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Investor Home Buying at Two-Decade High
Home purchasing activity among investors is on the rise, said CoreLogic, Irvine, Calif., with small investors picking up the slack.
In a special report, CoreLogic said the share of home sales bought by investors reached its highest level in two decades in 2018. However, noted CoreLogic Deputy Chief Economist Ralph McLaughlin, this increase isn’t from big institutional buyers, but rather from smaller investors just getting into the game. What’s more, he said, these investors appear to be focusing in the starter-home tier, giving first-time home buyers a run for their money while also chasing homes in markets with relatively high rents.
The report said by the end of 2018, the investment rate in the U.S. housing market reached 11.3%, the highest rate since CoreLogic started tracking this data in 1999. The investment purchase rate in 2017 was the second highest on record at 11%, which was above the investor buying fury of 2012-2014, when purchase rates reached 10.3%-10.9%.
Last week, the National Association of Realtors reported individual investors purchased 13% of homes in May, down from 16% in April and from 14% a year ago. First-time buyers represented 32% of sales in May, unchanged from April but up from 31% a year ago. All-cash sales accounted for 19% of transactions in May, down from April and a year ago (20% and 21%, respectively).
“Smaller investors are responsible for increasing investor home buying activity,” the CoreLogic report said. “This is in sharp contrast to the rise in large institutional investors in the years following the recession.”
CoreLogic said when looking at investor activity based on the total number of properties purchased over our study period, it found small investors–those who purchased 10 homes or less between 1999 and 2018–increased their share of home buying more than large- and medium-sized investors. These so-called “mom-and-pop” investors grew from 48% of all investor-purchased homes in 2013 to more than 60% in 2018.
By contrast, large investors–those who purchased more than 101 homes–nearly doubled their activity between 2000 and 2013 but have pulled back since the foreclosure crisis and now sit at 15.8% of purchases. Medium-sized investors–those who purchased between 11 and 100 homes–have also seen their share steadily fall, from a peak of 30% in 2010 to 22.7% in 2018.
The report also noted investor purchase rates were much higher among the starter-home tier of the home sale price distribution. The share of starter homes purchased by investors peaked at more than one-in-five homes over the past two years, with a rate of 20.3% in both 2017 and 2018. These rates are 2-3 times the investor purchasing rates of move-up (middle tier) and high-end (upper tier) homes that also peaked in 2018 at 7.8% and 6.3%, respectively.
CoreLogic reported highest rates of investor activity east of the Mississippi River and the lowest rates to its west. Each of the top 10 metros with the highest investor purchase rates is in the eastern half of the country, with Detroit, Philadelphia and Memphis, Tenn. leading the pack at 27%, 23.3%, and 19.7%, respectively. Just two of the top 10 are western cities, with Des Moines, Iowa and Oklahoma City at 18.7% and 17.2%, respectively.
Investor activity tends to be lowest in the West, although two East Coast markets and one Midwest market also had lower levels of activity. Markets with the least amount of investor activity are all west of the Rockies, including Ventura, Calif., Boise, Idaho, Oakland, Calif., San Jose, Calif. and Sacramento, Calif. at 4.8%, 4.8%, 5.1%, 5.2% and 5.3%, respectively.
McLaughlin said it’s “no surprise” investors are attracted to high-rent markets. “The inter-market variation in median cap rates–which is the ratio of annual rent collected on a property compared to its value–is highly correlated with the share of investor activity in a given market,” he said. “Investors are likely attracted to markets with high-cap rates because cap rates are simply a measure of return.”
For example, McLaughlin said, on an initial investment of $100,000, a property with a 10% cap rate will deliver an annual return of $10,000 in rent, and a property with a 2% cap rate will deliver $2,000. “While there are certainly other considerations for investors, cap rates are simple but powerful indicators of market dynamics,” he said. “Cap rates also reflect market-level risk and expectations in future home value increases, vacancy rates, tenant risk and physical conditions of properties. All things being equal, investors tend to prefer higher over lower returns, and those in the housing market are no different.”
Additionally, CoreLogic said larger increases in investor activity from the housing market bottom (2012) to the most recent calendar year (2018) are also strongly correlated with tightening housing market conditions. Across the largest 100 markets, there is a moderate correlation between the change in investor activity over these six years and the change in the absorption rate (the rate of sales divided the number of new listings) over the same period. “In other words, markets that witnessed an increase in the share of active investors also experienced a similar change in the rate at which homes sold relative to inventory,” the report said.
Does this mean investors snapped up supply that would have otherwise been bought by owner-occupiers? Perhaps, CoreLogic said, but the evidence isn’t conclusive because there’s a possible chicken-or-egg relationship between the two.
“While it’s certainly possible that an increase in investors into a market increases competition and lowers supply relative to aggregate demand, the opposite is also possible: markets with tightening supply could draw investors as they perceive markets with a dwindling supply to be safer bets than those with a more plentiful supply,” McLaughlin said. “Either way, it’s a truism that homebuyers today are more likely to cross paths with investors during an open house than at any other time in the past two decades.”