Institutional investors (those who own 1,000 or more homes) are selling their inventory in 2023. These large investors have reduced their buying activity by about 80% in Q4 of 2021 as compared to Q4 of 2022. John Burns Research & Consulting,
This change in activity has resulted in 90% fewer home purchases in January and February this year than in the first two months of 2022.
This is in stark contrast to the pandemic buying of homes in the US. These were times when it was easy to borrow money and interest rates were at a low level – this combined with rising rents and rising home prices created a perfect storm for institutional homebuyers. for their portfolio. So, why has the trend reversed?
We’ll take a closer look at the trends among institutional homebuyers, the reasons they’re holding back, and what it means for individual investors.
selling homes and shrinking portfolios
American Homes 4 Rent and Invitation Homes were net sellers in the first quarter of this year. As of March 31, 2023, American Homes 4 Rent—the leading builder of single-family rental communities—had a portfolio of 58,639 homes, compared to 58,993 homes (666 homes sold, 299 newly built and 13 homes sold) compared to 354 had become less than houses. acquired) by December 31, 2022.
In the first quarter of 2023, Invitation Homes bought 194 homes and sold 297. As the largest owner of single-family rentals in the US, its portfolio shrank from 83,113 to 83,010 single-family homes.
What’s more, data from Redfin shows that declining home prices are causing institutional investors to flee once-sought-after cities like Las Vegas, Nevada, and Phoenix, Arizona. How much has he dropped? According to Realtor.com, newly constructed homes in Phoenix declined 15% year over year in March.
rising interest rates
Along with rapid rate increases by the Fed, this has caused mortgage rates to drop. According to Forbes, the 30-year fixed mortgage rate was 3.22% in early 2022, but has since risen to an average of 7.17%. As a result, deals are not as attractive as they were during the pandemic.
What’s in store for the rest of the year? Experts—including Dave Mayer—are predicting more volatility in interest rates and that we may or will reach a peak during the summer, with rates holding steady through the end of the year.
housing prices are fluctuating
According to Realtor.com, we are seeing limited inventory as new home listings are down more than 20% compared to last year. In an April report from the National Association of Realtors (NAR), data showed the median existing home sale price fell 1.7% from a year earlier to $388,800.
Overall, we are seeing limited inventory and declining home sales, with home prices booming in half the country, while declining from pandemic peaks in the other half.
Rent growth has declined
Lately, rental growth in the US has been flat. In April, asking rents in the US rose only 0.29% annually to $1,967 – the lowest year-over-year rent increase in 37 months. New Orleans, Louisiana (-15%) and Austin, Texas (-14%) were the hardest hit. During the pandemic, we saw Millennials start families and buy homes, but now plan to stay in homes.
Even though rent growth has slowed down, tenant demand is likely to pick up. The issue of housing affordability will make home ownership challenging for Americans.
Are Institutional Investors Scooping Up All the Inventory?
Contrary to popular belief, institutional homebuyers are not sucking up inventory and driving up prices even higher. In fact, according to NAR, although the institutional homebuyer share increased in 84% of states, they accounted for only 15% of single-family home purchases in 2021. Versus Goliath.
What this means for everyday investors
These factors mean that the return on investment is not as attractive during the pandemic. Finally, with interest rates rising, housing prices rising, and rental growth slowing, financial benefits aren’t what they used to be.
However, if you live in certain Sun Belt areas, including Texas, Georgia, Oklahoma and Alabama, you may have seen more institutional homebuyer activity than usual. These sectors form a major part of the overall homebuying activity. So, it depends on where you live in the US to determine how much this will affect you.
Another study by Yardi Systems shows that in 2022, institutional investors in single-family rentals will make up only 5% of the market (700,000 out of 14 million). Furthermore, MetLife Investment Management (MIM) predicts that this could grow to 40%, or 7.6 million households, by 2030.
Is it a good time to buy rental property?
Only time will tell when institutional homebuyers will rise from the sidelines and actively buy more inventory. If mortgage interest rates and home appraisals decrease, we may see an increase in buying activity. Shaharyar Bokhari, a senior economist at Redfin, predicted that “it is unlikely that investors will return with the same enthusiasm in 2021.” This is welcome news for mom-and-pop real estate investors who feel they are competing with institutional investors.
What’s more, it comes down to crunching the numbers to see if it makes financial sense. With mortgage rates rising and inventory low, we are seeing Americans foreclosing as well. But with rising house prices across the country, the demand from renters will increase in the long term. You’ll need to determine whether a potential rental property will add value to your portfolio based on your personal financial goals.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
