Real estate investors snapped up more than a quarter of the low-cost homes sold in the U.S. during Q4, according to a recent report by Redfin, the tech-driven real estate brokerage. This 26.1% share is a rise from the 24% in the previous year, and it significantly outpaces the percentages of mid-priced and high-priced homes purchased by investors.
The reason is simple: affordable homes attract buyers – including investors – because their lower cost offers a strong investment potential when the borrowing rates and home prices are high. On top of this, when the market strains home affordability, cheaper homes offer opportunities for greater value appreciation and subsequent equity growth.
Categorizing homes into three price tiers: low, mid, and high-priced, Redfin’s analysis revealed that the majority of the investor purchases were low-priced homes at 46.5%. Meanwhile, mid-prices homes accounted for 24.6% of the sales, and high-priced homes represented 28.8%.
Interestingly, these purchases are happening despite the overall drop in investor home purchases, a 10.5% decline YoY in Q4. This is the lowest Q4 level since 2016. This is mainly due to high interest rates, elevated prices, and a subdued rental market that has discouraged some investors, who have in turn shifted their focus to less risky assets like Treasury bonds.
However, Redfin agents in California and Florida have disclosed that the appetite for homes among investors is far from satiated. The lack of properties, not lack of interest, is what is putting a lid on investor home-buying.
The 5.1% YoY decrease in the total supply of homes in December 2021 hasn’t helped the situation as the listing numbers stayed far below the pre-pandemic levels – a direct result of homeowners choosing to hold onto their low mortgage rate-acquired homes.
The average home procured by investors cost $453,271 in Q4, a slight increase from the earlier year’s $426,573. Despite the slight decline in the total value of investor home purchases ($32.3 billion, down from $33.6 billion YoY), the percentage dip in investor home purchases (10.5% vs 44.1% in the prior year) was much softer, suggesting a stronger resilience in the U.S. economy than anticipated.
Investors are waiting in the wings to see if the Federal Reserve will indeed cut the interest rates later this year. If it does happen, we’re likely to see a new surge of investor interest in the housing market.
As of Q4, about one in five homes sold in the U.S. were bought by investors. Primarily, the purchases were of single-family homes (68.6%), followed by condos/co-ops, townhouses, and multi-family properties.
The report ultimately demonstrates that despite the challenging conditions, investors are still hungry for homes, especially those at the more affordable end of the spectrum. This trend, combined with the anticipation of potential interest rate cuts, would seem to indicate that the real estate sector will continue to enjoy strong investor attraction in the near future.
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