Home buying by investors plunged 30% in the third quarter, a sign that rising lending rates and high home prices that have marginalized traditional buyers are also causing these companies to retreat.
Businesses bought about 66,000 homes in the 40 markets tracked by real estate broker Redfin in the third quarter, compared with 94,000 homes in the same quarter last year. The percentage drop in investor purchases was the largest in any quarter since the subprime crisis, excluding the second quarter of 2020, when the pandemic halted most home purchases.
The investor pullback represents a reversal from months ago when their buying was ramping up rapidly. These companies bought homes in record numbers last year and earlier this year, helping to boost the housing market.
Now, investors are reducing buying activity in line with the decline in overall home sales, which have collapsed amid rapidly rising mortgage rates. But with investors’ large cash positions and big firms like JPMorgan Chase & Co. planning to increase their exposure to the home buying business, investors are poised to resume more aggressive buying if interest rates or home prices soften.
These firms have responded to a pandemic-driven surge in demand for suburban homes. These owners rented out the houses and increased house rents by double-digit percentages. Investors accounted for one in five home purchases nationwide through the first quarter of 2022.
But rising borrowing costs have kept investors from buying as much of late, said Green Street analyst John Pawlowski. Buyers and sellers are also less likely to agree on pricing, which stifles sales.
“It causes a lot of people to just put down their pen,” said Mr. Pawlowski.
Rental growth has also started to slow down. Single-family home rents rose 10.1% year over year in September, compared with 13.9% in April, according to housing data company CoreLogic.
In a historical comparison, however, this growth rate is still very high and significantly stronger than in the housing market. Rent increases for apartment buildings are now much lower on most measures. Near-record rents aren’t attracting as many new tenants, and demand fell to a 13-year low in the third quarter.
Demand for rental homes has held up better, in part because many of these homes are rented to relatively high-income people who have found buying on the sale market too expensive, some analysts say.
That rental growth for single-family owners hasn’t translated into stock market gains this year. Investors have lumped these owners with home builders and sold many of them. Stocks for the three largest publicly traded owners, Invitation Homes,
American Homes 4 Rent and Tricon Residential,
are each down more than 25% year-to-date, underperforming the S&P 500 over the period.
Rental home landlords are also facing headwinds from rising property tax bills that have accompanied a huge increase in house prices.
At the same time, large landlords are coming under more scrutiny from federal and local governments. Congressional Democrats have held a series of hearings focused on eviction practices and rent increases. Three California congressmen this month introduced a bill called the Stop Wall Street Landlords Act, which proposes new taxes on single-family landlords. It would prevent state-sponsored companies like Freddie Mac from acquiring and securitizing their debt.
Many of the places where investors have facilitated buying are the same cities where they had an outsized share of total sales. That includes Las Vegas and Phoenix, where investor sales fell more than 44% year over year in the third quarter.
Fewer purchases from online home pinball machines, or iBuyers, may have contributed to these declines, according to Redfin. Redfin earlier this month decided to shut down its own home flipping business, RedfinNow.
Nationwide, investors still accounted for 17.5% of all home sales in the third quarter, a higher share than at any time before the pandemic, according to Redfin’s count.
This share is likely to increase again. Builders with unsold homes due to widespread cancellations by traditional buyers have attempted to sell to landlords in bulk.
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Meanwhile, some institutional investors are now preparing large funds to buy houses. JP Morgan’s wealth management business announced this month that it has formed a joint venture with landlord Haven Realty Capital to buy and develop $1 billion in homes. A division of JLL’s real estate firm LaSalle Investment Management, in partnership with landlord Amherst Group, has announced plans to buy $500 million worth of homes over the next two years.
Tricon has nearly $3 billion it plans to use to buy and build homes. “We will step in and deploy this capital when the time is right,” Tricon chief executive Gary Berman said at an earnings call in November.
While a recession could lower lending rates, it would likely be accompanied by higher unemployment, making it harder for traditional shoppers to take advantage, said Daryl Fairweather, Redfin’s chief economist. For investors, however, this could offer an opportunity to purchase apartments at reasonable prices.
“An investor may have more resources to get in at the very moment interest rates are falling,” Ms Fairweather said.
Write to Will Parker at [email protected]
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