Corporate homebuyers plunged deeper into metro Phoenix’s housing market during the past few months, driving up prices and giving first-time buyers unwanted competition for an already tight supply of houses.
Big investors and so-called "iBuyers" snapped up more than 1,900 Valley homes in September, according to the Arizona Regional Multiple Listing Service. That’s almost five times as many that were bought by corporate buyers in January.
Big investors, also known as institutional buyers, are spending hundreds of millions of dollars purchasing Valley houses, like they did during the crash a decade ago, and turning them into rentals. Rapidly rising rents are drawing these deep-pocketed buyers even as Phoenix home prices keep hitting monthly records.
IBuyers Opendoor, Offerpad and Zillow, also known as instant buyers because they do cash deals quickly and mostly online, flip houses for a profit.
The buying sprees of these corporate buyers are shutting the door on a growing number of traditional buyers who plan to live in the homes. Big investors and iBuyers purchased 21% of all Phoenix-area houses that sold last month.
Regular or traditional buyers who plan to live in their houses purchased more than 90% of the metro Phoenix houses that sold during the summer of 2020, but that rate has fallen to 74%.
“Currently, institutional buyers are all in, and iBuyers are on a buying spree,” said housing analyst Tom Ruff with ARMLS’ Information Market group.
But Ruff is puzzled about these buyers paying top dollar in metro Phoenix now.
“The rule for real estate investing has always been to buy undervalued assets,” he said. "We are still very much in a seller’s market with inadequate supply to meet demand."
The in-balance between demand from buyers and the number of Valley homes for sale has pushed prices up to a record high, and the market definitely isn't undervalued, say housing analysts.
Part of Ruff’s concern is about how big investors are buying from iBuyers in the Valley.
For example, in June a traditional buyer purchased a new home for $382,000. That home was sold to an iBuyer for $450,000 in August. Then in mid-September, an institutional buyer paid $470,000 for it.
The house is in a Phoenix-area subdivision where 38 homes with an average price of $383,000 have sold so far this year. The neighborhood still has 17 lots available, and the iBuyer sale to the institutional buyer sets a new higher comparable sale price.
The price of the home climbed 23% in about four months. Metro Phoenix’s median home price climbed less than 3% to $410,000 during that timeframe.
In September, big investors bought 116 Valley homes from iBuyers, according to ARMLS.
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Las Vegas real estate agent Sean Gotcher posted a popular TikTok video with a riff about how a corporate buyer was behind a scheme to exploit prices by purchasing dozens of houses in a neighborhood for one price.
The company then buys another home for $40,000 more to boost the value of the first homes it bought, he said.
The video got almost half a million likes.
IBuyers paid a median price of about $430,000 for the more than 900 Phoenix-area houses they bought in September, according to ARMLS.
As of Oct. 1, iBuyers had an inventory 2,775 metro Phoenix homes that they had purchased but not resold.
Ruff said that inventory will most likely lead to an increase in the supply of homes for sale.
Zillow announced earlier this month it would stop buying homes for the rest of the year as it worked on selling its backlog.
Metro Phoenix’s tight supply of rentals and rapidly rising rental rates are drawing big investors, and rising home prices aren’t deterring them.
Rents on Valley single-family homes jumped 19% during the past year, according to national real estate data firm CoreLogic. That’s the biggest increase in the U.S. and almost double the national average rent increase.
“Investors see soaring home prices as an opportunity,” said real estate firm Redfin's senior economist Sheharyar Bokhari. “With housing values consistently on the rise, solid returns are pretty much guaranteed — especially when you’re an investor who has access to extremely cheap debt.”
Institutional investors own 25,199 rental homes across the Valley now, according to Ruff. That figure doesn't include iBuyers.
One of the biggest corporate buyers this year is Dallas-based Roofstock, which under the name RS XII Phoenix Owner 2 LP, has spent more than $350 million scooping up more than 1,200 metro Phoenix homes this year, according to property records. All are now rentals.
Scottsdale-based Progress Phoenix, which is part of Progress Residential, has spent more than $220 million to buy almost 700 Valley homes so far this year. All are also now rentals.
Most of the homes were purchased one at a time, and some of the houses weren’t listed for sale.
Metro Phoenix leads the nation for tenant demand for single-family rentals, according to John Burns Real Estate Consulting.
That’s partly because so many would-be first-time buyers are getting priced out of the market and now must pay more to rent homes.
Real estate investors purchased a record 67,943 U.S. homes in the second quarter of 2021, according to Redfin.
The Biden administration is addressing how the investor-buying spree is keeping many people from getting homes of their own.
“Large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes, making it harder for aspiring first-time and first-generation home buyers," a White House statement said.
"These purchases are unlikely to meaningfully boost supply in the lower-cost portions of the rental market, as investors charge more for rent to recoup higher purchase costs,” the White House statement said.
To help first-time buyers, the U.S. Department of Housing and Urban Development is going to give families and nonprofit organizations a longer window of time to bid on foreclosed FHA-insured or HUD-owned properties before offering the properties to investors.
A big investor buying boom took off in 2012 after the foreclosure-led crash.
Then investment mogul Warren Buffett helped spark the homebuying boom when said he was considering purchasing a couple of hundred thousand U.S. homes and keeping them for the long term.
Investors listened to him and poured into the market, buying bargain-priced homes from lenders that had taken them back. Metro Phoenix was a mecca for foreclosures and big investors that bought tens of thousands of the bank-owned homes at auction. The median Valley home price was $122,500 then.
Now with metro Phoenix's median price expected to hit $415,000 in October, Ruff is wondering if it’s time for “the smart money to reevaluate their mathematical formulas” for investing in single-family homes.
"Investors' appetites can change quickly,” he said.