Apache is functioning normally
Professional investors might be tapering down their home purchases, which could be a good development for frustrated homebuyers who find it hard to compete with investors’ lofty, quick-close, all-cash offers.
Investors who typically rent out their properties to tenants purchased 8.2% of homes in December 2022, according to the Realtor.com® Spring 2023 Investor Report. That was down from the peak in February 2022 when they bought up 8.9% of homes on the market. However, it was a bit higher than in December 2021.
The report suggests investors took a bit longer to respond to surging mortgage interest rates than homebuyers did as the majority made all-cash offers.
The report focused on investors who purchase property to hold and rent out, and excluded home flippers as much as possible.
“We have seen that investor activity has started to come down, which means that the typical homebuyer would be competing with fewer investors,” says Hannah Jones, an economic data analyst at Realtor.com. “We heard this over and over during the [COVID-19] pandemic. A family is looking to buy a home but they got outbid by investors.”
From January to June 2022, investors made up 8.5% or more of all home sales. But by June, mortgage rates were pushing higher, rents appeared to have peaked, cutting into potential landlord profits, and “the economic outlook became more uncertain and fears of a possible recession loomed,” the report states.
Notably, it’s not just homebuyers who are better able to compete now.
Smaller investors, typically those with fewer than 50 properties, are also buying up more homes since the larger ones pulled back last summer. In December, mom-and-pop real estate investors made up 72.8% of all investor purchases, up from a low of 52.6% the previous October.
Even though investors and first-time and other homebuyers might want the same properties, they have vastly different motivations and considerations, Jones says.
“When it comes to making a decision to buy a home, a typical family is considering, ‘Do we need to buy now, and can we afford to buy in the place that we want?’” says Jones. “It has a lot more to do with personal circumstance.”
In contrast, investors are thinking more about their return on investment—both in terms of buying and later selling the property, as well as how much rent can be collected on it. Investors also have more access to cash, whereas households often depend on getting a mortgage.
Those differences can be seen starkly in purchase activity in 2022. Investors accounted for more of the purchases in large part because regular homebuyers pulled back as mortgage rates shot up. Through the entire year, noninvestors purchased 16.6% fewer homes compared with 2021, while investor purchases were up 6.4%.
It took until midyear—when both home prices and rents peaked—for investors to start pulling back.
“Once prices got so high, the return on investment became a little dicier for investors,” says Jones. “They’re no longer as incentivized to be competing as much as they were. And as rents cooled, the value proposition weakened.”
Today’s investors are chasing the same thing as many homebuyers: lower prices. In 2022, 12.2% of all home purchases in the South were by investors, as were 9.3% of all purchases in the Midwest. These two regions generally offer lower home prices than the Northeast and West.
“Affordability is driving so much of the market now,” Jones says. “The traditionally affordable areas are continuing to see more investor activity. But they’re also seeing more activity from traditional homebuyers.”
To come up with its findings, Realtor.com looked at deed records f0r single-family homes, condos, townhomes, and row homes from January 2000 to December 2022. Data was national as well as in the 263 metropolitan areas with more than 100 investor sales in 2022.
Realtor.com analyzed only absentee owners with a name that includes “LLP,” “LP,” “LLC,” “GP,” or “TRUST” and excluded keywords and sales that were likely related to homebuilders, relocation companies, government bodies, and financial institutions. Multifamily buildings, large home-flipping businesses, and iBuyers were not included in the analysis. Small investors not registered under a company name, generally making up more than a third of individual investors, were also excluded in this report.
Source: realtor.com