The rise of high-tech real estate investing platforms and their effect on housing affordability
Real estate tech startups are making it easier for people to invest and manage property. But critics argue that these software companies and their business models are gobbling up the limited amount of available housing in the process, driving up costs and pushing out first-time buyers.
These investing services encourage users to invest in multiple properties, taking away already scarce housing inventory, said Tram Tran-Larson, a community engagement manager for the Housing Justice Project, a Seattle-based legal aid clinic that provides eviction defense for low income tenants and is part of the King County Bar Association. This drives up costs for available housing, she added.
But researchers argue that the lack of affordable housing has more to do with the limited supply, not the proliferation of tech-enabled real estate investing platforms.
“Housing supply is the fundamental problem long-term,” said Sheharyar Bokhari, a senior economist with real estate giant Redfin. “If you had homes for everybody, maybe the investors wouldn’t even be in the market because they wouldn’t have to bank on so much demand.”
Arrived Homes, a Seattle-based startup that offers fractional ownership of rental properties, has funded about $50 million worth of real estate. That equates to about 150 properties in about 20 American cities, said Ryan Frazier, CEO and co-founder.
“I definitely understand their criticism, especially as housing prices are going up,” he said about the pushback against real estate investing platforms. “We certainly don’t want to take inventory away from people who are looking to buy homes that they want to live in.”
Arrived currently has about 100,000 people signed up for its service, with about 10,000 users actively investing. On average, there are about 200-300 investors per house.
Frazier added that there is an “equal interest and demand in having quality rental housing,” especially as the cost of borrowing is rising and more homebuyers are moving more frequently, he said.
The demand from investors interested in purchasing real estate as an alternative asset has always been high, regardless of the presence of real estate investing apps, said James Young, director of the Washington Center for Real Estate Research at the University of Washington.
He asked: “Should we blame the personal computer for high house prices?”
Factors such as stagnating incomes that haven’t kept up with housing cost increases and a slowdown in housing construction are making it difficult for many Americans to afford homes. There was also a flurry of property investment during the pandemic, when investors took advantage of record-low mortgage interest rates.
About 70% of Americans say they have a harder time purchasing a home than their parents did, according to a survey by Pew Research. The median home price for the first quarter of 2022 was $428,700, according to data from the Federal Reserve.
Investors accounted for a record 28% of U.S. single-family home sales in the first quarter of 2022, up from 19% from the same quarter last year, according to a recent report by the Harvard Joint Center for Housing Studies. That is “well above” the 16% market share averaged between 2017 and 2019, the report said.
The market share of homes owned by investors has been steadily growing in Seattle and Portland, according to data provided by Redfin, which classifies such investors as a person or business that owns at least four properties.
In the first quarter of 2022, investors owned roughly 10% of the overall Seattle housing supply, compared to 3% in the first quarter of 2000. Investor market share in Portland rose from 7% to 12%.
The growth in market share in the Pacific Northwest is relatively subtle when compared to investor activity in the Southeast, where investors accounted for more than 30% of home sales in Atlanta, Jacksonville and Charlotte in the first quarter of the year.
Bokhari, the Redfin economist, said investors are driving up costs in places such as the Southeast, where private equity and Wall Street firms are buying up large swaths of property. In contrast, he said, the impact that real estate investing startups have on supply is relatively small.
He said he hears the most frustrations toward real estate investing startups on the micro-scale. These investing platforms often bring cash to the table and they are capable of outbidding first-time buyers, he added.
“That basically gives them an unfair advantage because they’re pooling so much money, and have bargaining power,” he said. “Given the state of the market, it creates frustration for average American buyers.”
In King County, home buyers are sometimes paying $100,000 to $200,000 over asking price, Tram-Larson said.
Asked about competing with first-time home buyers, Frazier said Arrived often avoids bidding on properties that would otherwise be owner-occupied.
Young, the UW director, said investing in real estate is different from investing in other assets, like stocks or bonds, because of the homogeneity between assets. Each property comes with its own set of problems, takes up physical space, and has utility. This means real estate assets are not easily liquidated, he said.
“In real estate markets, you can raise all the capital you want through an app,” he said. “But it still doesn’t mean you’re gonna be able to close any faster than anybody else.”
Shkelqim Kelmendi, executive director of Housing Connector, a nonprofit that provides housing assistance to those experiencing homelessness, said that he does not see real estate investing startups as a threat to affordable housing.
“Innovation is not bad,” said Kelmendi, who recently partnered with Zillow to launch an instrument to help private property owners and landlords rent to those experiencing houselessness.
He said that as real estate investing startups scale and have more bandwidth to commit to social impact causes, his company would be interested in exploring opportunities to work with them to tackle the vast housing issues in our country.
He asked, “Are there ways that we can leverage or collaborate with some of these new companies and this new innovation to still meet the demand that we have on the streets?”
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