Rising mortgage rates are moving the housing market in a new direction since the onset of the Covid-19 pandemic-induced boom.
But what impact escalating interest rates will have on investors that buy homes to rent them out is to be determined, although first-quarter investor purchasing activity gives early indication that investors are slowing their pace of homebuying.
Seattle-based Redfin Corp. (NASDAQ: RDFN) found the number of homes purchased by real estate investors in the first quarter declined 11.5% from the fourth quarter of 2021 and 16.5% from Q3 2021. Despite that, investor purchases made up a larger share of the housing market, purchasing a record 20% of homes that sold in Q1, an increase from 19.2% in Q4 2021 and 15.3% from Q1 2021.
That’s owing to a slowing housing market in the first quarter, which saw a decrease in overall home purchases nationally, according to Redfin.
Sheharyar Bokhari, senior economist at Redfin, said the reasons for fewer investor purchases in Q1 could vary but rising interest rates are likely a factor.
Whether investors or owner-occupiers are more sensitive to rising rates is something Thomas Malone, an economist at Irvine, California-based CoreLogic Inc., is watching closely. He said it’s just a guess at this point but he suspects investors might be more sensitive to that upward movement.
“Investors would be considering real estate amongst a broad set of asset classes to invest in whereas, for a homeowner, buying is more of a lifestyle choice,” he said. An owner-occupier may opt for a smaller home or one in a different neighborhood when faced with higher costs to buy a home, whereas investors could reallocate capital out of real estate.
Bokhari said the expectation is sellers aren’t going to be able to sell their homes as quickly as they have, especially as they did last year, which’ll result in price cuts. Investors may, therefore, be holding off to take advantage of better deals down the line.
Investors who purchase homes to flip them relatively quickly will likely also slow their activity, in anticipation of slower home-price appreciation, Bokhari said. Already, the share of iBuyers, or instant buyers, in the U.S. housing market has slowed. The 12,652 homes sold by homeowners using an iBuying service in Q1 represented 1.3% of all U.S. home sales, down from 1.7% in Q4 2021.
Not much changed in the geographic makeup of where investors were most prolific in Q1.
Atlanta saw $2.7 billion in investor sales in Q1, making up 33.1% of all homes purchased by an investor that quarter, the most of any major metro area tracked by Redfin. Jacksonville, Florida, ranked No. 2, with $705.8 million in investor purchases in Q1 comprising 32.3% of that metro area. Charlotte, North Carolina, came in third, with $1.15 billion in home purchases by investors, or 32.2% market share.
Given all of the investor activity it’s seen, some homeowners associations have implemented or cracked down on restrictions to try and prevent investor activity in their neighborhood. Through piecemeal efforts, a growing number of communities have sought to put guardrails in place to combat such purchases.
In one Charlotte neighborhood, Berewick, at least seven homes owned by limited-liability company or limited partnership entities are currently available for sale. The entities are affiliated with American Homes 4 Rent (NYSE: AMH), an Agora Hills, California-based REIT that specializes in single-family rental homes.
Brian Hamelink, the listing agent, said his client decided to sell the homes because of changing restrictions in the neighborhood. A copy of the neighborhood’s community charter obtained by The Business Journals says owners in the neighborhood cannot collectively lease, or offer for lease, more than one unit at any time.
The investor-owned homes on the market in the Berewick neighborhood is an anomaly to what Hamelink said he’s seeing throughout Charlotte, even with rising interest rates.
“The appetite for homes in Charlotte is, right now, as great as it’s ever been,” he said. “Funds are in town, looking to build large portfolios. I don’t see the acquisition of homes slowing down.”
If there is some kind of pullback in home prices, which hasn’t been evident yet in a market like Charlotte, Hamelink said investor activity will likely only increase.
Nobu Hata, CEO of Denver Metro Association of Realtors, said during a media briefing this week the institutional buyer share of the broader Denver metro area is 14% higher than the national average, citing National Association of Realtors data. Rents are going up because of that.