Investors appear to be pulling back from the flagging real estate market, with business-purpose purchases of residential property falling 29.7% year over year in the third quarter, according to a new Redfin report.
That’s a larger yearly decline than the one for the market at large, with overall home purchases falling 22.2% year over year during the same time frame, per Redfin’s data. Investors bought 48,667 homes from July through September, marking the fewest investor purchases of any third quarter since 2016.
On a dollar volume basis, investors bought $36 billion in homes in the third quarter, down 19.5% year over year. The typical home bought by an investor saw its price rise from $449,895 in Q3 2022 to $475,115 in Q3 2023.
Investors have pulled back faster than consumer homebuyers for a variety of reasons, including the big one-two punch of rising home prices and heightened interest rates that have decimated the entire residential market. While mortgage interest rates impact the investor market less than the overall market — 71% of investor purchases in Q3 2023 were all cash — elevated rates still take a toll because a portion of investors take out loans to cover non-mortgage expenses.
Investor activity has also been subdued simply because it has become harder to make a profit in the current environment. Redfin reported that many sellers are being forced to cut their list prices to accommodate demand, making it more difficult for an investor to justify their initial purchase at a higher price. The investors who buy homes to earn rental income are also cooling their jets as rent growth has softened and vacancies have increased.
Subsequently, investor market share has dwindled from 17.6% in last year’s third quarter to 15.9% this year. It’s worth noting that this share is still higher than its pre-pandemic level, but it isn’t projected to see a meaningful increase in the near term, said Redfin senior economist Sheharyar Bokhari.
“We don’t expect investors to dive back into the market in a big way anytime soon,” Bokhari said. “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.”
Heather Mahmood-Corley, a Redfin agent in Phoenix, said that she’s seeing more investors selling than buying.
“The investors who bought up all the Airbnbs are selling — some are institutional investors and some are mom-and-pop investors who got in over their heads,” she said. “They’re selling because the Airbnb market isn’t as strong as it was during the pandemic, and in some areas, new rules on short-term rentals have made owning them less attractive. There are also just a lot of unknowns right now, so some people want to get rid of their investment properties so they don’t have to deal with the uncertainty.”
