Investor home purchases off by almost 30% from a year ago

Investors purchased almost 30% fewer residential properties year over year, as higher borrowing costs are making profits harder to come by, a new Redfin report said.

Buyers planning to purchase to either rent or renovate a home for resale accounted for 48,667 sales transactions in the third quarter, the real estate brokerage said. The number came in at its lowest mark for the July-September period since 2016 and 29.7% below the nearly 65,000 recorded in the third quarter last year. 

The transactions also dropped at a steeper pace than for the residential purchase market overall, which fell off 22.2% compared to the third quarter of 2022. 

But the annual deceleration of investor purchases managed to slow from a more elevated decline of 45% in the second quarter, when they totaled 50,347. 

Despite the falloff in total numbers, as a share of overall purchase volume, investor transactions represented 15.9% of third-quarter sales, contracting by less than two percentage points from 17.6% they garnered a year ago.  

The recent surge in interest rates and scarce inventory likely means investor purchase activity will remain muted in the near term, according to Redfin senior economist Sheharyar Bokhari.

"We don't expect investors to dive back into the market in a big way anytime soon," he said in a press release. "Borrowing costs are unlikely to fall significantly in the near future, and while home prices may soften a bit, they probably won't cool enough to bring back a critical mass of investors."

Even though a 71% majority of investors bought their homes with cash in the third quarter, high interest rates are likely to hit if they take out loans for refurbishment or other related expenses, Redfin said.

By dollar volume, investors made approximately $36 billion worth of home purchases between July and September, a 19.5% annual decrease. As they were spending less in total, the typical investment-home price also increased by 5.6% to $475,115 from $449,895, reflective of overall housing price trends.

The pullback in investor real estate interest is most noticeable in the Sun Belt region, which saw housing demand boom during the pandemic. But enthusiasm among bigger investors has dried up in the past 12 months, coinciding with the rapid fall in affordability. 

"If I get any investor clients these days, it's usually the mom-and-pop ones, said Heather Mahmood-Corley, a Phoenix Redfin agent. "The bigger investors who used to come in and buy five or 10 homes at a time — you just don't see that anymore."

The pace of sales declined the most in Atlanta, where it fell 49.7% from a year ago. Just behind were two other Southern cities, Charlotte, North Carolina, and Jacksonville, Florida, which saw their numbers down by 49.6% and 48.2%. Phoenix and Las Vegas rounded out the top five with 47.4% and 43.3% fewer investor purchases, respectively. 

Mom-and-pop investors, especially those planning to fix and flip homes, could see benefits as larger businesses retreat, though, thanks to more purchase opportunities, the real estate investment marketplace New Western said. Macroeconomic trends, including federal policy changes, are likely to have a less severe effect on many of the finance businesses serving smaller investors compared to larger banks, it said. 

But the current rate of home value growth also lags the pace of a few years ago, with sellers sometimes forced to slash their asking prices, resulting in smaller profits, Redfin said.

In September,16.4% fewer investment properties went up for resale compared to one year earlier, Redfin reported. But the number still accounted for 8.2% of new listings during the month, close to the 8.8% mark of September 2022. Flipped properties were also sold for a loss from the original purchase price 4.5% of the time, down from 13.5% a year earlier.