Institutional investors are buying fewer homes in many markets nationwide and even pulling out entirely of others, the latest evidence that the once-booming housing market is entering a bumpy stretch.
Fast-rising mortgage rates coupled with near-record-high home prices are causing many institutional investors to crunch the data, and more are finding those huge gains are history.
Home Partners of America, the single-family landlord company owned by Blackstone Inc., will stop accepting applications and property submissions in 38 cities, including Boise, Idaho – a city with a dramatic increase in home prices during the past two years – and Fresno, one of the most affordable markets in California. The company will freeze activity in 10 other cities starting Oct. 1.
“We assessed several factors such as home prices appreciation, state and local regulations, and market demand to guide our investment plans to best serve consumers,” Home Partners said in an announcement on its website. “We hope to resume purchasing homes in these markets in the future.”
REALITY HITTING REAL ESTATE INVESTORS
Other companies – including Invitation Homes Inc., American Homes 4 Rent, and KKR & Co.’s My Community Homes – are also pulling back on buying homes to rent later.
And real estate investors overall – from big corporations to small mom-and-pop landlords – are starting to worry. Investors bought 19.4% of homes that sold nationwide during the second quarter, down from a record 20.1% in the first quarter but up from 16.2% a year earlier, according to Redfin.
“The cooldown in the overall housing market motivates some investors and scares others off. Investors are contending with sky-high home prices just like other buyers.”
— Sheharyar Bokhari, Redfin chief economist
California, like most states nationwide, has been attracting real estate investors for the past few years, thanks to cheap borrowing – remember those record-low mortgage rates – and double-digit price gains. Now as those are memories from a few months ago, fewer investors are purchasing homes in the state (see table below).
‘COOLDOWN’ IN THE HOUSING MARKET … ‘SCARES’ OFF SOME INVESTORS
Home sales to investors dropped a staggering 16% in San Francisco during the second quarter compared to a year ago and were off almost 11% in Anaheim and San Jose, and more than 10% in Sacramento. Other cities had much smaller declines compared to a year ago, according to Redfin.
But investors remain a huge part of the housing puzzle. They accounted for more than one of every five deals in San Diego, San Francisco and Los Angeles during the second quarter. They often buy in cash and are generally less price sensitive.
“The cooldown in the overall housing market motivates some investors and scares others off,” says Redfin senior economist Sheharyar Bokhari. “Investors are contending with sky-high home prices, just like other buyers. Those who plan to turn homes into rentals are still in the market because high rental payments help offset the cost of the home, and the home will likely grow in value over time.”
FEWER INVESTORS ARE ONE LESS ROADBLOCK FOR BUYERS
Of course, home flippers – those who buy, renovate and sell homes in less than a year – are more cautious, especially as home price increases stall or even slide.
“Investor purchases probably won’t bounce back to 2021 levels, but they’ll likely remain more common than before the pandemic because the housing market is stable compared with today’s volatile stock market,” Bokhari says. “Those who buy properties as rentals will still cash in, with high demand and vacancies near record lows. But investors will be less of a roadblock for regular buyers as the housing-market slowdown reduces competition. Investors and individual buyers who can afford to purchase homes have a leg up because other prospective buyers have been priced out.”
Indeed, fewer buyers and more homes will create more of a buyer’s market, as noted by the latest sales and price report from the California Association of Realtors.
RENT NOW, BUY LATER, WITH A TWIST
However, there is a downside to Home Partners of America’s decision to halt purchases in about 5% of its 80 markets, which includes Los Angles, Modesto, Sacramento, San Diego and Vallejo. The company gives many renters a way to homeownership.
Customers apply for the program and, if approved, can submit homes they would like to eventually buy. Home Partners buys the home with cash and rents the house to the customer who then has the right to purchase the home at a predetermined price – much like a vehicle lease.
But with the highest mortgage rates in more than a decade, many of the rent-to-own residents may not be able to afford to buy at this time, as affordability tumbled during the second quarter.
Homes sales to individual investors in second-quarter 2022 vs. a year ago
| Metro | % of sales to investors | Decline in % of sales to investors from a year ago | Median home price paid by investors |
|---|---|---|---|
| Anaheim | 23% | -10.8% | $1.2 million |
| San Diego | 22.2% | -4.8% | $951,000 |
| San Francisco | 20.4% | -15.6% | $2.05 million |
| Los Angeles | 20% | -2.8% | $1.1 million |
| Sacramento | 18.1% | -10.2% | $612,000 |
| Riverside | 17.2% | -8.0% | $574,500 |
| San Jose | 15.9% | -10.8% | $1.75 million |
| Oakland | 14.7% | -4.4% | $1.2 million |
