Buy-to-Rent Investors and the Market for Single Family Homes
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Buy-to-Rent Investors and the Market for Single Family Homes Walter D’Lima 1
& Paul
Schultz 2
# Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We examine the impact of house purchases by large buy-to-rent investors on local real estate markets. First, we present micro-level evidence of positive externalities from institutional entry. We show that returns on repeat sales of properties near purchases by buy-to-rent investors are significantly greater if the repeat sale concluded after the buyto-rent purchase rather than before. Secondly, we highlight the potential channel underlying such an externality as a supply side effect. Specifically, we show that properties outside the price range normally paid by buy-to-rent investors experienced smaller gains after nearby buy-to-rent purchases. Thus, buy-to-rent investors appear to increase the value of properties in an area by reducing the local supply. Lastly, we document mortgage market effects due to institutional purchases and related supply effects. We show that mortgage use increased after the buy-to-rent purchases of nearby properties and that the increase arises from existing lenders that operate in the market rather than new lenders entering the market. Keywords Institutional investor . Residential market . Housing supply . Mortgage market
externalities JEL Classification R0 . R3
Introduction In much of the country, real estate prices increased steadily over 2000–2006, declined sharply from 2006 to 2009, and continued to fall into 2011. A number of authors claim
* Walter D’Lima [email protected] Paul Schultz [email protected]
1
Strome College of Business, Old Dominion University, Norfolk, VA 23529, USA
2
Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, USA
W. D’Lima, P. Schultz
that prices were irrationally high in 2005–2006. Less appreciated is that in 2010–2013, some value investors believed that single family home prices in some cities presented a historic buying opportunity. Warren Buffett, on February, 27, 2012 on the CNBC show Squawkbox, said he would like to buy “a couple hundred thousand” single family homes if it were practical to do so. Sophisticated investors recognized this opportunity and large scale buy-to-rent investors entered the market for single family homes. Typically, such large investors focused their investment strategies in the commercial real estate market and in structures that involved multiple rental units. However, technological advances reduced the transaction costs for managing properties that are geographically dispersed. Such investors bought a large number of homes, implemented renovations and then rented to generate cash flows. In this paper, we use over 100,000 single family home purchases by eight large buyto-rent investors in seven states to examine the relation between house purchases by these investors and nearby property price appreciation. We find that the buy-to-rent investors purchase homes in areas that had suffered large price depreciation. Using repeat s
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