Investor Activity in U.S. Residential Real Estate Sees Steep 49% Annual Decline
In the first quarter of 2023, real estate investors in the United States purchased significantly fewer homes compared to the previous year, marking a substantial 48.6% decrease. This notable downturn is the largest annual decline on record, surpassing the 40.7% drop observed in overall home purchases across the 40 major metropolitan areas monitored by Redfin.
Quarter-over-quarter, investor purchases dipped by 15.9%, a figure closely aligned with the 14.7% decrease observed in overall home purchases during the same period.
Redfin Senior Economist Sheharyar Bokhari commented on this trend, stating, “While investors have slowed down their home purchases, they still account for a larger share of homes than pre-pandemic levels, posing challenges for individual buyers amidst a limited inventory.” Bokhari highlighted that investors are gravitating towards more affordable properties due to persistent high housing costs and rising mortgage rates, consequently reducing the availability of starter homes for first-time buyers.
The surge in investor home purchases during the pandemic, driven by historically low mortgage rates and surging housing demand, has now subsided. The current pullback can be attributed to rising interest rates, causing housing values to decline in many parts of the country as demand from homebuyers wanes. Even though many investors utilize cash for purchases, the impact of high interest rates is felt, particularly as they often resort to non-mortgage loans for renovations and other expenses.
Heather Kruayai, a Redfin Premier real estate agent based in Jacksonville, FL, noted the decline in investor offers, stating, “It’s been about eight months since one of my listings sold to an investor. I rarely get offers from investors these days, and when I do, it’s a lowball offer on a house that’s been sitting for a while.”
Looking ahead, borrowing costs continued to rise in May, potentially leading to further investor retreat from the housing market in the second quarter. Typically, investor home purchases increase in the spring, but second-quarter data may reflect stagnant or declining activity.
The challenging landscape extends to landlords experiencing slowed rent growth, making profit margins tighter. Additionally, investors engaged in home flipping are facing hurdles in turning profits due to declining home prices. In March, approximately 13.5% of homes sold by investors were at a loss, nearing the seven-year high set in February. Home flippers fared worse, with 20.8% of homes resold at a loss.
The first quarter of 2022 saw near-record highs in investor home purchases, further accentuating the dramatic year-over-year decline witnessed in 2023. Overall, investors acquired $27.5 billion worth of homes in the monitored metros during the first quarter, marking a substantial 46.3% decrease from the previous year.
Investors Continue to Hold Significant Market Share Despite Declines in Home Purchases
In the first quarter of this year, investors maintained a notable presence in the housing market, acquiring 17.6% of homes purchased in the metropolitan areas tracked by Redfin. While this figure represents a decline from the peak of 20.4% observed a year earlier, it remains higher than any quarter preceding the pandemic.
Redfin Senior Economist Sheharyar Bokhari noted that investor market share is likely elevated above pre-pandemic levels due to many individual homebuyers being priced out of the market.
For a substantial reduction in investor market share to occur, investors would need to scale back their purchases significantly more than regular buyers. Presently, both investor and regular buyer groups are rapidly withdrawing from the market.
Investor Activity in Sun Belt Markets Witnesses Significant Declines
Nassau County, NY, experienced the most notable decrease in investor home purchases, plummeting by 67.9% year-over-year in the first quarter, according to analysis conducted by Redfin across 40 major metros. Following closely behind were Atlanta (-66%), Charlotte, NC (-66%), Phoenix (-64.2%), and Nashville, TN (-60.4%). Other metros in the top 10, including Las Vegas, Jacksonville, Philadelphia, Tampa, FL, and Orlando, FL, also saw declines exceeding 50%.
With the exception of Nassau County and Philadelphia, all of these metros are located in Sun Belt states, which experienced a surge in popularity among homebuyers during the pandemic. Investors rushed in to capitalize on rising rents and home values, but are now retreating as housing markets in the Sun Belt cool down after experiencing rapid growth in recent years.
In Phoenix, for instance, a staggering 30.7% of homes sold by investors in March were sold at a loss, marking the highest share among the 40 metros analyzed by Redfin. Las Vegas followed closely behind with 28%, trailed by Jacksonville (20.9%), Sacramento, CA (20.2%), and Charlotte (17.4%).
The decline in investor purchases may also be attributed to the popularity of iBuyer investors in markets like Atlanta, Charlotte, Las Vegas, and Phoenix. Many iBuying companies, including RedfinNow, have either ceased or scaled back their operations in recent years.
Meanwhile, Baltimore saw the smallest decrease in investor purchases, falling by only 8.8% year-over-year in the first quarter. It was trailed by Providence, RI (-9.6%), Seattle (-15.5%), Milwaukee (-21.6%), and Cleveland, OH (-23.2%).
Investors Witnessed Significant Market Share Declines in Charlotte, Atlanta, and Phoenix
The latest data from Redfin reveals that investors experienced a notable decline in market share across 17 of the 40 metros analyzed. This decline is particularly evident in areas where investor purchases saw substantial drops. In Charlotte, for instance, investors accounted for 18.4% of homes purchased in the first quarter, marking a significant decrease of 14.1 percentage points from 32.5% recorded a year earlier. This represents the most significant percentage-point drop among the metros analyzed. Following Charlotte are Atlanta (with a decline of 14 percentage points), Phoenix (11.1 percentage points), Jacksonville (10.7 percentage points), and Nashville (9.3 percentage points).
On the contrary, investors saw an increase in market share in certain areas. Baltimore, for instance, witnessed a rise in investor purchases, with investors buying 21.6% of homes in the first quarter compared to 17% a year earlier, marking a 4.6 percentage point increase. Other areas where investors gained market share include Nassau County (4.3 percentage points), New York (4 percentage points), Providence (3.4 percentage points), and Seattle (2.8 percentage points).
Overall, Miami retained the highest market share for investors, with investors purchasing 30% of homes in the first quarter. Following closely behind are Cleveland (24%), Anaheim, CA (22.6%), Detroit (22%), and Jacksonville (22%).
Conversely, the lowest market share for investors was observed in Warren, MI (10.6%), Montgomery County, PA (10.6%), Washington, D.C. (10.6%), Minneapolis (11.1%), and Portland, OR (11.5%).
Increase in Low-Priced Homes Among Investor Purchases
The latest data from Redfin unveils a notable shift in the composition of investor purchases, with low-priced homes representing a significant portion of acquisitions in the first quarter. In fact, low-priced homes accounted for nearly half (48.7%) of investor purchases during this period, marking the highest share observed in the past two years. Conversely, mid-priced homes constituted approximately one-quarter (23.6%) of investor purchases, reflecting the lowest share recorded in the same timeframe. High-priced homes remained relatively stable, comprising 27.7% of investor purchases, a figure consistent with previous quarters.
Analyzing specific figures, investors acquired 24.9% of all low-priced homes purchased in the metros tracked by Redfin in the first quarter. This percentage closely aligns with the record high of 25.3% observed a year earlier. Conversely, investor purchases accounted for 12.5% of mid-priced homes, marking the lowest share seen in the past two years, and 15.3% of high-priced homes.
The data suggests that investors currently active in the market are gravitating towards more affordable properties, driven by persistently high home prices and elevated interest rates. Notably, a record 41.1% of investor purchases in the first quarter were classified as starter homes, defined as homes with 1,400 square feet or fewer. This represents a notable increase from the 37.2% share observed a year earlier.
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