Home flippers see opportunity ahead
A recent survey found that investor optimism increased in the past six months, though the high cost of financing is slowing investment purchases.
Key points:
- In an investor sentiment survey, nearly half the respondents said conditions are better than they were a year ago, up from 30% in the spring survey.
- More investors also think market conditions will improve, especially if a recession forces the Fed to lower interest rates.
- Flippers were more optimistic than rental investors, likely due to a softening rental market.
Traditional buyers may not feel great about the real estate market, but for home flippers, things are looking up.
Investor sentiment has improved over the past several months, according to a new survey conducted by CJ Patrick Company for RCN Capital. Nearly half the respondents in the Fall 2023 Investor Sentiment Survey reported that conditions are better than they were a year ago, up from just 30% in the spring survey.
Investors were also more bullish about the future, with 44% saying they believed conditions are going to improve, also up from 30%.
"Despite higher home prices, higher financing costs, and limited inventory, real estate investors continue to express optimism about market opportunities today and in the months ahead," said RCN Capital CEO Jeffrey Tesch.
That optimism is a matter of perspective: The majority of those surveyed also said they expect a recession — which is generally bad news for consumers — but for investors, a cooling economy could bring new opportunities.
Flippers are feeling good; rental investors are wary
Broken down by investor type, those who primarily fix-and-flip homes are much more optimistic (50%) about the next six months compared to rental property investors (24%), said Rick Sharga, CEO of CJ Patrick Company.
"That may be an indication that flipping activity has bottomed out, but may also be a reflection of current challenges in the rental market, with (rental) rates continuing to decline even as rental inventory comes online."
If investor predictions of a recession are correct, that could mean more distressed inventory for home flippers, Sharga said in an email. A recession might also force the Federal Reserve to reverse course and start to cut interest rates, reducing the cost of financing a home purchase.
For rental investors, however, a recession could be bad for business. Renters are typically more impacted by economic downturns than homeowners, which could result in missed rent payments and higher vacancy rates.
"So that could be one of the reasons that rental property investor optimism is a bit weaker," Sharga said.
Still, rental investments could pan out in the long run. "Poor affordability, on the other hand, should provide rental property investors with opportunities over the next few years as prospective homebuyers who've been priced out of the market opt to rent instead," Sharga said.
Similar to typical buyers, investors cited the high cost of financing as the biggest challenge in the current market, followed by low inventory and competition from other buyers. Only 22% of those surveyed plan to buy more properties than they did a year ago, while 39% plan to buy fewer.
Sharga expects the housing market to be sluggish for the next year or two, which will likely reduce the overall number of home flips, but increase the share done by experienced investors who know how to make a profit in today's market.
Bigger players sitting it out?
Smaller rental investors aren't the only ones feeling uncertain about their prospects. An Oct. 3 Wall Street Journal article highlighted data from John Burns Research & Consulting that points to a trend of institutional investors — companies that manage more than 1,000 houses, in their research — buying fewer properties in 2023.
According to their data, large landlords bought 0.4% of U.S. homes in the second quarter of 2023, down from a peak of 2.4% during the fourth quarter of 2021.