In the second quarter, real estate investor home acquisitions dropped by 45% compared to last year, surpassing the 31% decline in overall home sales. This marks a significant reduction since 2008, except for the quarter just prior when investor purchases fell by 48%. The drop is due to the current state of the real estate market. Unlike the frenzied homebuying activity driven by the pandemic in 2021 and early 2022, this year has seen a comparatively cooler housing and rental market. As a result, investors find it less appealing to invest in residential properties, leading to a decline in investor home purchases.
According to the Redfin analysis of country records, investor home purchases in 39 major U.S. metropolitan areas show a significant year-over-year decline. These investors have bought the fewest number of homes in the second quarter in seven years, except for the pandemic’s initial stages. When we analyze the whole Redfin growth graph, investor purchases reach lows in the first quarter and peak in the second quarter.
According to the national investor purchases graph by Redfin, the purchases have pulled back significantly, stepping back from the peak seen during the pandemic. This surge was driven by low mortgage rates and high demand for homebuying and rentals, providing investors with attractive profit opportunities. Shay Stein, a prominent Redfin Premier agent in Las Vegas, says there has been a notable absence of offers from hedge funds in recent times. She mentioned that she hasn’t received offers from them for some time, except for unreasonably low offers. Stein explained that from the middle of 2020 until early 2022, hedge funds aggressively purchased numerous properties and converted them into rental units. This trend drives up property prices, making it challenging for local homebuyers to compete. As a result, a big portion of the housing market was under investors’ ownership but not added to their portfolios.
In terms of dollars, investor purchases dropped significantly, and in the second quarter, investors bought $36.4 billion worth of homes, down 42% year-on-year. While still above pre-pandemic levels, it’s getting closer to $34 billion in Q2 2018 and $31.9 billion in Q2 2019. The average home purchased by investors costs $470,120, similar to $467,885 a year earlier. In market share, investors bought 15.6% of U.S. homes in Q2, down from 19.7% a year earlier and the record high of 20.4% in early 2022. The investor’s market share remains higher than pre-pandemic levels but has declined or remained stable since its early 2022 peak.
Limited Inventory And Demand – A Major Challenge For Real Estate Investors
Investors reduced their purchases faster than individual homebuyers in Q2 due to high home prices, mortgage rates, limited inventory, and economic uncertainty. These challenges affect housing demand and have more impact on investors, who are driven by profit. High prices and interest rates discouraged investors, with 71% using cash for purchases in Q2. The Redfin Senior Economist Sheharyar Bokhari says, “Moving forward, the investors who do come back may be more focused on scooping up rental properties than flipping homes.” However, home flippers may take longer to come back due to expected stable mortgage rates and alternative investment opportunities. Despite a potential increase in market share, investors’ purchase volume is expected to stay low due to limited listings and low mortgage rates.
Investors Share Shrinks In New Listings, But Sellers Celebrate Strong Returns
The share of new listings owned by investors has decreased to 8% in March, down from 9% the previous year and a peak of 13% in late 2021. Investors listed 36% fewer homes than last year, while new listings dropped by 24%. Despite the decline, most investors still profit from home flipping, with a 61% gain in June, although slightly lower than 69% the prior year. Only 3% of flipper-sold homes incurred losses in June, down from a peak of 29% in September 2022. Bokhari mentions this investor trend isn’t alleviating the housing shortage or affordability issues, as they’re listing fewer homes and not replenishing the market with renovated properties.
Investors Preference For Low-Priced Homes
Investors bought 23% of low-priced homes in Q2, down slightly from a year earlier but still higher than their share in pricier homes. They purchased 11% of mid-priced homes (down from 19% the previous year) and 14% of high-priced homes (down from 16% the last year). Investors are attracted to affordable homes, aiming to buy low and sell high, a strategy especially appealing in a market with elevated home prices and interest rates. Tiny homes under 1400 square feet accounted for 39.2% of investor purchases in Q2, and low-priced homes constituted 46% of their acquisitions, up from 39% a year earlier. Meanwhile, high-priced homes made up 31% of their purchases, up from 29%. This shift reduced the share of mid-priced homes to 23%, down from 32% a year earlier.
Investors Lean Towards Single-Family Properties
In the second quarter, single-family homes represented 68% of investor purchases, down slightly from 73% the previous year but still the dominant choice. Condos made up 20% of acquisitions, rising from 16% in the prior year, while townhouses accounted for 7%, and multi-family properties constituted 5%. Investors had the highest market share in multi-family properties, at 31%, close to the 32% from the previous year. They purchased 15% of single-family homes, a decrease of the prior year’s 20%, and around one in six condos and townhouses, similar to the last year.
According to the metro-level summary for investor home purchases, Q2, 2023, by Redfin, investor market share and purchases declined significantly in Phoenix, Las Vegas, and other Sun Belt cities that experience pandemic-driven booms, leaving ample room for the market to recede.