Repair-and-flippers are going through elevated competitors in the actual property market

The U.S. housing market has gotten so hot that fix-and-pinball machines, usually squeezed by Wall Street-backed firms, are now competing more strongly with common American house hunters.

According to a new survey by real estate data firm RealtyTrac, investors buying residential property are seeing more competition from citizens looking to buy homes than from their traditional competitors, large public institutional investors. The smaller investors tend to compete with the Wall Street-backed companies who pool the loans and sell bonds to mutual funds to buy houses, either to repair or rent them out.

The fierce competition has created headaches for house flippers ranging from soaring property prices to higher material costs. Rising demand and limited properties available have sparked bidding wars in certain parts of the US over the past few months, even for ordinary homes.

"Mom-and-pop investors make up a large percentage of the real estate investment market – they own nearly 90% of the single-family homes rented across the country," said Rick Sharga, executive vice president of RealtyTrac. "It is interesting that they are more difficult to compete with traditional homebuyers than larger investors, considering that these homeowners are usually at a disadvantage compared to investors who can often do business faster with cash or non-traditional financing are."

The 150 investors surveyed are based in the United States and are almost evenly split between fix-and-flip investors and those who buy real estate to hold and rent. The group is representative of the mom and pop investor segment and plans to buy one to five properties in the next year.

SFR bond pushback
The capital that has flooded the single-family rental industry as a result of the post-pandemic exodus to the suburbs, as well as rising rents, has also driven demand for bonds backed by single-family rentals.

Earlier this year, spreads on some asset-backed securities covered by single-family rentals hit historically low levels due to strong investor demand, said Caroline Chen, senior research analyst at Income Research + Management in Boston.

Pre-pandemic AAA tranches were typically in the 90bp to 100bps swap benchmark range, but a February transaction from Progress Residential landed at 45, an all-time low, Chen said in an interview this week. The BBB was 120 basis points, compared to the pre-pandemic range of 180 basis points.

"Since then, investors have started to push back," said Chen, expanding the AAA SFR security back to 65 basis points and BBB to 140. Due to spreads tightening this year, SFR ABS has lost some of its relative value.

"Additionally, structures are more issuer-friendly these days," Chen said, noting that in some recent deals, issuers have been allowed to sell real estate collateral from the transactions to monetize the positive real estate appreciation (HPA).

That may be okay with today's HPA uptrends, but if prices turned down, fewer homes backing a negative HPA loan would change the dynamics of the business and make it riskier for investors, Chen said.

The two biggest challenges investors cited were inventory shortages and rising property prices, followed by competition from traditional homebuyers and rising material costs, the survey found. They assume that these four points will remain the biggest obstacles for the next six months.

Interestingly, access to capital was not seen as a problem, despite the perception that large institutional investors are devouring residential properties to rent. Instead, regular homebuyers were the bigger threat.

"It just shows how unbalanced supply and demand are in today's residential real estate market," Sharga said.

The majority of the respondents believe that property prices will continue to rise and do not expect a large number of foreclosures to hit the market once the state moratorium and forbearance programs expire. About 45% of investors believe that the real estate investment market is worse or much worse today than it was a year ago, but about 40% believe that it will be better or a lot better in six months.

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