Institutional investors (those who own 1,000 homes or more) sold off their inventory in 2023. These large investors reduced their buying activity by about 80% from the fourth quarter of 2022 compared to the fourth quarter of 2021, according to John Burns Research and Consulting.
This change in activity led to a 90% decrease in the number of homes purchased in January and February of this year compared to the first two months of 2022.
This is a sharp contrast to the epidemic home buying in the US in these times when it was easy to borrow money and interest rates were rock bottom – along with rising rents and skyrocketing home prices making it the perfect storm for institutional homebuyers to add to their portfolios. So why has the trend reversed?
We’ll take a closer look at the trends of institutional homebuyers, the reasons for their decline, and what this means for retail investors.
Sell homes and shrink purses
American Homes 4 Rent and Invitation Homes had net sales in the first quarter of this year. As of March 31, 2023, American Homes 4Rent—a leading builder of single-family rental communities—had a portfolio of 58,639 homes, which was reduced by 354 compared to 58,993 (666 homes sold, 299 built newly acquired and 13 acquired) as of December 31, 2022.
In the first quarter of 2023, Invitation Homes bought 194 homes and sold 297. As the largest owner in the United States of single-family rentals, its portfolio decreased from 83,113 to 83,010 single-family homes.
Moreover, data from Redfin shows that institutional investors are fleeing once desirable towns like Las Vegas, Nevada and Phoenix, Arizona, due to falling home prices. How much did they drop? Newly built homes in Phoenix fell 15% year-over-year in March, according to Realtor.com.
High interest rates
With the Fed raising interest rates rapidly, it has caused mortgage rates to go up. According to Forbes, the 30-year fixed rate mortgage rate was 3.22% in early 2022, but has since increased to 7.17% on average. Thus, the deals are not as profitable compared to what they were during the pandemic.
What’s in store for the rest of the year? Experts – including Dave Meyer – predict more volatility in interest rates and that we may or may have peaked during the summer, with rates stabilizing by the end of the year.
Home prices are volatile
We’re seeing limited inventory as new home listings are down more than 20% year over year, according to Realtor.com. In an April report from the National Association of Realtors (NAR), data shows that the median existing home sales price fell 1.7% from a year ago to $388,800.
Overall, we’re seeing limited inventory and declining home sales, along with home prices rebounding again in half of the country, while the other half is falling back from pandemic peaks.
Rental growth has decreased
Recently, rental growth in the United States has been steady. In April, required rents in the US increased just 0.29% annually to $1,967 — the smallest year-over-year rent growth in 37 months. New Orleans, Louisiana (-15%) and Austin, Texas (-14%) were the hardest hit. During the pandemic, we’ve seen millennials start families and buy homes, but now families are planning to stay put.
Although rent growth may have slowed, tenant demand is likely to increase. The issue of housing affordability will make it more difficult for Americans to become homeowners.
Do Institutional Investors Accumulate All Stock?
Contrary to popular belief, institutional homebuyers don’t suck up inventory and drive prices up. In fact, according to NAR, even though institutional homebuyers increased their share in 84% of states, they accounted for only 15% of single-family home purchases in 2021. So, everyday investors shouldn’t worry too much about a David battle scenario against Goliath.
What does this mean for everyday investors?
These factors mean that return on investment is not nearly as profitable during a pandemic. In the end, with interest rates rising, home prices inflating, and rent growth slowing, financial gains are not what they once were.
However, you may have noticed higher-than-usual homebuyer institutional activity if you live in certain areas of the Sun Belt, including Texas, Georgia, Oklahoma, and Alabama. These areas accounted for a larger portion of the overall homebuying activity. So, it depends on where you live in the US to determine how much it affects you.
Another study by Yardi Systems shows that in 2022, institutional investors who own single-family rentals made up just 5% of the market (700,000 out of 14 million). Moreover, MetLife Investment Management (MIM) expects it to grow to 40%, or 7.6 million homes, by 2030.
Is it the right time to buy a property for rent?
Only time will tell when institutional homebuyers will wake up from the sidelines and actively buy more inventory. If mortgage interest rates and home valuations fall, we could see a pickup in buying activity. Shahryar Bokhari, chief economist at Redfin, predicts that “investors are unlikely to return as energetic as they were in 2021.” This is welcome news for real estate investors who feel they are competing with institutional investors.
Beyond that, it’s a matter of multiplying the numbers to see if it makes sense financially. With mortgage rates inflated and inventory declining, we’re also seeing Americans resilient. But with housing prices rising nationwide, there will be an increased demand for long-term renters. You will need to determine if any potential rental property will add value to your portfolio based on your individual financial goals.
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Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.