Investor Home Purchases Drop 30% as Rising Rates, High Prices Cool Housing Market

Investor purchases of homes fell 30% in the third quarter, a sign that rising lending rates and higher home prices have sidelined traditional buyers, causing even these firms to take a backseat.

Companies bought about 66,000 homes in 40 markets tracked by real-estate brokerage Redfin during the third quarter, compared with 94,000 during the same quarter a year ago. The percentage drop in investor purchases was the largest in a single quarter since the subprime crisis, save for the second quarter of 2020 when the pandemic halted most home buying.

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The investor pullback represents a turnaround from months ago when their buying was still bullish. These firms bought a record number of homes last year and earlier this year, helping to supercharge the housing market.

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Now, investors are reducing their buying activity in line with a decline in overall home sales, which have fallen as mortgage rates have risen sharply. But with investors holding larger cash positions, and with large firms such as JPMorgan Chase & Co. planning to increase their risk exposure in the home buying business, investors are ready to resume more aggressive buying when rates or home prices rise. Prices start coming down.

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These firms have captured the pandemic-induced increase in demand for homes in suburban areas. These owners rented out homes and increased home rents by double digit percentages. By the first quarter of 2022, investors accounted for one in five home purchases nationally.

But rising borrowing costs have kept investors from buying lately, said John Pawlowski, an analyst with Green Street. Buyers and sellers are also becoming less agreeable on pricing, stifling sales.

“It leads a lot of people to put the pen down,” Mr. Pawlowski said.

Rent growth has also started slowing down. Rents for single-family homes rose 10.1% year over year in September, up from 13.9% in April, according to housing data firm CoreLogic.

That rate of growth is still very high by historical standards, and very strong compared to the apartment market. Multifamily rent growth is now very low by most measures. Record-high rental prices have failed to attract as many new tenants, and demand fell to its lowest level in 13 years in the third quarter.

Some analysts say that demand for rental housing has remained subdued partly because many of these homes are leased to relatively high earners, who have found the market too expensive to sell.

Rent increases for single-family owners haven’t translated into stock-market gains this year. Investors clubbed these owners with home builders and sold many of them. Shares of the three largest publicly traded owners of Invitation Homes,

American Homes 4 Rent and Tricon Residential,

are down more than 25% year to date, underperforming the S&P 500 over that period.

Rental landlords also face headwinds from rising property tax assessments, which have come with a steep rise in house prices.

At the same time, large rental landlords are coming under greater scrutiny from federal and local governments. Congressional Democrats have hosted a series of hearings focused on eviction practices and rent increases. This month three members of Congress from California introduced a bill called the “Stop Wall Street Landlords Act,” which proposes new taxes on single-family landlords. This would prevent government sponsored enterprises such as Freddie Mac from obtaining and securing their loans.

Many of the places where investors found it easier to buy were in cities where they accounted for a major chunk of total sales. That includes Las Vegas and Phoenix, where investor sales fell more than 44% in the third quarter compared to a year ago.

According to Redfin, fewer purchases by online house-flippers or iBuyers may have contributed to those declines. Redfin made the decision earlier this month to spin off RedfinNow, its home-flipping business.

Nationally, investors still accounted for 17.5% of all home sales in the third quarter, a higher share than at any time before the pandemic, by Redfin’s count.

That share is likely to rise again. Due to widespread cancellations by traditional buyers, builders with unsold homes are looking to sell in bulk to rental landlords.

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Meanwhile, some institutional investors are now building up large funds to foreclose on homes. JPMorgan’s asset-management business said this month it had formed a joint venture with rental landlord Haven Realty Capital to buy and develop $1 billion in homes. A unit of real-estate firm JLL’s LaSalle Investment Management in partnership with landlord Amherst Group said it plans to buy $500 million worth of homes over the next two years.

Tricon has about $3 billion, which it plans to tap to buy and build homes. “When the time is right, we will raise and deploy that capital,” Tricon Chief Executive Gary Berman said on the November earnings call.

Daryl Fairweather, chief economist at Redfin, said that while a recession could lower lending rates, it would be accompanied by high unemployment, making it difficult for traditional buyers to take advantage. However, for investors, it can provide an opportunity to acquire homes at favorable prices.

“When rates drop an investor may have more resources to jump in,” Ms Fairweather said.

Write to Will Parker at [email protected]

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