Investors — from small-time flippers to Wall Street-backed landlords — helped propel US home prices to record levels during the pandemic boom. But now, they’re pulling back as recession risks mount, in a move that could accelerate the market’s slowdown.
Institutional landlords are canceling contracts and getting more particular about purchases. The tech-powered home flippers known as iBuyers are slashing asking prices to clear inventory. Small-time property hounds are passing on homes they would have bought three months ago because higher borrowing costs make it harder to turn a profit.
Fear has crept into the housing market, replacing the can’t-lose optimism that attracted mountains of capital in the years after the most recent crash. After the near-doubling of mortgage rates since the end of 2021, investors are having to navigate an increasingly complex dynamic where both borrowing costs and home values are relatively high. There’s at least one potential silver lining: A pullback could help prices settle at more affordable levels.
“I really think investor activity has heightened volatility,” said Redfin Corp. Chief Executive Officer Glenn Kelman, whose brokerage company operates an iBuying business. “Having their activity slow has really changed the market. I wish it were a gentler process, but I don’t mind when prices come back down.”
Investors’ share of the overall market fell for a fourth straight month in June, according to data from Redfin. Across the second quarter, their purchases posted double-digit declines in Riverside, California, New York’s Nassau County, and Miami, the data show.
While many consumers have been priced out by the rapid run-up in mortgage rates, the remaining buyers don’t need a pile of cash to notch a winning bid, according to Veronica Franco, an agent with Keller Williams Atlanta Perimeter.
“It just gives the homeowners a better chance,” said Franco, who has had large investment firms rescind offers on homes she’s listed in recent weeks.
Scott Arnold, who represents institutional landlords as a broker with DMAX Investment Properties in Dallas, said a California-based investor canceled 20 contracts after mortgage rates jumped in June. The company lost about $3,000 per property because of deposits it put down to express interest, he said.
Arnold has been left scrambling to pacify sellers, who were faced with the unappealing prospect of relisting homes in a softening market. His firm eventually decided to purchase two of the properties to preserve relationships with the sellers’ agents.
The investors “want to reassess the market to make certain we aren’t going into a severe recession,” Arnold said. “They are waiting for the market to slide so that they can buy at a lower price. And they believe the interest rates will go back down a little bit.”
Arnold’s client isn’t the only one taking a breather. Invitation Homes Inc., American Homes 4 Rent and Rithm Capital Corp. are among the large landlords telling investors that they are taking a cautious approach to acquiring rental houses in the short term with plans to take advantage of bigger opportunities later depending on the condition of the market.
Tightening Requirements
Large landlords across the industry have increased their yield requirements for new purchases, a trend that has pushed some investors to cut buying activity by more than 50%, Bloomberg reported last month. Spruce, a technology company that manages the process of closing home sales, said that clients in the single-family rental industry canceled 40% of transactions in July — up from 8% in February.
“We’ve seen evidence of tightening buy boxes,” said Spruce CEO Patrick Burns, adding that he expects the slowdown to be temporary. “Institutional buyers generally have a much longer-term view of growth than just a few months.”
Home flippers are also expressing waning confidence as higher mortgage rates make it harder for them to buy homes. The prospect of cooling prices increases the chances they won’t be able to sell at a profit. A fix-and-flip index that measures current and expected sales as well as competition for deals contracted sharply in the second quarter, with some flippers reporting that they have effectively halted new acquisitions, according to the data compiled by John Burns Real Estate Consulting.
IBuyers, which flip homes on a vast scale, are feeling the issue even more acutely. Redfin’s Kelman said his firm is pricing homes aggressively to try to work through inventory faster, preferring to accept lower offers over accruing interest expenses and other carrying costs as listings linger.
Waiting for Opportunities
Opendoor Technologies Inc., the biggest iBuyer, said that it expects to swing to a loss in the third quarter as it cuts prices on houses acquired before the market started shifting.
Investors can play an important role in the housing market. When the market crashed in the wake of the 2008 financial crisis, private equity firms began scooping up properties at cheap prices, setting a floor on prices and priming the market for a rebound. This time around, investors are eyeing slower new homes sales and hoping to score discounts from builders looking to reduce inventory. But for now, it pays to wait.
“At these mortgage rates, investors can’t make the economics of investing work, whether they’re a flipper, small mom-and-pop or institutional investor,” said Mark Zandi, chief economist for Moody’s Analytics. “Institutional buyers are opportunistic. I’m sure they’re waiting, thinking they’ll get a much better price for these properties in the not-so-distant future.”
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