Cash-offer competition

DeWayne Gaines and his wife were driving down a busy interstate in San Antonio two years ago when his cell phone rang. The couple had recently placed an offer on a house in one of the hottest real estate markets in the United States, and they were confident they’d win. While staying within their loan range, they had bid above the developer’s asking price.

But on the phone their real estate agent delivered bad news: With multiple offers in hand, the developer had chosen another offer.

“It was pretty disheartening because some of the homes were really nice, I mean really nice, and were just affordable,” said Gaines, 43, a cybersecurity expert and father of three who was renting an apartment for $1,900 a month at the time. “But we would lose them every time because someone else was putting in cash above or someone was waiving their inspections and paying the closing costs.”

The housing market peaked last year after a 10-year run and has since slowed considerably, but as home prices and interest rates see-saw across the nation, institutional investors with all-cash offers continue to make home purchasing more difficult for traditional buyers. That includes financially established families like the Gaineses, low-income families, and minority buyers who are less likely to own their own homes.

A real estate agent tours a home for sale in San Francisco. Justin Sullivan/Getty Images

Definitions of a real estate “institutional investor” vary. “Mom and pop” investors who own less than 10 properties hold the majority of U.S. rental homes, and they ­purchased nearly half of single-family ­properties sold in the first quarter of 2022, according to a CoreLogic report. Large investors, with 101 to 1,000 properties, and mega investors, with 1,000 or more (such as Blackstone Real Estate, Zillow, Redfin, and Opendoor), purchased one-fifth of properties sold during the same period.

In some cities, the percentage of homes purchased by institutional investors is significantly higher—46 percent in San Antonio in 2021, according to the National Association of Realtors. (The association defines “institutional buyers” as companies, corporations, or LLCs.)

For U.S. families, owning a home remains the single largest investment and source of wealth growth. The median wealth of homeowners in 2019 was $254,900—approximately 40 times the $6,270 for renter households. Brian Paris, who teaches first-time buyers how to save and build wealth through homeownership, is ­trying to tip the scales.

“If I’m a first-time buyer, I now have fewer homes to choose from to start my journey,” said Paris, president of the San Antonio chapter of the National Association of Real Estate Brokers. “So of course when that ­happens, we become more of a nation of renters, which makes it challenging to accomplish your family’s future long-term goals.”

First-time buyers, often low-income or minority households, typically need down payment assistance that requires extra time and forms filled out before they can close on a house. Many homeowners accept cash offers and quick settlements rather than wait for buyers navigating the lengthy process for ­federally backed loans. In the year ­ending June 2022, just one-quarter of buyers purchasing a home as their ­primary residence were first-time buyers, a 40-year low.

Corporate investors point to the upside of their involvement in the housing market. During the Great Recession in 2008, institutional investors helped stabilize communities by purchasing foreclosed or distressed properties in hard-hit cities. Blackstone’s Home Partners of America, one of the largest real estate companies, announced in January 2022 it would invest $1 billion in buying homes with the intent to give low-income tenants a roughly 10 percent discount on rent and an option to buy later.

There’s no shortage of bank or government programs to help Americans achieve the homeownership dream. The Department of Housing and Urban Development provides money to cities that provide grants to eligible home buyers. And the Biden administration proposed several initiatives last May that would increase down payment assistance and expand grants and loans to builders to construct affordable housing. (Housing analysts at the American Enterprise Institute predict that offers of down payment assistance and credit easing may increase demand, drive up prices, and hurt those whom policymakers are trying to help.)

In the private sector, Bank of America provided $85 billion in home loans in 2021 and announced in August it is relaxing loan requirements for low-income and minority borrowers in Charlotte, Dallas, Detroit, Los Angeles, and Miami. The bank is waiving down payments, closing costs, mortgage insurance, and minimum credit scores for eligible borrowers.

The Gaineses, who looked at 50 to 60 homes and made offers on 15 to 20, gave up their search for a home in San Antonio and moved to Virginia in 2022 for a new job and another home search. For now, they are renting a townhome—and presumably paying down the landlord’s mortgage rather than their own.