got. The hedge funds would not have that problem since they are not lending money to homeowners. But they are still smart enough to know that if they sell all of their houses at once it could hurt the markets they are selling in and lower their profits when they sell.
I cannot see a scenario where it makes sense that the hedge funds would sell all of their houses at once and even if they did would it hurt that market that much?
How many houses do the hedge funds own?
The first thing to realize is that the hedge funds do not own houses in every market in the United States. They own houses in most major cities but there are hundreds of towns with no properties owned by hedge funds. If the hedge funds wanted to sell off everything, it would not tank the entire US market, but it could hurt certain markets where they own the most houses.
There are also many different hedge funds. Invitation Homes owns 80,000 homes in the United States and is currently the largest homeowner in the country. The Blackstone Group used Invitation Homes to buy up single-family properties in the US, but recently sold off most of their shares in the company after taking it public. There are about 83 million single-family homes in the United States. There is more than one hedge fund but there are not that many houses owned by hedge funds compared to the total number of houses in the United States. Invitation homes own .1% of all homes in the US so even if they sold them all at once, it most likely would not impact the market enough for anyone to notice except in a few markets where they own most of their houses.
Invitation Homes are still buying and recently said they have 1 billion dollars to spend on houses in the US. That sounds like a lot right? That would buy about 3,500 houses. Houses are very expensive and the hedge funds own a very small percentage of them. It is estimated that big investment companies own about 2% of all rental homes. Not 2% of all homes, just 2% of all rentals!
Should we be worried about a real estate market crash if the hedge funds are still buying?
The hedge funds are still buying houses. The hedge funds are run by really smart people who have almost unlimited resources to research housing and the markets. If the hedge funds are still buying real estate that would mean they do not expect prices to drop anytime soon. That is not a guarantee that prices won’t drop or that they are wrong but I like to look at where the big money is going and a lot of it is going into residential real estate. If you want to know where development is headed look to where Walmart or Home Depot is adding new stores because they do a ton of research into population movement. The same can be said for hedge funds and where they are buying.
Hedge funds are not only buying houses, but they are creating subdivisions and building new houses to rent out! Many of these developments are not in the big cities where they primarily bought after the foreclosure crisis but in the suburbs. They think the suburbs are a safer bet after Covid and the problems big cities had and still have.
Conclusion
Do hedge funds own a lot of houses? Yes. Are they planning to sell them all at once? No, especially since they are buying them and even building them. Even if the hedge funds decided to sell them all, could they crash the market? No. They might hurt some local markets where they own the most houses, but they simply do not own enough houses to cause a crash and why in the world would they cause a crash when it would hurt them so much?
This article is very poorly researched and includes many misleading assumptions about institutional investors. Just because the author has flipped 175 homes does not qualify him to act as an authority or to publish these not-well-thought-out speculations. Mark, if you’d like to learn more from someone who works at one of these institutions, please reach out.
You are welcome to say what is wrong right here.
Appreciate your article. It’s been my experience that hedge funds themselves don’t typically purchase properties directly, but instead fund business that in turn either acquire whole loans or liquidate small housing portfolios on the retail market. I’m happy to discuss this with your further.
The author keeps saying these institutional investors are led by “really smart” people. Just curious if these are the same “really smart” people that caused the 2008 crash? What this is doing is taking away the ability of individuals to build wealth through the equity in their home. This will be a long term negative for the next generation of Americans.
No, it is not the same people. It was mostly huge banks that did that and the government easing restrictions on loans. There are almost no hedge fund purchases in the grand scheme of things. The people who are buying the houses and pushing prices up are the people.