The Lesser-Known Reason Why It's Been So Hard to Buy a Home

It's not just a matter of high home prices.

It's fair to say 2021 was an extremely difficult year to buy a home. Not only was real estate inventory limited, but home prices were through the roof as a result of intense buyer demand.

Last year, home prices were up almost 19% compared to the previous year, according to recent data from the S&P CoreLogic Case-Shiller US National Home Price Index. That alone explains why many would-be buyers were unsuccessful -- they were simply priced out.

But there's another reason buyers may have struggled to purchase homes in 2021. And it has to do with a tough source of competition.

When investors crowd the housing market

When we think of real estate investors, it's easy to imagine professionals who own large buildings, or who operate different commercial properties, like office buildings, warehouses, and shopping malls. But in reality, there’s a lot of money to be made by investing in residential properties, too. And that's exactly what many investors did last year.

During Q4 2021, an estimated 18.4% of homes sold were purchased by investors, as opposed to buyers purchasing those homes to live in themselves, according to Redfin. That's the highest percentage on record dating back to 2000.

The reason investors love private homes is simple -- they can rent them out and turn them into income properties. This applies to everything from condos to townhouses to larger standalone homes.

These days, the demand for rentals is huge. Part of the reason is that it's become too expensive to buy. But also, a lot of people shored up their finances -- and plans -- in 2021 after spending much of 2020 in limbo and/or struggling financially. And investors have been able to capitalize on strong rental demand by jacking rates upward.

What’s more, because real estate investors may be more likely to have cash at their disposal, they come off as stronger buyers, especially in a competitive housing market. Last year, buyers with cash offers clearly had the upper hand at a time when sellers could easily afford to be choosy.

Everyday buyers commonly need to finance a home purchase with a mortgage. But investors with existing portfolios of properties may have had more leeway to buy homes outright with cash by tapping their existing home equity.

Will buyers continue to face competition from investors in 2022?

Most likely, yes. The practice of purchasing homes and converting them to income properties isn't at all new. And while higher mortgage rates might deter everyday buyers from purchasing homes this year, investors with a lot of equity in their existing properties may not have to worry about financing new additions to their portfolios.

This isn't to say that if you're a regular buyer who's looking to purchase a home this year, you're automatically doomed from the start. Rather, you should be aware that the competition you face might extend beyond the realm of buyers in a similar boat -- and prepare to potentially pay a premium to beat out an investor's offer.