Investor home purchases fell 30% in the U.S. from a year ago in the third quarter as prices fell, the biggest decline since the Great Recession, excluding the first quarter of the pandemic.
Companies bought about 65,000 homes in the 40 most populous U.S. metropolitan areas, representing an investment of $42.4 billion, according to a study by real estate brokerage Redfin Corporation of county records in those markets. The decline in home purchases by investors outpaced the 27.4% decline in all purchases nationwide.
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- Investor home purchases in the U.S. fell 30% in the third quarter from a year earlier
- Home prices are starting to fall as demand declines from the extreme highs of the pandemic
- A recession could again lead to an increase in investor buying
“The housing markets that investors are pulling back from the fastest are those that grew rapidly during the pandemic and are now declining rapidly,” Redfin Chief Economist Sheharyar Bokhari said in a press release. “This volatility creates a lot of uncertainty, which increases the risk that investors will lose money.”
Demand for suburban homes with outdoor space and space to quarantine or work from home has surged during the pandemic, pushing up prices and investors accounting for a fifth of home purchases earlier this year. After that, price growth began to slow, falling to just 3% year-on-year appreciation in the third quarter, the slowest year-on-year growth since 2020, suggesting that the boom is over and that buyers, and especially investors, are pulling back.
The pandemic is also increasing in prices mortgage rates have pushed affordability beyond what buyers can handle, leading to a drop in demand and prices.
Borrowing rates are rising because the Federal Reserve raised the benchmark interest rates in the fight against inflation and rent growth has also slowed. As a result, investors no longer expect much return on homes and have slowed their purchases.
Places that were most in demand during the pandemic, such as Phoenix and Las Vegas, saw the biggest drop in investor home purchases. Phoenix saw the largest decline of all areas analyzed, at -49.4% year-over-year.
Investor purchases fell 26.1% in the third quarter from the second quarter, the largest quarterly decline in 20 years, excluding the second quarter of 2020. Investors accounted for 17.5% of all home sales in the third quarter, still well above their market share before the pandemic.
“Investors are unlikely to return to the market in a big way anytime soon. For that to happen, home prices would have to drop significantly,” Bokhari said in a press release.
A recession could actually slow the decline in prices because it would likely reduce interest rates on loans, while higher unemployment would give investors an advantage over traditional buyers.
“An investor may have more resources to jump in right when rates are falling,” Daryl Fairweather, chief economist at Redfin, told the Wall Street Journal.
Redfin shares are down 88% over the past 12 months, compared with a 30% decline in the Nasdaq Composite.