The markets investors are fleeing amid the housing slump

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Virtually no group of buyers is as active in the home market today as it was a year ago.

But one class of buyer has gained an ever-bigger foothold in the market in recent years: investors. And by following their activity, we can perhaps get an early idea of how the smart money thinks local housing markets are likely to evolve in the months to come.

Investor purchases are a historically tough transaction type to track. But using Redfin classifications of county homebuyer data, we can gain a closer idea of how much investor money is out there — and to which markets it’s flowing.

For now, investors are focused on homes in the lower price points in each market, often beating out first-time buyers in the hopes of converting these properties into steady rentals or flippable assets, Redfin’s data shows. But like other buyers, they’re scaling back their activity during the present market shift.

“It’s possible that investors will start to wade back into the market this year given that mortgage rates have ticked down from their 2022 high — especially if home prices show signs of bottoming,” Redfin Senior Economist Sheharyar Bokhari said in the report. “But it’s unlikely that investors will return with the same vigor they had in 2021.”

Still, investors remain a larger share of the homebuyer pool today than they have been at any point in the past two decades. In a detailed review, Intel dove deeper into Redfin’s investor dataset and other sources to glean more insights, including which markets investors are fleeing — and where they’re holding strong.

What emerged was an image of a market in transition, where some of the most attractive investment opportunities of the early pandemic have since gone cold — and a few cities appear to be bucking the broader trends.

Shifting gears

The pandemic housing market has been marked by many changes, and one of them has been a significant rise in the role that investors play, Redfin’s data suggests.

The Seattle-based real estate company’s records are based on county records of home sales in 40 of the nation’s largest home markets. If a buyer’s name included one of several corporate keywords or ownership codes — think “LLC” or “joint venture” — it’s classified as an investor. This method also captures some transactions made through family owned trusts and LLCs for traditional residences.

Overall, investors have heavily scaled back their purchase of single-family homes in recent quarters. Investors purchased 89,000 homes in the second quarter of 2022. By the fourth quarter, their purchase levels had fallen to 48,000.

But if we look only at investor market share — the percentage of all sold homes that were purchased by an investor — we see that they still maintain an outsized place in the housing market.

Chart by Daniel Houston

About 18 percent of all homes sold in the fourth quarter of 2022 went to an investor. That’s down from their peak levels in the first half of the year, but still roughly twice as big slice of the pie as investors made up in the early 2000s.

An Intel analysis of metro-level data suggests that investor demand is shifting away from cities where they had the largest market share in the months before prices began to reverse, and toward less investor-targeted markets.

Chart by Daniel Houston

Of the seven U.S. metro areas where at least 1 in 4 homes for sale were purchased by investors in the second quarter, virtually all saw unusually large drops in investor activity compared to the nation at large.

Explore the table below to see how investor activity evolved from the first half of the year to the second half in 40 of the nation’s 50 biggest local housing markets — and compare how each market’s decline compares with the national decline.

The final column above shows how many percentage points higher a local market’s drop in investor purchases was than the national average. Note that in almost all of the metro areas with positive values in that last column, investor purchases declined along with sales to traditional buyers.

But some markets still stood out for strong investor activity amid a slumping market.

The Midwest was perhaps a golden child for investors in the face of last year’s home-price downturn.

In Chicago, investor purchases dropped 15 percent from the first half of 2022 to the second half. That might seem steep, but it’s half as much as investors scaled back in the U.S. as a whole.

Other Midwest cities fared even better. Investor purchases declined by less than 6 percent in Cleveland and Cincinnati in the second half of the year. Milwaukee and Minneapolis weren’t much worse.

Even some coastal metropolises maintained heightened interest.

Investor purchases declined by a mere 7 percent in New York City in the last six months of the year. The D.C. area also saw declines that were significantly smaller than the national average. And on the West Coast, Seattle stood out as a market where investors toed the line with a 17 percent decline in investor purchases.

Meanwhile, investors fled some metros at extraordinary rates. Investor purchases were slashed in half in Phoenix and Las Vegas, two pandemic hotspots where home prices have been in freefall — and have yet to hit bottom.

Atlanta and Charlotte each saw approximately 40 percent declines in investor purchase activity. So did the major Florida markets of Tampa, Miami and Jacksonville.

Despite these declines, some of the cities where investors have pulled back most suddenly remain near the top of the list for investor market share. As the home market contracted in Atlanta and Jacksonville, for instance, more than 1 in 4 homes that sold in the fourth quarter were scooped up by an investor.

Trouble building? Call an investor

Last year’s mortgage-rate shock hit homebuilders particularly hard, pushing their price points out of reach for swaths of traditional buyers.

Ben Caballero, a Dallas-area broker who lists homes for some of the nation’s largest homebuilding companies, says this side of the industry has been resilient because of all the steps they have taken to close the gap when demand is low.

Ben Caballero | HomesUSA

“Builders have been able to mitigate their price reductions through the ability to offer incentives and bonuses,” Caballero told Intel. “They can do [mortgage rate] buy-downs. They can pay closing costs. They can add upgrades to their home. So all these are very positive for new homes.”

And one other way builders are closing the gap, government survey data shows, is by building communities with the intent to sell them directly to investors.

Nearly 9 percent of new single-family construction projects were intended as rentals in the final three months of 2022, according to the Survey of Construction published by the U.S. Census Bureau. That represents the biggest chunk of home starts built-for-rent in a single quarter since 2010, and caps off the largest share in a full year in well over two decades.

Chart by Daniel Houston

The ramped-up build-for-rent operation in recent months may be stark, but it’s not quite unprecedented. Builders catered more  toward investors at different points throughout the recovery from the Great Recession, when they were starting fewer projects and more traditional buyers were scarce.

It’s too soon to tell whether this trend will turn around — as it did later on in the recovery from the last housing crash — or whether investors are gaining a more permanent foothold among the homebuilders of today.

But in the meantime, it further cements the place of investors in a market where they’re already more of a player than they’ve been in some time.

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