“The prospect of a substantial drop in home prices puts them at risk of losing money.”
By Wolf Richter for WOLF STREET.
Single-family home purchases by investors fell 32.3% in the third quarter compared to the same period last year, according to Redfin, based on data from counties in the 40 most populous metropolitan areas. Beyond the Q2 2020 lockdown, this was the steepest percentage decline since the housing collapse.
Investor purchases of condominiums and cooperatives plunged 27.5%; of townhouses by 17.9% and multi-family buildings with 2-4 units by 18.3%.
The graph shows the count of homes purchased by category of homes; and to the right, the percentage decline year-over-year. These “investors” are defined as institutions or businesses that purchase residential properties. (chart via Redfin):
The increase in investor purchases in recent years also shows the impact of a major shift: build to rent, where homebuilders build entire subdivisions specifically as rental homes, fill them with tenants, and then sell the entire development to a great fund manager. Building to rent was the hottest development in the housing market before the recession.
“Real estate investors are retreating because the prospect of a substantial drop in home prices puts them at risk of losing money,” Redfin said in the report, echoing what the largest single-family home buyers — American Homes 4 Rent, Invitation Homes et al — said in their earnings calls.
For example, American Homes 4 Rent, which has focused on purchasing build-to-renit developments in recent years, said it was reducing its purchases by 80% year-over-year to “allow the market to recalibrate and stabilize ” because house prices have yet to come down enough. “We are starting to see some price breakthroughs happening. But we are still at the beginning of that process. It said these homebuilders still want prices that “you would have seen in March.”
According to Redfin, “Investors are unlikely to return to the market in a big way anytime soon. House prices would need to drop significantly for that to happen.
“Investor Buyings Plunge in Pandemic Boom Cities”: Redfin.
Some of the subways where investors had flocked to with particular devotion are now seeing the steepest drop in investor buying.
“Investors have expanded into these areas during the pandemic to cash in on rising rental prices and home values, and are now pulling back as these markets slow relatively quickly”:
|Metros with Largest % Drops in Investor Buyings: Q3 2022|
|% every year|
|Las Vegas, NV||-44.8%|
|San Diego, CA||-34.5%|
Investor buying increased year-over-year in just five of the 40 metros Redfin analyzed: Philadelphia (+46%), New York (+11%), Baltimore (+8%), Cleveland (+5%) and Newark (less than 1%).
Investor share of total purchases in the third quarter.
In those 40 metropolitan areas combined, investors bought 65,000 homes of all types, representing a 17.5% share of all home purchases, down from a 19.5% share in the second quarter and in the second quarter. 18.2% from a year ago as overall buying plummeted and investor buying plummeted faster than individual buying.
This trend was also outlined by the National Association of Realtors through October, with existing home sales nationwide declining 28% year over year and investors’ share of those declining sales declining further.
According to Redfin, investors held the highest market share in these markets:
- Jacksonville, FL (29.6% stake);
- Miami (28.9%)
- Atlanta (27.6%)
- Vegas (26.9%)
- Orlando, Florida (26%).
In Jacksonville terms, despite the large share of investor buying, overall buying plummeted, and investor buying plummeted with them, 31.9% year over year! “A lot of investors are looking to offload properties,” according to a local Redfin agent, Heather Kruayai: “Almost all of my listings right now are people looking to sell investment properties or second homes. They want to get rid of them now while they still have a some value because they are afraid that there will be another big crash.
Investors had the lowest market share in these markets:
- Montgomery County, Pennsylvania (7.1%)
- Providence, RI (7.3%)
- Warren, Michigan (7.7%)
- Washington, D.C. (8.6%)
- New Brunswick, New Jersey (9.7%).
Investor buying has plummeted across the price spectrum.
Year-Over-Year Percentage Decrease in Investor Buyings by Price Category (Chart via Redfin):
- High-end homes (-35.7%)
- Mid-range homes (-37.1%)
- Low-priced homes (-20.0%)
“Investors” in the real estate market fall into several categories.
There are the big money managers, like BlackRock and Blackstone, and pension funds that buy up entire developments built for lease from homebuilders or entire corporations that are already huge owners. Rental REITs, such as American Homes 4 Rent and Invitation Homes, also purchase entire build-to-rent developments. These companies don’t compete with individual homebuyers; they are buying established rental properties.
Then there are smaller investors who buy homes as rental properties and compete with individual home buyers. But they are facing high mortgage rates and falling home prices which make this decision difficult.
A relatively new development in the investor landscape is the i-buyer phenomenon where companies funded by investor money have piled into the house flipping business. This phenomenon has already collapsed. Zillow abandoned it last year amid huge losses. Redfin threw in the towel this year. Opendoor, with nothing else to rely on, cut back on its purchases. The company, which had gone public via a merger with a SPAC in December 20202, lost $928 million in the third quarter, bringing its total loss from 2019 to $2.2 billion. And every house he’s bought has to be sold, and that turns out to be much more difficult than expected. Its shares, now at $1.64, are down 95% from their peak and are in my pantheon of imploded stocks:
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