For the past several years, venture capital–backed investment behemoths and mom and pop newbies alike have poured money into real estate. With mortgage interest rates at historically low levels and stimulus cash sloshing through the economy, real estate investment went from vigorous to full-on feverish. And along the way, investors—many of whom came to the party with all-cash offers—fully changed the face of many markets, sometimes locking out first-time homebuyers.
However, many of those investors, especially smaller ones, have recently slammed the brakes on their purchases as the housing market has shifted.
The market conditions that made the foray into real estate investment such a sexy proposition have in large part begun to dry up as mortgage rates have soared—and the large hikes in rental prices are beginning to slow.
In some parts of the country where investors competed directly with first-time and other buyers, often winning the bidding wars, investors have been beating a hasty retreat. So Realtor.com® dug into the data to figure out where investor home purchases have fallen the most. Buyers might have a stronger shot at purchasing homes where they hope to live in these markets if they’re not competing with as many cash-flush competitors.
Note: We looked only at sales of investment properties that were purchased using mortgages, which, according to Daren Blomquist, is where you’ll find more of the beginner investors. These homes are generally flipped or rented out.
“Established investors who have more capital reserves would be more likely to buy with cash,” says Blomquist, the vice president of market economics at Auction.com, a website that specializes in foreclosure listings.
Rising home values of the past several years pushed many of these investor buyers out of the premier, coastal real estate markets and into smaller cities, says Matthew Gardner, the chief economist for Seattle-based Windermere Real Estate. They include places like Boise, ID, where home prices were traditionally more affordable than urban hubs such as New York City, Boston, Chicago, and San Francisco.
However, those places where investors flooded into are now the places where investors are pulling back the most.
“The geography has started to shift,” says Gardner. “Investors are going to be looking at markets that are cheaper.”
Nationally, the portion of investors using a mortgage to buy a rental property or a home to flip is at a three-year low as of October, according to seasonally adjusted data from Optimal Blue, a mortgage data clearinghouse. Fewer than 1 in 17 mortgages is being used for an investment purchase, down from around 1 in 12 a little less than a year ago.
Many smaller, mom and pop investors who don’t have the mountains of cash of the institutional investors—aka the big banks, hedge funds, and other large financial companies—usually buy homes with mortgages. Some of these homes are then used as rentals, which can be highly profitable in places where home costs are low but rents are high and rising. Or they purchase properties that need work, hold onto them for only a few months (while paying the mortgage and the costs of required repairs, updates, or upgrades), then sell them for a hefty profit.
But it’s harder to make the numbers work in today’s cost-squeezed market.
For example, an investor buyer who was looking at borrowing $400,000 to buy a rental property last year with a 3.5% mortgage rate on a 30-year fixed-rate loan, would need to earn about $1,800 a month to cover the investment.
If that same hypothetical investor is looking at borrowing $400,000 with today’s roughly 7% mortgage rate, it will take around $2,700 to cover the monthly payment. In many places, renters simply can’t afford that $900 rent hike, so the investment no longer makes sense.
“Investors will jump back in when things change,” Gardner says, meaning some combination of lower borrowing costs, significant price reductions, or the capacity of renters to cover much higher leases.
So where have investor buyers pulled back the most? To figure it out, we looked at Optimal Blue mortgage data for the 100 largest metropolitan areas. Then we identified the places where investor purchases, as a share of all mortgage-financed purchases, have dropped the most, year over year, since their post-pandemic peak.
To add context, cash-purchase data from ATTOM Data Solutions, another real estate data provider, was included for metro areas where it was available. And we included only the single metro area with the largest drop for any state, to ensure geographical diversity. (Metros include the main city and surrounding towns, suburbs, and smaller urban areas.)
By Evan Wyloge
Nov 22, 2022