Real Estate Investor Purchases Drop Dramatically

Written by Ashley Sutphin Posted On Tuesday, 03 October 2023 00:00

Despite limited inventory, the housing market in the United States has lost its luster in the eyes of many, including real estate investors. It’s an unaffordable market overall, and Redfin recently reported purchases of homes by investors went down a staggering 45% in the second quarter compared to the same period last year. With the exception of the first quarter, when the annual decline was 48%, it’s the biggest drop since 2008.

It was the fourth quarter consecutively to see annual declines, and the decline during the second quarter in investor purchases outpaced the drop in overall home sales of 31%.

Redfin’s analysis indicates that the cooling markets, including housing and rentals, make investing in real estate less appealing.

The investor real estate market share fell, hitting 16% in the second quarter, below the all-time high (20%) in the first quarter of 2022. That was a time when the pandemic homebuying boom was still going fairly strong.

In the Redfin report, a Las Vegas agent said that offers from hedge funds are drying up. The agent said in their experience, there hadn’t been an offer from a hedge fund in a long time, except incredibly low ones. From the middle of 2022 through early 2022, hedge funds scooped up enormous properties, pricing out local buyers and then turning them into rentals. The agent went on to say that now that investors own a big portion of homes, they’re not making additions to their portfolios.

The total investor purchases did go up from the previous quarter to 50,347, but that was the fewest of a second quarter in seven years, except the start of the pandemic.

Additionally, investors aren’t selling as much. Redfin reports that investors own 8% of new listings, which compares to 13% at the end of 2021.

It’s coming at a point when mortgage rates exceed 7%, inventory is low, and there’s a sense of uncertainty regarding not just the real estate market but the larger economy.

An economist for Redfin said it may take home flippers longer to come back, mostly because we’re unlikely to see mortgage rates go down in any significant way in the short term. That’ll keep demand low, discouraging flippers. Investors also have the opportunity to put money in lower-risk places currently than real estate since the bond market has high yields.

When investors are buying, it’s mostly single-family and low-priced properties.

All of this information is based on Redfin’s analysis of county records in 39 of the country’s most populous metros. Redfin defines an investor as a business or institution that buys residential real estate.

This highlights the trend of investors backing out of the housing market faster than individual buyers during the second quarter.

For investors things like high prices and mortgage rates will serve as bigger deterrents because their only objective is to make money. If the demand is down for housing,  investors simply aren’t going to be as motivated. Individual buyers may need to move, but investors don’t have the same pressures on them.

While around 71% of second-quarter investor purchases were made in cash, they still have to keep an eye on interest rates because they frequently rely on loans to cover other expenses.

When investors return, they may focus more on getting rentals than flipping because the rental market is relatively strong.

The asking rent in the U.S. right now is just $16 below the all-time high.

Metros where investor market share has dropped most substantially include Phoenix, Las Vegas, and Atlanta. Also rounding out the list are Jacksonville, Florida, and Charlotte, North Carolina. Markets that saw the investor market share go up the most included New York, Seattle, Cleveland, Chicago, and Riverside, California.

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