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Real estate investor activity dropped 30 percent in the third quarter as investors adjusted to the market slowdown caused in part by high prices and interest rates, according to a report released Tuesday by Redfin.
Aside from the anomaly during onset of the pandemic, the drop was the largest since the Great Recession, the data shows.
It was the latest sign real estate investors were unable to make deals pencil, with a decrease in activity by small-time fix-and-flip investors, independent landlords and institutional buyers.
“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,” Redfin Senior Economist Sheharyar Bokhari said. “This means that regular buyers who are still in the market are no longer facing fierce competition from hordes of cash-rich investors like they were last year.”
Investor activity slowed more in the second quarter of 2020 when the world was reacting to the spread of the coronavirus pandemic. Investor purchases dropped by 44.1 percent during that anomaly, Redfin said.
The slowdown is most pronounced in pandemic boomtowns like Las Vegas and Phoenix, according to Redfin’s analysis, which examined 40 metro areas.
Investors told Inman this month that they could no longer make deals with traditional financing work, as high interest rates and a shrinking buyer pool created difficult conditions.
Some reported they were only sourcing “creative financing” deals, such as assuming a homeowner’s mortgage or fixing a home and sharing profits after a sale without actually buying the house.
The Redfin report also reaffirms data from other companies that track investor purchases.
Attom, which tracks property data nationwide, shared data with Inman showing the share of institutional investors — or companies buying 10 or more homes — fell 20 percent in the third quarter compared to a year ago.
Rick Sharga, executive vice president of market intelligence with Attom, said small-time investors and big institutional buyers are pulling back fastest.
“Market conditions have changed in a way that’s not as favorable for fix-and-flip investing as it’s been in the last couple years,” Sharga said. “The institutions on the other hand, these are much more sophisticated investors, they have a tendency to read market conditions, and they probably are to a certain extent waiting for conditions to improve.”
The investors in between, particularly those who are buying in cash and aren’t as affected by high interest rates, will likely stay active through the down market. Sharga said.
“Your experienced fix-and-flip investors who do multiple properties a year are probably still relatively active,” Sharga added. “They’re used to kind of making the math work when they need to.”
Investor activity fell for all types of housing, Redfin found. But the drop was biggest for single-family homes, which remained the most popular housing type investors purchased.
“The housing markets that investors are backing out of fastest are those that rose rapidly during the pandemic and are now falling rapidly,” Bokhari said. “That volatility creates a lot of uncertainty, which raises the risk of investors losing money.”
Redfin CEO Glenn Kelman partially put blame on investors for the severity of the housing correction earlier this month, pointing to the pandemic-era buying frenzy that included rampant investor activity.
“When the shiitake mushrooms hit the fan, you [investors] want to get out first,” Kelman said. “The way to do that is to figure out where the lowest sale is, and be 2 percent below that. And if it doesn’t sell in the first weekend, move it down [again].”
Metros with largest declines in investor home purchases: Q3 2022
- Phoenix, AZ: -49.4 percent
- Portland, OR: -47.4 percent
- Las Vegas, NV: -44.8 percent
- Sacramento, CA: -43.2 percent
- Atlanta, GA: -42.2 percent
Where is investor activity increasing?
- Philadelphia: 46.4 percent
- New York: 11.2 percent
- Baltimore: 8 percent
- Cleveland: 5 percent
- Newark: 1 percent