Institutional investors (those who own 1,000 or more homes) have been selling off their inventory in 2023. These big investors have reduced their buying activity by nearly 80% from Q4 of 2022 compared to Q4 of 2021, according to John Burns Research and Consulting.
This change in activity has led to 90% fewer purchased homes in January and February of this year than in the first two months of 2022.
This is a sharp contrast to the pandemic purchasing of houses in the U.S. These were times when it was easy to borrow money and interest rates were at rock bottom—coupled with rising rents and soaring home prices making it a 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 why they are backing out, and what this means for individual investors.
Selling Homes and Shrinking Portfolios
American Homes 4 Rent and Invitation Homes have been net sellers in the first quarter of this year. As of March 31, 2023, American Homes 4 Rent—a leading builder in single-family rental communities—had a portfolio of 58,639 homes, which was reduced by 354 homes compared to 58,993 homes (666 homes sold, while 299 newly constructed and 13 acquired) as of December 31, 2022.
In the first quarter of 2023, Invitation Homes purchased 194 homes and sold 297. As the U.S.’s biggest owner of single-family rentals, its portfolio decreased from 83,113 to 83,010 single-family homes.
What’s more, data from Redfin shows that institutional investors are fleeing once sought-after towns such as Las Vegas, Nevada, and Phoenix, Arizona, due to home prices dropping. How much have they dropped? Newly built homes in Phoenix dropped 15% year over year in March, according to Realtor.com.
Rising interest rates
With the Fed increasing rates rapidly, it has caused mortgage rates to creep up. According to Forbes, a 30-year fixed mortgage rate was 3.22% in early 2022 but has since risen to an average of 7.17%. Consequently, the deals aren’t as lucrative compared to during the pandemic.
What’s in store for the remainder of the year? Experts—including Dave Meyer—are predicting more volatility in interest rates and that we may have or will reach a peak during the summer, with rates steadying by year-end.
Housing prices are fluctuating
We’re seeing limited inventory as new home listings have reduced by over 20% compared to last 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 dropped 1.7% from one year ago to $388,800.
Overall, we’re seeing limited inventory and a decline in home sales, along with home prices bouncing back in half the country, while the other half is declining from pandemic peaks.
Rent growth has declined
Recently, rent growth in the U.S. has been flat. In April, asking rents in the U.S. increased by only 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 witnessed millennials starting families and buying homes, but now households plan to stay put.
Even though rent growth may have slowed, renter demand will likely increase. The issue of housing affordability will make it challenging for Americans to become homeowners.
Are Institutional Investors Scooping Up All the Inventory?
Contrary to popular belief, institutional homebuyers aren’t sucking up inventory and pushing prices even higher. In fact, according to NAR, although institutional homebuyer share increased in 84% of the states, they only made up 15% of single-family home purchases in 2021. So, everyday investors shouldn’t worry too much about a battle scenario between David versus Goliath.
What This Means For Everyday Investors
These factors mean the return on investment isn’t nearly as lucrative during the pandemic. Ultimately, with rising interest rates, overinflated housing prices, and rental growth slowing down, the financial gains aren’t what they used to be.
However, you may have noticed higher-than-usual institutional homebuyer activity if you live in certain Sun Belt regions, including Texas, Georgia, Oklahoma, and Alabama. These regions have made up a larger portion of overall homebuying activity. So, it depends on where you live in the U.S. to determine how much of an impact this will have on you.
Another study by Yardi Systems shows that in 2022, institutional investors who owned single-family rentals made up only 5% of the market (700,000 out of 14 million). Furthermore, MetLife Investment Management (MIM) predicts it could grow to 40%, or 7.6 million homes, by 2030.
Is It a Good Time to Buy a Rental Property?
Only time will tell when institutional homebuyers will get up from the sidelines and actively buy more inventory. If mortgage interest rates and home valuations decrease, we may see an uptick in purchasing activity. Sheharyar Bokhari, a senior economist at Redfin, predicts it’s “unlikely that investors will return with the same vigor they had in 2021.” This is welcome news for mom-and-pop real estate investors who feel they are competing with institutional investors.
What’s more, it comes down to crunching the numbers to see if it makes financial sense. With mortgage rates inflated and low inventory, we’re seeing Americans holding out as well. But with rising home prices nationwide, there will be growing demand for renters in the long term. You’ll need to determine whether 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.