Why are property investors continuing to buy fewer homes in the US housing market and could they increasingly look abroad for their next investment?
In the second quarter of 2023, recent data show that property investors in the US housing market were buying 45% fewer homes compared to a year earlier. According to research by Redfin, this outpaces the 31% drop in overall home sales during that time period, which is the biggest decline since 2008 with the exception of the quarter before.
The relatively cool US housing and rental markets makes investing in properties less attractive at the moment. The investor market share is currently down to 16% after hitting an all-time high of 20% during the first quarter of 2022.
Additionally, a drop in purchases has brought the total number of residential properties bought by investors below pre-pandemic levels. Investors purchased roughly 50,000 homes in the second quarter of this year, the fewest of any second quarter in seven years besides at the start of the COVID-19 pandemic.
This marks a retreat from a boom in property investor activity seen in the US housing market across the past couple of years. In dollar terms, investors bought a total of $36.4bn worth of homes in the second quarter, which is down 42% from a year earlier.
Certain areas have seen investor purchases drop by even more than the national average. For example, Las Vegas, Jacksonville, FL and Phoenix recorded the biggest drops of the 39 most populous metro areas across the country with investor purchases decreasing by 65% year-on-year.
What’s behind this drop in investor purchases?
High house prices and mortgage rates paired with limited inventory and widespread economic uncertainty have dampened overall US housing demand and suppressed home sales. And property investors in the US housing market have backed off even faster than individual homebuyers.
Sheharyar Bokhari, senior economist at Redfin, comments: “Moving forward, the investors who do come back may be more focused on scooping up rental properties than flipping homes.
“All signs point to the rental market remaining relatively strong. Home prices and mortgage rates are high enough to motivate would-be first-time homebuyers to continue renting.
“The typical U.S. asking rent remains quite high, just $16 shy of its all-time high, so investors who are landlords stand to earn money. Investor purchases of rental properties could be limited by some of them building new properties to rent out, though.”
Even if US property investors’ market share picks back up later this year, their purchase volume is expected to remain low. They’re limited by a severe lack of listings as some current homeowners are locked in to relatively low mortgage rates.
Are mortgage rates still rising?
Impacting the US housing market, mortgage rates have soared towards 8%, hitting their highest level in over 20 years at the beginning of October, according to Redfin. This, along with high house prices due to low housing supply, are cutting into investors’ budgets.
The total number of residential properties for sale is down 14%. Mortgage-purchase applications have also dropped to their lowest level in nearly 30 years.
Chen Zhao, economic research lead at Redfin, explains: “There are several reasons why mortgage rates are still climbing. The Fed hinted that another interest-rate hike before the end of the year is likely, the latest job market data came in stronger than expected, and the yield curve is steepening as investors prepare for higher rates for longer.”
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