Real estate investors sat out the fourth quarter
A recent report found a record drop investor purchases as interest rates rose and prices began to decline.
Key points:
- Investor purchases fell by nearly half year-over-year, with the biggest decline in Q4.
- Activity may pick up if interest rates fall and home prices stabilize.
- Less competition from investors is good news for first-time buyers, who've been squeezed by high rents and low inventory.
While elevated interest rates and home prices have created affordability issues for individual buyers, investors also appear to be taking a pass.
The number of investor purchases of U.S. homes fell a record 45.8% year-over-year in the fourth quarter, according to a new report from Redfin. The last time investors cleared out of the market to that extent was in 2008 following the global financial meltdown that led to a dramatic drop in home prices.
The report also noted that much of the slowdown in investor purchases happened in the final three months of the year, when activity fell 27% on a quarter-over-quarter basis.
While interest rates were a factor, the expectation that home prices may have further to fall is also keeping investors away, according to the report. The mood may change if prices appear ready to rebound, said Redfin Senior Economist Sheharyar Bokhari.
"It's possible that investors will start to wade back into the market this year given that mortgage rates have ticked down from their 2022 high — especially if home prices show signs of bottoming," said Bokhari. "But it's unlikely that investors will return with the same vigor they had in 2021. That's good news for individual buyers, who are still grappling with high housing costs but no longer losing bidding war after bidding war to investors."
Battling it out with investors during a period of low inventory has put prospective buyers in a tough spot, particularly over the last couple of years. According to a July 2022 report by Stateline for the Pew Charitable Trusts, investors bought 24% of the homes for sale in 2021, up from around 15% annually in the past 10 years. The result has been less inventory for individual buyers, especially first-time buyers, coupled with higher rents, making it even more difficult for individuals to save money for a down payment.
The Redfin report found that the biggest percentage drops in investor purchases took place in pandemic boomtowns. Las Vegas investor home purchases fell 67% year-over-year, followed by Phoenix (down 66.7%). Sacramento, another popular pandemic boomtown destination, saw investor purchases drop 53.5% year-over-year.
Baltimore was the only metro Redfin analyzed that saw an increase in investor purchases, which rose a modest 1.4% year over year in the fourth quarter.
The report also noted that high-end and mid-priced homes had the biggest drops in interest from investors. Investor purchases of mid-priced homes dropped 58%, while high-end homes fell 53.2% year-over-year. Investor purchases of homes typically for first-time buyers fell only 28.6%.