Investor Home Purchases Follow National Trend of Housing Market Slump

An open house flag outside a single family home in Los Angeles on Sept. 22, 2022. (Allison Dinner/Getty Images)

Investor home purchases are down over 30 percent year-over-year nationwide, mirroring the trend of individual home purchases over the past several months.  A recent report from Redfin indicates the third quarter drop is the largest decline since the Great Recession, with the exception of the second quarter of 2020 due to the Pandemic.

Investors bought approximately 65,000 homes in the metro areas tracked by Redfin in the third quarter, or 17.5 percent of all homes that were purchased. That number is down from 19.5 percent in the second quarter and 18.2 percent a year earlier.  Translated to financial terms, investors went from buying $57.6 billion worth of homes at this time last year to $42.4 billion in the third quarter.  This represents a decline of 26.3 percent.

The South and West were the hardest hit areas, where investor purchases plunged almost 50 percent in Phoenix, Portland, and Las Vegas.  Institutional buys were also down over 40 percent in Sacramento, Atlanta, and Charlotte.

The National Association of Realtors (NAR) recently reported that single-buyer pending home sales slipped for the fifth consecutive month in October, with all four regions of the country recording year-over-year drops in transactions of 37 percent.

Redfin’s report indicates that investors are blaming declining home prices and higher interest rates for their gradual withdrawal from the market.  Many investors fear losing money on resales or lower-than-expected rents.

Offerpad, an iBuying firm that purchases directly from sellers and then resells the homes on the open market, has also been experiencing a decline with their own purchases and resales. Typically, the Arizona-based firm presents an offer to a seller for home “as is,” and often makes repairs or upgrades before putting it back on the market at a higher listing price. Offerpad’s home purchase clients include individual investors and corporate investment buyers—some of whom then rent out the homes.

“Given the rapidly changing market conditions, we have intentionally slowed the number of homes we are purchasing,“ Stefanie Layton, Offerpad’s vice president of investor relations told The Epoch Times.  “However, because of our diverse service offerings, including our agent-based listing service, we have continued to provide customers options that offer more certainty and control.”

High Inflation and Mortgage Rates

Founded in 2015, Offerpad operates primarily in the South and West and is currently in 28 markets. It typically buys and sells homes built after 1960 with a value of less than $1 million and lot sizes of an acre or less.

Layton said Offerpad’s homebuying operations were down in the third quarter of this year, at 1,847 homes as compared to 3,792 homes in the second quarter of 2022.  In 2021, the company bought 9,023 homes. “We have also seen a slowdown in our client transaction volume both with investment and individual buyers,” she said. “Inflation coupled with the increase in mortgage rates is causing people to pause and see what’s going to happen.”

She noted there seems to be a disconnect between seller and buyer expectations. “Someone might say ‘Oh my neighbor sold their home for so much more just months ago’ but the market has changed since then,” said Layton.  “Buyers also don’t seem to be willing to pay as much now as they would have just a short time ago.”

During the past two years, when so many people working remotely began to flock to more affordable areas of the country, places like Phoenix and Las Vegas experienced the most home appreciation. “Homes were selling quickly with multiple offers and over-asking prices, but now you can’t have higher rates and higher home prices,” added Layton. As a result, many of Offerpad’s investment buyers are purchasing in smaller quantities. These investors are comprised of both individuals and larger corporate investors.

Offerpad provides cash deals along with free moving expenses for sellers moving within 50 miles. While the company avoids buying “fixer-uppers,” it does typically upgrade older homes with new kitchens, bathrooms, flooring, and other renovations that give the homes a newer look and feel.  The company spends an average of $15,000 on renovations, but depending on the size and cost of the home, upgrades can go as high as $100,000.

A single-family home in Queen Creek, Ariz., currently listed for $834,900. (Photo Courtesy of Offerpad)

The Pace of Acquisitions Slowing

Opendoor, another iBuying firm, is also a staple in the South and West, currently operating in 53 markets.  Founded in 2014 in San Francisco, Opendoor buys directly from home sellers, makes necessary upgrades, and then resells to individual and investment buyers.

To date, institutional or investment buyers have purchased over 10 percent of their homes listed. Like Offerpad, Opendoor has also experienced fallout from the current state of the overall real estate market.

The company’s investor website reports its inventory balance of 16,873 homes—about $6.1 billion in value–is down three percent from the third quarter of 2021.  Purchased homes—8,380—are down 45 percent from last year’s third quarter.   The 2022 third quarter ended with a total of 2,259 homes under contract, representing a 64 percent decline from this time last year.

“Much has changed around us, including an interest rate change not seen in 40 years, sharply declining home prices, and transaction velocity,” Opendoor co-founder Eric Wu stated in the company’s Q3 2022 shareholder letter. “What hasn’t changed through this storm is our conviction that the current process of buying and selling real estate is broken, and that we will be the category winner by enabling a seamless way to buy, sell, and move with just a mobile device.”

Based on the firm’s Q2 shareholder letter, Opendoor has since implemented plans to slow the pace of acquisitions and adjust its resale strategy to be in line with the market.

What Attracts Investors?

According to NAR, institutional or investment buyers comprised just 13 percent of the county’s overall residential sales market in 2021, with the median purchase price typically 26 percent lower than each state’s median purchase price. The NAR data showed these corporate buyers making up a higher share of the market in regions where the number of homes available for sale was tighter.

NAR identified several factors that are likely to attract investment buyers to a particular area including a high density of renters and Millennials, higher income and education, fast recent growth, quicker home sales, and a lower rental vacancy rate.

Last year, the states with the highest institutional buyer market shares were Texas (28 percent), Georgia (19 percent), Oklahoma (18 percent), Alabama (18 percent), Mississippi (17 percent), Florida (16 percent), Missouri (16 percent), North Carolina (16 percent), Ohio (16 percent), and Utah (16 percent)

Nadia Evangelou, NAR’s senior economist and director of real estate research told The Epoch Times that home sellers often opt for iBuying due to the ease and efficiency.  “Our data shows that sellers prefer to sell their homes to institutional investors because many of them offer cash and affiliated services that facilitates the home selling process,” she said. “Thus, these two reasons make their offers more compelling to sellers.”

Despite the downturn in investment buying, Evangelou said it could still present more challenges for the first-time home buying public. “The presence of institutional buyers increases market competition,” she added. “Many of those institutional buyers offer all-cash deals, and first-time home buyers in these areas face even more competition.  Plus, they have to deal with rising rents that make it even more difficult for them to save for a down payment.”