As market slows, investors may pull back on their buying spree in California
Estimated reading time: 6 minutes
Bidding wars. Dramatically fewer homes on the market. Record-high prices.
Buying a home is tough.
Now, wanna-be buyers are facing another competitor — more investors entering the market.
Investors bought almost one of every five (18.2%) homes sold nationwide during the third quarter, a dramatic increase from the 11.2% a year ago, according to Redfin. Investors snapped up a record 90,215 homes during the July-September period — up 80% from a year earlier.
Now, it’s worth noting that iBuyers — think Zillow and Opendoor — are a tiny fraction of investors purchasing homes. So, Zillow’s decision to exit the home-buying market will have little, if any, effect on the competition.
One of every five homes in San Francisco, San Diego and Riverside was sold to investors
Investors are even a bigger player in California, with five of eight regions in the state exceeding the national average.
Sacramento, again one of the best-selling markets in the nation, had the largest percentage increase in the state at 56.3% compared to a year ago. Riverside had the second-largest percentage increase at 49%.
San Francisco had the largest percentage of homes sold to investors during the third quarter at 20.4%, with Los Angeles, Riverside and Sacramento all above 19% for the quarter.
“Increasing home prices fueled by an intense housing shortage have created opportunities for investors to reap big profits,” says Sheharyar Bokhari, senior economist for Redfin. “Those same factors have pushed more Americans to rent, which also creates opportunities for investors because investors typically turn the homes they purchase into rentals and can now charge higher rents.”
Average monthly rents rose 10.7% year over year in September, the fastest growth in at least two years, while the median home sale price increased 13.9%. It’s a double-win for investors — higher rents and increasing home prices.
But for everyday buyers, such as families looking to buy for the first time, investors are making it tough.
“With cash-rich investors taking the housing market by storm, many individual homebuyers have found it tough to compete,” Bokhari says. “The good news for those buyers is that the housing market has started to cool. Bidding wars are on the decline, and if home-price growth continues to ease, we may see investors slow their roll.”
Feature photo of homes in Simi Valley./ Shutterstock
Percentage of homes sold to investors in third quarter 2021, the total sold to them and the median price they paid
|City||% of homes sold to investors||Homes sold to investors||Price paid by investors|
|San Francisco||20.4%||815||$1.91 million|
|Los Angeles||19.1%||4,385||$1.1 million|
|San Jose||13.8%||754||$1.68 million|
More than 3.5 million California homeowners have more equity than debt
Many homeowners should feel rich. Well, at least when it comes to their homes.
More than half (52.1%) of homeowners with a mortgage in California had more equity than debt during the third quarter, thanks to double-digit price gains in the past 18 months, according to ATTOM Data Solutions. It’s a huge increase from the 39.7% of equity-rich homeowners a year ago.
About 3.54 million California homeowners were equity rich at the end of September — about 630,000 more than a year ago.
Despite some of the highest home prices in the state, the San Jose region has the highest percentage of equity-rich homeowners at 65.8%, followed by San Francisco at 61.2% (see table for nine regions).
The Sacramento region — one of the hottest housing markets in the nation — had the largest percentage-point increase at 22.9 (45.8% of homeowners were equity rich in the third quarter, compared to 32.9% a year ago).
California, like all western states, has enjoyed impressive gains during the COVID pandemic. Booming demand coupled with a limited supply of homes are increasing prices — multiple offers are still the norm — and that should remain in 2022, according to multiple housing experts.
U.S. homeowners ‘watch their balance sheets grow’
Almost two of every five (39.5%) homeowners with a mortgage in the U.S. were equity rich during the third quarter, compared to 28% a year ago.
Idaho has the highest percentage of equity-rich homeowners at 65%, followed by Vermont (61.2%) and Utah (60.9%). All three states benefit from two major factors: a dramatic increase in home prices in recent years and owners generally remain in their homes longer than those in California.
Eight of the 10 states with the largest percentage increase in equity were in the West, led by Idaho at 15.4 percentage points.
“Homeowners across most of the United States could sit back with a smile … in the third quarter and watch their balance sheets grow as soaring home prices pushed their equity levels higher,” says Todd Teta, chief product officer with ATTOM Data. “There is no doubt that homeowners continue benefiting big-time from the relentless home price increases we are seeing across the country.”
3 of every 4 families cannot afford to buy a home
While homeowners cheer their equity gains, those looking to buy are facing an uphill battle to homeownership — though there was a bit of optimism with the latest affordability and home sales reports from the California Association of Realtors.
Affordability inched higher during the third quarter, thanks to falling mortgage rates and home price increases slowing.
But more affordable doesn’t mean a lot more families can buy a home in the Golden State.
Fewer than one of every four households (24%) could afford a home during the third quarter, up slightly from the 23% in the second quarter — and 28% a year ago, according to the California Association of Realtors.
The average buyer would need to earn at least $148,400 to qualify for a 30-year, fixed-rate mortgage with a monthly payment of $3,710. The figure is based on a 20% down payment, or about $162,000 for the $816,000 median-priced home.
Yep, affordability doesn’t mean cheap. The average household earns about $75,000 per year in the state — much less than the almost $150,000 needed to purchase.
CAR’s closely watched affordability index crunches data based on the average household income and the median-home price based on county or region. California has become less affordable for buyers during the past several years, falling from the modern-day record high of 42% in third-quarter 2012, when the economy — and the housing market — was recovering from the Great Recession.
Only two counties in the state — Lassen (68%) and Kings (56%) — had affordability indexes above 50%, which is also the national average.
Housing costs are among the biggest concerns for Californians, and are prompting some to abandon the state in favor of lower-priced places such as Arizona, Nevada, Texas and Utah.
Fewer than one of every five families could afford to buy in Alameda, Los Angeles, Orange, San Mateo, Santa Barbara and Santa Cruz counties.
Affordability for select counties and household income needed to purchase in third-quarter 2021
|County||Affordability rate||Household income to buy|
Longtime business journalist-turned-communications executive who enjoys reporting on residential real estate in his spare time.