Low rates and expectations for rising rents behind increased activity, putting first-time homebuyers in a bind.
Investors are snapping up homes at an unprecedented pace across the country, including in metro Denver, resulting in more competition for individual buyers trying to find a place of their own in an undersupplied market.
Investors purchased a record 18.2% of the homes sold nationally in the third quarter, or 90,215 homes worth $63.6 billion, according to a study from the Seattle-based real estate brokerage Redfin. That is up significantly from 50,051 homes representing 11.2% of all sales that investors claimed in the third quarter of 2020 and above pre-pandemic levels, including during the housing bust when investors actively scooped up foreclosures.
More than three in 10 homes purchased in Atlanta and Charlotte, N.C., went to investors in the third quarter. Metro Denver tracked closer to the national averages, with investors accounting for 17% of home sales, up from their 9% market share in the same quarter a year earlier. That represents 2,831 homes of the 16,811 sold during the most recent quarter, up from 1,646 homes of the 17,577 sold in the third quarter of 2020, according to the study.
“Investors are expecting rents to increase in the coming years,” said Redfin Chief Economist Daryl Fairweather. “Even though home prices are high, they are waiting for rents to grow and there are no signs that prices will decline.”
Not only are investors buying more single-family homes than they historically have, but their purchases are also skewing more toward mid-priced and higher-end homes rather than entry-level homes, which have gone from a majority of investor purchases to a little more than a third, Redfin’s research shows. In Denver, the median price investors paid for a home was $508,700, according to Redfin.
Redfin defines an investor as a business entity used to purchase a residential property. That definition excludes individual buyers who purchase investment properties in their own names, but it also lumps some buyers into the investor category who purchase a home to live in through an LLC or trust. Overall, the range of investors is broad, from retirees buying a house on the same block to private equity funds with billions of dollars to deploy.
Troy Miller, executive director of the Investment Community of the Rockies or ICOR, estimates between five to seven institutional buyers are active in the Denver market. Most of the remainder are seasoned investors, not the kind of novices who jumped into a glutted and peaking housing market in the middle of the ’00s and paid dearly for it.
“Activity is very high because institutional buyers are chasing yield and are borrowing at close to nothing. One ICOR member works sourcing deals directly for one institutional buyer with the expectation of acquiring 40 properties per quarter,” he said in an email.
Plenty of available capital and diminishing competition has seasoned investors willing to take on even higher-priced homes in the $500,000 to $700,000 range, he said. The margins are smaller, but if redeveloped properly, the returns can be in the $100,000 to $200,000 range.
“Seasoned investors are simply adapting to new market variables,” he said.
Andrew Abrams, chairman of the Market Trends Committee at the Denver Metro Association of Realtors and a Denver-area real estate agent, said he has worked with clients wanting to pick up a second or third home to boost their income up to an active investor with 300 townhomes in his portfolio.
“From my conversations with them recently, they believe that the value of the dollar is decreasing every day and that interest rates are historically low. To invest in an actual asset that has limited supply will help them leverage against a weaker dollar,” he said. In short, real estate offers a way to hedge against inflation and represents an asset class they have more control over than stocks or bonds.
Investors can borrow money at around 2.5%, he said, and even if home price gains revert back to the 30-year average of around 6% a year, they will come out ahead. Should home prices dip, say because inflation causes mortgage rates to spike, investors are better equipped to ride it out. An investor who puts 30% to 40% down on a purchase has a much bigger cushion than a first-time buyer who puts 3% or 5% down, he said.
More broadly, there is also a sense that higher home prices will prevent more households from buying a place, creating stronger demand for single-family rentals for years to come. Higher home prices are a risk, but they are also a hedge ensuring more rental demand.
The current surge of investor interest comes after home prices have risen at unprecedented double-digit annual gains for several months. CoreLogic estimates that metro Denver home prices are up 19% year-over-year as of September. Next year, it estimates gains will average only 0.4%.
“It feels like we are at an inflection point,” Eli Beracha, a real estate professor at Florida International University, which together with Florida Atlantic University maintains an index of expected home price changes, said in a release.
When precisely any given housing market will peak is hard to tell, Beracha said, but he recommends individual buyers in the country’s most overpriced markets, which includes metro Denver, consider renting and reinvesting any savings. Put another way, his advice is to let investors have at it.
“You don’t want to be among the last to buy at your local market’s peak because it may be a long time before you can resell your property for a substantial return,” he said.
Abrams said first-time buyers should pursue property types where investors are less active right now, such as condos and townhomes, and they should try to strike a chord with sellers who might have been in a similar situation to them decades earlier.
“Telling your story helps buyers compete,” he said. “Most people have put so much love and memories into their house, they want to pass it on to someone else who will fill those walls in the same way.”
Owning a home is the primary way Americans accumulate wealth. Ownership can provide for a more stable retirement and a home is a resource that can be passed down to children and other heirs. Because of that, the growing dominance of investors has bigger implications for the country, Fairweather said.
“Fundamentally we will need to see strong wage growth for the middle class to take back homeownership from investors,” she said.
Read more like this on The Denver Post.
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