Large Investors Retreat from Housing Market but Smaller Groups are Still Buying

Article originally posted on HERE on January 10, 2024

Investors have earned significant attention since the Covid-19 pandemic run-up in housing demand and prices. With available equity and the ability to make aggressive offers on homes, including all-cash offers, these buyers — ranging from iBuying startups and big institutional players to mom-and-pop groups — have been viewed as a significant force in the competitive housing markets of 2021 and 2022 in particular.

Since 2021, investors of all sizes and stripes have made roughly one-quarter of all single-family purchases, according to CoreLogic Inc., an Irvine, California-based property data company. In July, August and September 2023, the share of single-family purchases made by investors was 26.8%, 27.2% and 28%, respectively.

Fourth-quarter numbers are not yet final, but CoreLogic economist Thom Malone said preliminary estimates suggest similar figures for the final three months of the year — with one notable difference: Larger investors are buying fewer homes now while small investors are still buying.

Mega and large investors — defined as those that own 1,000-plus or 100 to 999 properties, respectively — each purchased between 8,000 and 10,000 single-family homes per month throughout 2023, according to CoreLogic. That’s still about 1,000 more transactions per month than in 2019, but for mega investors, it’s well below the typical 20,000-plus purchases made per month in 2021 and 2022.

Redfin Corp., which also tracks investor purchase activity, also found those groups were slowing last year. In a November report, it found investor purchases of U.S. homes dropped 29.7% year over year in the third quarter. That slowdown outpaced even the broader dip in the housing market, in which overall home purchases fell 22.2% in the third quarter from the same time a year prior.

Redfin estimated the total share of investor purchase activity in the third quarter of last year was 15.9%. Its analysis included data from 39 of the nation’s 50 largest metro areas.

Why larger investors are pulling back

Malone said one reason why larger investors collectively are purchasing fewer homes is the pullback of iBuyers from the broader housing market.

CoreLogic doesn’t distinguish an iBuyer from the broader mega investor pool, but iBuyers have a different business model than traditional investors — a model that’s been tested during the pandemic housing market’s dramatic swings.

In August 2021, iBuyers made about 9,000 purchases nationally. That number had fallen to about 1,000 per month by late last year, Malone said.

“That’s just a harder business model to maintain when prices aren’t (rising as much),” he said.

Among all investors, mega and large groups each held an investor market share of about 10% at the end of the third quarter. That’s closer to the percentages those groups held pre-pandemic, down from a time in 2021 when mega investors in particular surged to 18%, adding market share in the immediate run-up following the onset of the pandemic.

The share held by medium investors (those that own 10 to 99 properties) at the end of the third quarter last year was 35%, while activity from small investors (those that own three to nine properties) was around 45%.

Some single-family rental giants like Dallas-based Invitation Homes Inc. are bolstering their build-to-rent sectors, especially with the existing home market’s limited inventory. Some groups that’ve traditionally only purchased existing homes and rented them out also are purchasing build-to-rent properties directly from builders.

Malone said it needs to be studied more closely why smaller investors have been able to maintain their share while other sized groups have pulled back, but anecdotally, he said because the minimum number of properties a small investor has to own is, by CoreLogic’s measurement, three, there’s been a notable increase lately in buyers purchasing a third property.

“A lot of people are locked in to such low (mortgage) rates that when they’re moving, rather than selling their old home, they’re instead deciding to rent that out,” Malone said.

What’s next for investors in 2024?

Investors have been most prolific in high-growth Sun Belt markets. During the pandemic, the investor share in those housing markets grew significantly, rising to more than 25% of all home purchases in some quarters.

But investor purchases have since declined fastest in those same metro areas, with Atlanta seeing the steepest decline on an annual basis (-49.7%) in Q3, followed by Charlotte, North Carolina (-49.6%); Jacksonville, Florida (-48.2%); Phoenix (-47.4%); Las Vegas (-43.3%); Orlando, Florida (-42.6%); and Tampa, Florida (-41.3%), according to Redfin.

Malone said CoreLogic’s data suggests investors are still targeting Sun Belt markets, in addition to California cities like San Jose and Los Angeles.

Looking at 2024, it’s possible investor share in the housing market could rise in January and February because of the seasonal slowdown at the start of the year among owner-occupiers. Overall, though, it’s not expected investor share will meaningfully move up or down this year, Malone said.

“The investor share went up really high when a bunch of radical things were happening in the housing market, like record (price) appreciation,” he said. “Without the rest of the real estate market doing extraordinary things, it’s hard to see what the driving force behind investors greatly increasing their share would be.”

And with affordability still being a major challenge for households across the U.S., that’s going to drive more people to the rental market, which which creates an incentive for investors to add rental properties, Malone said.

“There doesn’t seem to be any clear sign this share will go up or down a lot in the near future — the only big question is interest rates and how that will affect the housing market,” he said.