Housing market ‘extremely volatile’ with private equity accounting for a third of the sales: Expert

Inflation and recession fears turned a once red hot housing market into a cool down.

Fluctuating mortgage rates dropped below 5% and then up again, with the rate on the 30-year fixed mortgage at 5.22% from 4.99% the week prior.

“Housing used to be a very stable asset class and now it's extremely volatile,” Glenn Kelman, CEO at Redfin, told Yahoo Finance Live (video above). “One reason is that institutions used to account for about a quarter of the sales, but now it's about a third. You have real estate investment trusts (REITs) all active in the single family home market.”

Redfin analysis showed real estate investors bought 18.4% of homes sold in the fourth quarter of 2021, up from 12.6% a year earlier.

This year has been what some experts have called the worst housing affordability crisis, with many entry level and first-time buyers pushed out of the market.

For homebuyers wondering why it’s harder to win a bid, it may have something to do with the fact that they're not bidding against another family, but instead an institutional investor.

Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-NY 14th District) have criticized institutional investors for buying up homes, squeezing out first-time buyers and turning the properties into overpriced rentals.

When institutional investors buy and sell properties, the mindset is different from a traditional homebuyer or seller.

“An iBuyer is going to price ahead of the market and mark it down every week until it sells [and] makes the market more like the stock market, more volatile, more up and down,” Kelman said. “If you've lived in a house for 30 years and raised your kids there, there's no way you're going to mark it down after two weeks on the market.”

The strategy of private equity and REITs has caused a reduction in home prices, especially in areas that received a pandemic boom from domestic migration due to the ability to work remotely — like Boise, Salt Lake City, and Denver.

The upside is that this liquidation is causing home prices to come down, depending on where you are. If you’re still in the housing market, you may benefit — not good news if you’re selling your home.

“[REITs and iBuyers] are going to liquidate their inventory much faster, and they're the ones causing a correction more than anything,” Kelman said. “It's good when home prices go down.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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