Housing under construction in Atlanta, Georgia on Sunday, November 13, 2022.
Elijah Nuvlage | Bloomberg | Getty Images
Home sales have fallen for nine consecutive months due to rising mortgage rates, and now investors are pulling back even more than traditional homebuyers.
According to real estate brokerage Redfin, home purchases by investors in the third quarter of this year fell by just over 30% compared to the same period last year. This is the biggest drop in investor sales since the Great Recession more than a decade ago, with the exception of a very brief stagnation in the first two months of the Covid-19 pandemic in 2020.
The fall in sales to investors outpaced the fall in total home purchases, which fell about 27% in the third quarter. The share of investors in the market as a whole also fell to 17.5% of all sales from 18.2% a year ago. However, this proportion is still slightly higher than the pre-pandemic 15%.
“It is unlikely that investors will return to the market anytime soon. House prices would need to fall significantly for this to happen,” said Sheharyar Bokhari, senior economist at Redfin. “This means that regular buyers who are still in the market no longer face stiff competition from hordes of wealthy investors, as they did last year.”
Non-investor homebuyers face much higher mortgage rates and a shortage of affordable homes to sell. Investors tend to use cash more often than traditional buyers, so they are not affected as much by mortgage rates. However, they are affected by house prices, which are falling.
House prices are still higher than last year, but annual gains are shrinking at an unprecedented pace. The S&P CoreLogic Case-Shiller National House Price Index rose 13% in August, the latest but slower than the 15.6% annual gain in July.
“The -2.6% difference between these two monthly rates of change is the largest slowdown in the history of the index (the July slowdown now ranks second),” said Craig Lazzara, managing director of S&P DJI, in a press release. “In addition, price increases have slowed in each of our 20 cities. This data clearly shows that the pace of house price growth peaked in the spring of 2022 and has been declining ever since.”
However, investors who are still in the market are still paying higher prices than last year. A typical house bought by an investor in the third quarter is worth $451,975, up 6.4% from a year ago but down 4.3% from the second quarter.
At the regional level, the largest decline in investor activity was observed in the markets of Phoenix, Arizona, Portland, Oregon, Sacramento, California, and Atlanta, Georgia. These were all some of the hottest markets driven by the pandemic and are now experiencing the sharpest decline in overall sales. Miami has also seen a sharp drop in investor numbers, suggesting that even the massive drive for the Sun Belt is finally easing.