Home purchases by investors fell 30% in the U.S. from a year ago in the third quarter as prices slid, the largest decline since the great recession, not including the first quarter of the pandemic.
Companies bought about 65,000 homes in the 40 most populous U.S. metropolitan areas, amounting to $42.4 billion of investment, according to a study by real estate brokerage Redfin Corporation of county records in those markets. The decline in investors' home purchases outpaced the 27.4% drop of all purchases nationwide.
- Investor home purchases in the US fell 30% from a year ago in Q3
- Home prices are beginning to fall as demand decreases from the extreme highs of the pandemic
- A recession could lead to an increase in investor purchases again
“The housing markets that investors are backing out of fastest are those that rose rapidly during the pandemic and are now falling rapidly,” Redfin Senior Economist Sheharyar Bokhari said in a press release. “That volatility creates a lot of uncertainty, which raises the risk of investors losing money.”
Demand soared during the pandemic for suburban homes with outdoor space and room to quarantine or work at home, driving up prices, and by the start of this year, investors accounted for a fifth of home purchases. Then price growth began to slow, falling to just 3% year-over-year appreciation in the third quarter, the slowest annual growth since 2020, indicating that the boom is over and buyers, and especially investors, are retreating.
The pandemic’s run-up in prices as well as rising mortgage rates have pushed affordability beyond what buyers can handle, leading to a decline in demand and prices.
Borrowing rates have been increasing as the Federal Reserve has raised benchmark interest rates to fight inflation, and rent growth has also slowed. As a result, investors no longer expect a large return on homes and have slowed down their purchases.
Places that were in the highest demand during the pandemic, such as Phoenix and Las Vegas, saw the largest decline in investor home purchases. Phoenix had the largest fall of any area analyzed, at -49.4% year-over-year.
Investor purchases dropped 26.1% in the third quarter from the second quarter, the largest quarterly decline in the last 20 years, excluding the second quarter of 2020. Investors accounted for 17.5% of all home sales in the third quarter, still far above their market share pre-pandemic.
“It’s unlikely that investors will return to the market in a big way anytime soon. Home prices would need to fall significantly for that to happen,” Bokhari said in a press release.
A recession could actually slow the price declines as it would likely reduce borrowing rates, while higher unemployment would give investors an advantage over traditional buyers.
“An investor may have more resources to jump in at exactly the moment when rates decline,” Daryl Fairweather, Redfin’s chief economist, told the Wall Street Journal.
Redfin stock has fallen 88% in the last 12 months, compared with the 30% drop in the Nasdaq Composite.