America is facing a significant housing shortage in markets across the country. Mom-and-pop investors are quietly leading the charge in upgrading America’s current housing stock and bringing more habitable inventory to the market. But as with any emerging trend, this problem-solving has layers and complexities.
I recently interviewed Kurt Carlton, president and co-founder of New Western real estate investment marketplace. Carlton has labeled the emerging trend of home rehab “The Great Renovation.”
Since 2008, New Western has built a database of over 200,000 investors who have bought and sold over $17 billion in properties. New Western surveys its users quarterly for the Flip-Side Report to uncover important trends among its users.
Check out the video above and the details below about this emerging trend, and how renovating America’s aging homes with a well-overdue facelift can help with our inventory issues.
Vacant older homes
As of April 2024, the U.S. Census Bureau estimates that there were approximately 15.1 million vacant homes in the United States.
Another 25 million homes that were built prior to the Great Recession are between 20 and 40 years old and will need repairs to major systems soon. These can include roofing issues, lead, mold problems and below-the-slab PVC plumbing leads that require jackhammering the slab to fix.
“That’s not something a typical homebuyer, someone who has inherited a home, or even a Realtor wants to do with their client because of how difficult it can be to deal with contractors,” Carlton said.
“This market segment will soon represent approximately 20 percent of the listings on the market. Both Realtors and consumers will have to adjust to coping with major system repairs in one out of every five listings.”
Surprisingly, this market is much stronger than anyone realizes. Corelogic’s most recent data shows that investor purchases now account for 29 percent (and rising) of all single-family residential sales.
The roots of today’s inventory problem
Carlton believes there are multiple causes of today’s inventory shortage of five million homes: The runaway financial market that led to the tidal wave of foreclosures during the Great Recession. The industry’s failure to keep pace with the current rate of family formation. Lack of new inventory.
“While the National Builders Association is predicting that 988,000 new homes will come on the market this year, we still have all these vacant homes, most of which are in disrepair,” Carlton said. “Many of these homes are inherited properties held by out-of-area owners who lack the time and the money to deal with the needed repairs,” Carlton said.
People with growing families don’t want to live in apartments anymore.
“They want backyards and garages, and we just don’t have it. The houses that builders are supplying today are not affordable,” Carlton said. “This has caused an imbalance in the supply and demand.”
The “lock-in-effect” where people do not want to trade their low-interest mortgage on their current home to purchase a replacement home that will have a much higher interest rate and payment.
“In the meantime, there’s a substantial supply of distressed homes needing local real estate investors to rehab them,” Carlton said. “These properties need to be identified, rehabilitated and put back on the market.”
Who are today’s mom-and-pop rehab investors?
Carlton’s quarterly surveys of his users allow him to quickly spot important trends within the rehab investor market. These flippers and rehabbers will play an increasingly important role due to our aging housing inventory. These new investors fall into the following categories:
Corporate refugees
“These investors have left their nine-to-five rat–race jobs. They’ve got the management skills, they’ve got some money in the bank, and they’re looking to do something where they are their own boss, where they have more autonomy. Usually, they’re following some side hustle that’s become popular, but these days they’re getting into investing full time and becoming house flippers,” Carlton said.
“So, they’re finding this vacant inventory that’s in need of repair, changing what was an uninhabitable home to one that becomes habitable, and that ends up being a net plus one housing unit. The result is a dramatic effect on supply.”
Gen Z and boomers
Both Gen Z and older adults in their 60s and 70s (the “silver lining” as Carlton calls them) are playing a major role in the Great Renovation. Gen Z investors are ambitious and driven by excitement and financial gain. What’s driving older adults, however, is quite different.
“It’s taken me 10 years to realize that the business we’re in is a passion product. People love to do this. It’s so much more than just about the money,” Carlton said.
“We see a lot of husband-and-wife teams — it’s like date night every night. It’s their creative outlet. Instead of going out for dinner and drinks, they’re rehabbing a house,” Carlton said.
“What we found with this older cohort is that their reasons for investing are very different from their financial ambitions. Many of them are focused on their community with the goal of designing something and rebuilding it.”
The Great Renovation is already in progress
Carlton pointed to some interesting statistics about the Dallas-Fort Worth area that illustrate how powerful the Great Renovation movement already is.
“For example, in the Dallas-Fort Worth area, last year 50,000 new homes were delivered and between 17,000-18,000 were rehabbed by flippers and returned to the market,” Carlton said.
“This illustrates how the Great Renovation is transforming uninhabitable homes into livable homes, increasing the supply, and helping to reduce the housing shortage.”
Challenges remain
Several major shifts have taken place, however, that make entry-level housing even more difficult to obtain. These changes include:
- Institutional buyers, including iBuyers, buying up rental properties. Nevertheless, Carlton’s Flip-Side Report shows that activity has slowed down. In fact, in an April 2023 interview, Carlton’s Flip-Side Report research showed that iBuyer activity had dropped by 90 percent and that individual investors were picking up the slack.
- For the first time, single-family real estate has gone from being local to national. Blackstone can buy a house anywhere in the country today and manage it from afar.
- Single-family real estate has also gone from private to public due to an increase in the number of REITS (real estate investment trusts) that are public.
- The regulatory environment is also changing quickly, which will require a totally new model that addresses the changes now taking shape.
The major challenge ahead: ‘Nobody understands what a wholesaler is’
Wholesaling is already taking place in many local neighborhoods across the country.
“The problem is that nobody really understands what a wholesaler is. There are a lot of misunderstandings about what is required when there is a distressed property and that it is really going to require a real estate investor to do the work, not the homeowner,” Carlton said.
“A real estate agent has a role here, but somebody has to fix up that house. So, this space has really started to expand rapidly.”
Because wholesalers typically rehab houses with issues so severe that they’re not currently saleable to a typical SFR buyer, many people mistakenly believe that rehabbers are reducing the pool of available properties rather than actually adding to it. An additional challenge is that when something is new, people often think it is bad.
This lack of understanding often extends to the legislative level as well. Carlton is currently working with lawmakers to help them understand the positive impact wholesaling can have on supply and affordability in their communities.
While several legislatures have passed laws that support these efforts, Carlton bumped into a major issue with one set of local well-intentioned lawmakers who didn’t understand how the process worked. Sadly, their “anti-housing” legislation has resulted in blocking a tremendous amount of new rehabbed inventory from coming onto the market.
“The way to become part of the middle class in America is to buy your own home, but these aspiring buyers cannot afford to pay $480,000 for new construction. They need something that is in the $180,000 to $200,000 price range, but that inventory is not available.” Carlton said.
“People are not moving out of those homes because of the interest rate environment. We need to give them an asset that they can afford, that will help them enter the middle class, and fulfill the American dream of homeownership.”
In this state, there are lot of homes priced between $80,000-$90,000 that are in need of serious repair and that the traditional real estate models mostly ignore.
“If I’m only going to make $2,200 on a transaction, the customer acquisition cost to find that customer, get into their living room to do a listing presentation, and then sign on the dotted line to list their home exceeds that commission,” Carlton said.
The other issue is the amount of time and money required to get many of these properties to the point where they’re even habitable.
Improving local neighborhoods
Mom and Pop investors typically invest close to where they live.
“Our investors generally advertise in neighborhoods they know and understand and probably live in. In fact, 95+ percent of the investors on our platform buy houses within 30 minutes of their home, so they’re not California guys buying in Columbus,” Carlton said.
“They’re adding value, they’re doing the rehab, and they’re taking a financial risk in order to deliver a finished home that may be in the $150,000 to $160,000 price range that a teacher or nurse could buy. These are local small businesses,” Carlton said.
“Whenever there is an opportunity where their crew is busy, they often call up a friendly local competitor and pass that deal on to them for a small fee. Our investors typically have rehabbed about 10 houses and often assign a couple more each year.”
Unfortunately, when local lawmakers fail to understand how this works and the contribution that investors make to their communities, they shut down the process.
The result is fewer affordable entry-level houses, houses that could have been be listed by a Realtor, and that have been brought up-to-date by today’s market standards by a rehabber. This in turn reduces the amount of inventory available which in turn drives up prices.
A peak at the new Flip-Side Report
Carlton said that they’re just in the process of compiling the data for their next Flip-Side Report, but there’s one statistic in particular that they’re investigating in more detail: Flips done by women sell faster, receive more multiple offers and sell for higher prices.
Carlton noted that during the Great Recession in 2008 when New Western was founded, it was the financial products that caused a property to become distressed. Many of the homes that were foreclosed upon were about five or less years old.
“Today we have millions and millions of homes that no aspiring homeowner is going to purchase because someone aged in place for a long time before dying, the roof damage was never attended to, and there’s black mold and other major issues,” Carlton said.
“If you’re a real estate agent, you certainly wouldn’t want to put these properties on the front page of your website and you probably don’t know what to do with it. It’s not glamorous, the income you will make from it is low, and you’re not only taking on being a listing agent, you’re also taking on the role of being a project manager.”
Final thoughts
The Great Renovation opens up new markets and new inventory, and improves affordability. Carlton is passionate about tackling this issue at the national level.
“Regulation is definitely needed, but it must be well thought out. Local, state and federal lawmakers as well as state real estate commissions, must carefully craft regulations to avoid stemming the flow of available affordable inventory,” Carlton said.
“It’s an interesting time in single-family real estate, especially in our value-added niche, where we’re addressing the entry-level housing shortage that is so crucial to solving the affordability problem. These properties open up an entirely new market that can be built out.”
The Great Renovation is already in process. If this trend continues to grow, it certainly has the potential to solve our inventory problems by breathing new life into America’s aging and abandoned vacant homes.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, and the founder of RealEstateWealthForWomen.com is a national speaker, author and trainer with over 1,500 published articles.
