Wall Street didn't break the housing market

The affordability problem goes beyond institutional investors snapping up homes

Hello investors! If you’re new here, add your email below to get every edition of Opening Bell Daily in your inbox, free.

Hello! Welcome back from the long weekend.

The S&P 500 and Nasdaq are coming off a five-week winning streak and investors are banking on history: Stocks usually crush it in the summer before a presidential election, according to Bank of America.

More on that below — but first, a look into Wall Street’s role in the housing market.

Today’s letter is brought to you by iTrust Capital

Bitcoin has been one of the best-performing assets of the last decade. Yet if you turn to a traditional exchange, you have to pay taxes.

iTrust Capital offers tax-advantaged accounts so you can save money on taxes while still investing in crypto. Long-term investors understand the power of an IRA.

Institutional buyers didn’t start the housing crisis

The US housing market is tight, expensive, and losing momentum.

But not because of Wall Street.

Legislators and retail professionals alike often blame the lack of affordable homes on institutional buyers and private equity firms.

These massive companies, the thinking goes, invest, flip, and otherwise sit on a huge share of properties which ultimately makes it harder for Average Joes and Janes to enter the market.

The David-and-Goliath narrative is easy to support (see: GameStop) but that doesn’t make it accurate.

It’s true that financial behemoths have resources that far eclipse those of the typical American household, yet bidding wars rarely pit the two against one another.

The chart below from consultancy firm John Burns illustrates how institutional buyers snap up less than 1% of the 105 million single-family homes in the US.

Source: John Burns

Similarly, the National Rental Home Council estimates that big investors accounted for 0.74% of single-family home purchases at the start of the pandemic housing boom.

But again, the investors that have their names on Manhattan skyscrapers make up a nearly-invisible fraction of that.

“If anything, it’s shocking how small of a share big financial firms have in the housing market,” wrote Ritholtz Wealth’s Ben Carlson in a recent note.

To be fair, investors of all types — Airbnb managers, landlords, mom-and-pop rental owners — do account for about a quarter of home-buying today.

That’s roughly double what it was in 2002.

But ultimately, it’s not a matter of Eat the Rich, but Econ 101. The housing market’s snafu can be traced to more than a decade of under-construction after the 2008 housing crash.

Supply can no longer keep up with demand.

To that point, the Commerce Department reported Thursday new home sales in the US declined 4.7% in April — more than expected — to hit 634,000, seasonally adjusted.

That pullback in activity is a reflection of waning affordability and limited inventory. 

With mortgage rates hovering near 7% and home prices still elevated, many house hunters have been priced out of the market. Plus, homeowners who secured lower rates during or before the pandemic don’t want to move. 

That “lock in” effect keeps a swath of both buyers and sellers sidelined.

Torsten Sløk, Apollo’s chief economist, wrote in a note last week the US has an estimated deficit of about 2.3 million homes.

Household formation continues to outpace the number of homes being built, as illustrated in the chart below. 

Source: Apollo

Just like we shouldn’t blame Wall Street for the dilemma, we shouldn’t look to it for solutions, either. 

JPMorgan, for one, does not see homes getting more affordable anytime soon, though the landscape could improve if the Federal Reserve cuts interest rates.

Mortgage rates, in turn, would eventually come down too.

Looser policy opens the door to improved economic growth and, indirectly, Americans’ purchasing power.

“We think the path to affordability, for starter homes as well as the luxury market, is that wages rise to catch up to and meet the higher costs,” said Joe Seydl, senior markets economist at JPMorgan Private Bank.

*At a glance:

*Data as of Monday, 9 p.m. ET

Elsewhere:

  • Markets get faster this week. Starting today, the so-called T+1 rule will shorten the time it takes buyers and sellers to finalize a securities trade, from two days to one. Markets in the US, Canada, Mexico, and Argentina will implement the new plan. (FT)

  • China’s struggling to revive its housing market. As trade wars loom, Beijing is attempting to end a real estate slump that’s dragged down the entire economy. But top-down initiatives have stalled as local governments remain reluctant to add debt and developers don’t want to sell homes at a discount. (Bloomberg)

  • AI is boosting old-school stocks. Nvidia gets most of the attention, but lower-profile names across utilities, energy, and materials have outpaced much of the market. In the last three months, the utilities sector has returned 15% — besting other pockets of the market. (WSJ)

Rapid-fire:

  • An Israeli airstrike killed at least 40 Palestinians in Gaza (Bloomberg)

  • Memorial Day movie ticket sales estimated 40% lower than 2023 as Hollywood continues to flounder (New York Times)

  • Reinsurance policies are skyrocketing and crushing home owners (WSJ)

  • Wall Street is one step closer to spot ether ETFs (Inc. Magazine)

  • History suggests Nvidia’s 10-for-1 stock split is bullish (Sherwood Media)

  • Elon Musk’s answer to OpenAI sees $24 billion valuation in latest funding round (WSJ)

Last thing:

Interested in advertising in Opening Bell Daily? Email [email protected]