Investors Losing Their Appetite for Purchasing Homes

This year’s relatively cool housing and rental markets have made investing in homes less attractive than it was during the pandemic-driven homebuying frenzy of 2021 and early 2022, according to a new report from Redfin.

Investor home purchases fell 45% from a year earlier in the second quarter, topping the 31% drop in overall home sales, according to Redfin.

It’s the biggest decline since 2008 apart from the quarter before, when they dropped 48%.

“All signs point to the rental market remaining relatively strong,” Redfin Senior Economist Sheharyar Bokhari said in prepared remarks. “Home prices and mortgage rates are high enough to motivate would-be first-time homebuyers to continue renting.”

The typical US asking rent is $16 shy of its all-time high, so investors who are landlords stand to earn money, she said.

A record gap has formed between home affordability and the cost of renting and rising mortgage interest rates are a boon to apartment operators, according to Sam Tenenbaum at Cushman & Wakefield.

Pierre Debbas, Managing Partner, Romer Debbas LLP, tells GlobeSt.com that a significant decline in investor interest was to be expected given the fact that the cost of debt has nearly tripled in the past year while rents largely remain flat and housing values maintain their post-pandemic levels. 

The 30-year rate this week has averaged 7.31%, which was the highest level since December 2000.

“Thus, the ROI on the investment has plummeted due to interest rates, and investing in the housing market is nowhere near as attractive as it was the past few years,” Debbas said.

“The drastic increase in rates in such a short period of time is causing a significant amount of capital to sit on the sidelines for either distress opportunities or for rates to come down. Until then, investors can get 5% returns in liquid conservative investments such as money market funds and CDs and most will continue taking a wait-and-see approach to investing in the housing market.”

Contrarily, Kurt Carlton, president and co-founder at New Western, a national private source of residential investment properties, tells GlobeSt.com that what is widely underreported is the independent investors who are doing their part to add supply to the industry. 

“Investor sentiment is positive right now as they haven’t let the macroeconomic environment slow them down,” Carlton said.

“Because most investors borrow private money, the interest rates on these types of loans have not seen the dramatic increases that the typical 30-year fixed-rate mortgages have seen. 

So, investors are continuing to purchase homes and have a positive outlook on investing for the remainder of 2023. 

A recent New Western survey showed that 93 percent of investors plan to purchase homes in the second half of the year, Carlton said.

Investor purchases of rental properties could be limited by some of them building new properties to rent out, though.”

“Home flippers may be slower to come back,” Bokhari continued. “That’s mainly because mortgage rates are unlikely to decline significantly in the short term, which will keep homebuying demand relatively low and discourage flippers. Plus, investors have lower-risk places to park their money right now than real estate, with high yields in the bond market.”

Las Vegas Redfin Premier agent Shay Stein said in prepared remarks that offers from hedge funds have dried up.

“I haven’t received an offer from one in a long time, except unrealistically low offers,” Stein said. “From mid-2020 until early 2022 when interest rates started going up, hedge funds bought up a ton of properties and immediately turned them into rentals, pricing out local buyers. Now a big portion of our homes are owned by investors, but they’re not adding to their portfolios.”

Investor purchases declined 65% year over year with the biggest drops in Las Vegas, Jacksonville, and Phoenix.