New data from real estate brokerage Redfin shows promising signs that a record inflation of the U.S. housing bubble may be pausing — if not altogether deflating — in a statistic showing that investors purchased almost half as many homes as they did in Q1 of 2022.
Despite the figure evidencing a massive shift in market sentiment, structure, and activity, the number of investor purchases have merely returned to about what they were between the recovery from the 2008 great financial crisis to the COVID-19 pandemic.
Overall, investors purchased 41,181 homes in Q1 of 2023, a huge decline compared to 80,128 in Q1 2022 and an even sharper drop from the all time high of 96,124 in Q3 of 2021.
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Yet investor purchases were still as high as 40,000 to 65,000 per quarter as late as the 2015 to 2019 period, data shows.
The May 31 analysis published by Redfin under authors Lily Katz and Sheharyar Bokhari, a former Bloomberg analyst and MIT graduate respectively, stacked data from 40 of the largest metropolises, defining an investor as “as any institution or business that purchases residential real estate” based on certain keywords used in official documentation indicating an entity besides an individual was the buyer.
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Figures also show that despite the 49 percent reduction in investor purchases — a record decline since 2005 — that it’s not only the investor market cooling: all home sales are dwindling.
Although the ratio of investor home purchases showed a marginal decline from the 20.4 percent of all transactions posted last year to 17.6 percent in Q1 2023, Redfin notes today’s figure is still “higher than any quarter on record prior to the pandemic.”
Between 2010 and 2020, the figure oscillated between 9 and 16.5 percent.
Bokhari was paraphrased in the article as stating that, “Right now, both groups [investors and retail] are retreating rapidly from the market.”
The numbers translate into real world transaction volume. Only $27.5 billion worth of investor purchases occurred in Q1 compared to $31.4 billion in Q4 of 2022 and $51.2 billion in Q1 2022.
But the 49 percent decline is an overall average that varies widely locale by locale.
Specific data showed that although venues such as Atlanta published a staggering 66 percent decline, others such as Baltimore and Providence showed a modest 8.8 and 9.6 percent decline, respectively.
In a Twitter thread on the data, head of Reventure Consulting, Nick Gerli, pointed out that the likely source of the issue is interest rates and how they collide with the “Cap Rate.”
National average mortgage rates have increased from under 3 percent in late 2021 and early 2022 to as high as 6.9 percent at present as the Federal Reserve hiked its key benchmark rate from 0.25 percent to 5.25 percent in a little over 13 months.
For a normal retail homeowner looking to house their family, Vision Times found during an analysis of the Canadian housing market that a comparatively modest interest rate increase from 2.99 to 5.89 would not only cost an additional $800 in mortgage payment, but more than double the total interest cost per term on a $500,000 mortgage amortized over 25 years.
For an investor, Gerli explained that Cap Rate calculates an investor’s potential returns based on rental income, a figure that has stayed flat at roughly 4.65 percent since May of 2021.
In April 2022, as the central bank started tightening economic policy, the cost of mortgage financing exceeded the cap rate, producing a situation where investors “are guaranteed to lose money on their rental after paying debt service,” Gerli stated.
The analyst added, “Thus – they have stopped buying.”
In addressing the disparity in investor sales drop by locale, Gerli pointed out that the Cap Rate in a locale like Cleveland is 6.2 percent, nearly 200 basis points higher than the national average, meaning investors can still make money from rental income after paying the cost of debt.
He also noted that although many property investors pay in cash rather than through a conventional mortgage, “While the offer is in cash, the source of the cash is almost always debt.”
In elucidating this fact, Gerli also revealed a staggering piece of data not covered by Redfin: real estate speculators often generate their debt through the Mortgage Backed Securities (MBS) market, a sort of bond underwritten by a mortgage contract to a buyer with prime credit.
“This MBS Market has completely collapsed,” he said.
Gerli stated that the MBS market has only funded $600 million worth of loans thus far in 2023, a steep decline compared to the $16.6 billion in 2021 and even the $11.2 billion in 2022.
Giving readers an example of differences in the rental market from city to city, Gerli stated that Cap Rate could be as high as 7 or 8 percent in a locale like Memphis or New Orleans compared to one as low as 3.5 or 2.9 percent in Los Angeles and Austin.
The proof of the shifting market tides is found in the pain side of the trade.
An April 21 analysis issued by Redfin and also penned by Katz and Bokhari found that investors suffered a loss on 14 percent of all homes they sold.
The duo said the number was up significantly from only 4.8 percent one month earlier in March.
Data showed that while the percentage of losing trades by investors remained under 10 percent during the 2006 and 2007 prelude of the ’08 Great Financial Crisis, once the datapoint took off, it didn’t look back, reaching as high as 65 percent by 2009.
It wasn’t until roughly 2015 that the percentage finally fell back to where it just printed in April.
Moreover, Redfin found that sellers who did bank a gain were making significantly less money.
The delta of sales price against purchase price decreased to 45.9 percent compared to 55.3 percent a year prior and 67.9 percent in the peak of COVID stimulus funding.
Authors cautioned, “It’s important to note that gains don’t necessarily equal profits. Just because an investor sold a home for $145,000 more than they paid doesn’t mean they’re making money because they may have spent more than that on renovating the property.”
Gerli also cautioned readers who may believe chilling industry data may be a long awaited buying signal, “Also important to remember that a drop in investor purchases is historically a ‘leading indicator’ for the Housing Market.”
“In the last bubble investor buying peaked in mid-2005,” he added, “A good THREE YEARS before we saw substantial price declines.”