(Photo by Joe Raedle/Getty Images)
- Real-estate investors spent billions buying homes to flip or rent out when it was cheap to borrow.
- But investors have backed off, especially in formerly hot areas like Phoenix, Redfin found.
- The significant drop in investor purchases means less competition for regular homebuyers.
Real-estate investors are known for "doing the numbers," or calculating the potential profitability of a project, before snapping up homes to renovate and rent out or sell for a profit.
New evidence, however, suggests that the numbers don't seem to be working anymore.
According to a February report from national brokerage Redfin, home purchases by investors during the final quarter of 2022 fell a dramatic 46% from the same quarter in 2021. The figure is notable for being the largest year-over-year drop in investor purchasing activity recorded since Redfin started tracking it in 2002, researchers said.
But the recent about-face from investors may be a boon to regular homebuyers, particularly those who until recently had to compete with competitive cash offers from investors.
The term "real-estate investor" refers to people or companies not buying a property as their primary residence. It includes everyone from scrappy DIY-ers who buy, fix up, and resell properties on their own to couples flipping homes and building a business. The catchall phrase also includes investment banks and private-equity giants like Blackstone and JPMorgan, many of which snapped up thousands of single-family homes during the pandemic to rent out as megalandlords.
Investors purchased approximately $31 billion worth of properties — equivalent to 48,445 homes —nationwide in the last three months of 2022. This represents a substantial decline from the $54 billion in purchases, or 89,396 homes, from the same period a year prior. Still, it's a small subset of the nearly 6 million homes sold each year, according to the National Association of Realtors.
Investors back off of buying sprees for a number of reasons. One key culprit is relatively high interest rates, which makes it hard to borrow money to buy new properties. Flippers who have to contend with still-high home prices may think they can't make a big-enough profit off a single renovation. And would-be landlords might be discouraged by signs that rents are flattening out.
"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," Redfin Senior Economist Sheharyar Bokhari wrote in the report. "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."
When boomtowns (and boom times) go bust
Homebuyers might have the best luck in the places with the biggest drop in investor-buying activity. They include Las Vegas, Phoenix, the New York City suburb of Nassau County, Atlanta, and Charlotte, all of which saw investor purchases fall over 60% year-over-year, the report said.
In Phoenix, not only is investor appetite for properties falling drastically, but home prices are in freefall as well. Phoenix is one of the US cities with the largest decline in home prices. December's $410,000 median sale price represented a 10.5% drop from the 2022 peak price of a typical home in the desert metropolis of 1.62 million people.
But the drop in home prices and investor purchases last year could signal even more dire conditions in 2023, some analysts and experts predict. Last month, global finance behemoth Goldman Sachs predicted that Phoenix — along with San Jose, Austin, and San Diego — could see a full-blown 2008-style housing crash where prices could fall 25% or greater from the 2022 peak.
Relatively lower prices are nice for buyers, but even better are the concessions that homebuilders and sellers are offering to sweeten the deal and lure interest. A separate Redfin report found that Phoenix was one of the top cities where concessions were offered to buyers: nearly 63% of closed deals in the last quarter of 2022 included concessions.
Common concessions include money towards needed repairs, mortgage-rate buydowns, and warranties on appliances.