Approximately 1 in 5 homes sold in the housing market are being purchased by investors, and they are making more money than before. At the beginning of last year, investors reduced their home purchases by almost 50%, which was similar to the decline in existing home sales, reaching their lowest point in almost three decades. This was a departure from their behavior during the housing boom fueled by the pandemic, when investor home purchases more than doubled. This surge was driven by historically low mortgage rates and the rise of remote work. However, the situation changed as mortgage rates increased, home values declined in some areas, and rents cooled down, impacting investors’ profits. Additionally, borrowing costs were higher.
Now, investors are making a comeback. Redfin’s analysis reveals that investor home purchases have slightly increased for the first time in nearly two years. In the first quarter, investors bought 44,000 homes, representing a half percent increase compared to the previous year. According to Redfin’s definition, an investor is defined as “any institution or business that purchases residential real estate.” Investors accounted for almost 19% of homes sold in the first quarter of this year, or approximately one in five homes, which is a smaller number compared to the pre-pandemic period. However, it is the highest share in almost two years, as stated in the analysis.
According to Redfin, the reason behind the increase in returns for investors is that home prices and rents are on the rise, and the initial impact of higher mortgage rates is no longer a concern. As a result, investors are becoming more active in the market and making more money than they did a year ago. In March of this year, the average return for an investor selling a home was over 55%, resulting in a profit of close to $175,000. In comparison, last year’s typical return was just over 46%, with investors selling homes for more than $146,000 above their purchase price. Additionally, fewer investors are selling at a loss.
Redfin’s analysis also found that investors are purchasing more expensive homes than before, as well as a record number of affordable homes. The average price of homes bought by investors in the first quarter was $464,560, up 9.2% from the previous year. The total value of homes purchased by investors in the first quarter was $31.3 billion, a 6.6% increase from the previous year.
While investors are buying more expensive homes, low-priced homes still make up a larger share of their purchases. In the first quarter, low-priced homes accounted for 47.5% of investor purchases, while high-priced homes accounted for 28.5%. The increase in more expensive home purchases is largely driven by investors’ growing presence in California, particularly in cities like San Francisco and San Diego, where investors bought over 23% of homes sold in the first quarter. This trend is also seen in cities in Florida, such as Miami and Jacksonville.
However, the profitability of investors in San Francisco pales in comparison to cities like Philadelphia. In San Francisco, the typical home sold by an investor fetched a price that was only about 29% higher than what the investor initially bought it for. On the other hand, in Philadelphia, the typical home sold by an investor saw a substantial increase of over 136% compared to the purchase price.
Although investors are still active in the real estate market, their preferences seem to be shifting. In the first quarter of this year, their purchases of single-family homes increased by nearly 4%. However, their interest in multifamily properties, including townhouses, condos, and apartments, declined. This shift can be attributed to the strong demand for single-family homes in the United States, driven by the idealization of these types of properties, such as the popularity of tiny homes. In fact, single-family homes accounted for almost 69% of investor purchases in the first quarter, according to Redfin, and they continue to gain market share.
According to an analysis, 18.4% of single-family homes sold in the first quarter were purchased by investors, marking the highest share since mid-2022. Meanwhile, the share of other property types bought by investors decreased compared to the previous year, with multifamily properties accounting for 31.9% and condos/co-ops and townhouses making up 18.1%.
However, a Redfin agent based in New Jersey observed that the balance of power between investors and regular buyers is shifting. In situations where there is a bidding war for a home, sellers may now prefer buyers who will actually reside in the property, and in some cases, individuals are willing to pay more than investors upfront.
It’s a rare occurrence to hear that institutional investors are to blame for the country’s housing issues. According to previous reports from Fortune, the majority of single-family rentals and homes are owned by institutional investors like Blackstone and Invitation Homes, accounting for less than 5% and less than 1% respectively. However, in certain markets such as Atlanta, where institutional investors own over 4% of single-family homes, their presence could be contributing to higher housing costs.
The discussion surrounding investors in the housing industry is complex. After a nearly two-year break, they have returned to the market, and their purchases are increasing after a temporary decline during a stagnant housing market. Nevertheless, their impact is still far from what was observed during the housing frenzy caused by the pandemic.