By Ryan Dezember | Photographs by Jeff Lautenberger for The Wall Street Journal 

A bidding war broke out this winter in a new subdivision north of Houston. But the prize this time was the entire subdivision, not just a single suburban home, illustrating the rise of large investors as a powerful new force in the US real estate market.

DR Horton Inc. built 124 homes in Conroe, Texas, rented them out, and then put the entire community, Amber Pines to Fosters Ridge, on the block. A Who’s Who of investors and home rental companies flocked to the December sale. The winning bid of $ 32 million comes from an online real estate investment platform, Fundrise LLC, which manages more than $ 1 billion on behalf of approximately 150,000 people.

The nation’s most prolific homebuilder has set aside about double what it typically does by selling homes to the middle class – an encouraging start in the business of selling entire neighborhoods to investors.

“We certainly don’t expect every single-family community we sell to sell at a gross margin of 50%,” the builder’s chief financial officer, Bill Wheat, said at a recent investor conference.

From individuals with smartphones and a few thousand dollars to pensions and private equity firms with billions, yield-seeking investors are grabbing single-family homes to rent or flip them. They compete for homes with ordinary Americans, who are armed with the cheapest mortgage financing ever, and drive up home prices.

“You now have permanent capital competing with a young couple trying to buy a house,” said John Burns, whose eponymous real estate consultancy estimates that in many of the country’s largest markets, about a house out of every five sold is bought by someone who never moves in. “It will make American housing more expensive all the time,” he said.

The consulting firm found Houston to be a hot spot for investors who recently accounted for 24% of home purchases there. Investor share in the housing market is growing – as it is doing in other booming cities, such as Miami, Phoenix and Las Vegas – among properties priced below $ 300,000 and in districts decent schools.

“The limited supply of housing, low rates, a global reach for yield and what we call the institutionalization of real estate investors have paved the way for a new speculative bubble in investor-induced real estate prices,” the firm concluded.

The bubble has room to develop before it bursts, according to John Burns Real Estate Consulting. But it swells quickly. The company expects home prices to climb 12% this year – on top of the 11% increase last year – and rise by at least 6% in 2022, a period of appreciation reminiscent of 2004 and 2005.

This boom was different, fueled by non-repayable loans that allowed individuals to speculate on house prices by racking up mortgages that they could only pay off if house prices continued to climb. The money party ended a few years later when house prices stopped rising. The ensuing crash wiped out $ 11 trillion in U.S. household wealth and brought the global financial system to the brink of collapse.

Financiers stepped in from 2011 and gobbled up foreclosed homes at steep discounts. They sent buyers to the courthouse auctions with cash travel bags. Smartphones and tablets – new at the time – allowed them to orchestrate land grabbing and manage tens of thousands of distant properties afterwards.

They dominated the market for a few years, accounting for about a third of sales in some markets and setting a floor for lower prices. There wasn’t a lot of competition. Stung by losses, banks have made it more difficult for ordinary buyers to obtain a mortgage. Millions of Americans were under water, owed more on their mortgages than their homes were worth, and couldn’t move out.

Home rental businesses, including Invitation Homes Inc. and American Homes 4 Rent, flourished. Renting suburban homes has proven to be so profitable that homeowners hit the open market and added full-price properties after foreclosures dried up. Many are now building houses explicitly for rent.

The coronavirus pandemic has sparked a race for home offices and backyards. Occupancy rates are at record highs and rents are rising with house prices. The ecosystem of businesses that serve, finance and emulate mega-owners is booming.

Burns has counted over 200 housing-seeking investment firms and firms: computer-aided pinball machine Opendoor Technologies Inc., fund managers such as JP Morgan Asset Management and BlackRock Inc., platforms such as Fundrise and Roofstock which buy and organize rental management on behalf of individuals and builder LGI Homes Inc., which now reports wholesale home sales to wholesale buyers in its quarterly results.

Spring brought a new rush of buyers.

PCCP LLC, which typically invests in apartment buildings and office towers, said it bought rental housing communities in the Southeast, the start of a billion dollar pact with Calstrs, the system teachers’ pension of $ 286.9 billion in California.

Home builder Lennar Corp. has announced a rental business with investment firms such as Centerbridge Partners LP and Allianz SE, to which it and potentially other builders will provide more than $ 4 billion worth of homes.

Madison Realty Capital moved into leasing with clients who previously focused on developing owner-occupied apartment and subdivision buildings. On Thursday, he closed a $ 110 million loan on a project in Los Angeles, where 220 of the nearly 700 home sites are sold to investors. The original plans, derailed by the housing crash, did not include any rentals.

“A lot of things that would have been homes for sale are going to be homes for rent,” said Josh Zegen, general manager of Madison.

Bruce McNeilage began building rental homes around Nashville, Tennessee, in 2005. After the housing collapse, his Kinloch partners expanded into other Southeast markets, offering occupied rentals to more big investors.

Kinloch was funded primarily by community banks in towns where he rehabilitated foreclosures and built rentals. These days, Kinloch can borrow much more from Walker & Dunlop Inc., a commercial real estate lender that is getting into suburban rental. Mr. McNeilage’s problem is that others are auctioning houses and lots.

“I’m locked up,” he said. “There are too many people chasing things and they are willing to pay too much. It’s ridiculous money right now.

Write to Ryan Dezember at [email protected]

(END) Dow Jones News Wire

April 4, 2021 10:14 am ET (2:14 pm GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.