Real estate investors buy 49% fewer homes Y/Y in Q1, Redfin says (NASDAQ:RDFN)

U.S. real estate investors drew back on home purchases in Q1 by 48.6%, real estate brokerage Redfin (NASDAQ:RDFN) reported this past week, marking the biggest year-over-year drop since 2000.

The slump, which outpaced the 40.7% decline in overall home purchases in the 40 metro areas tracked by Redfin, comes as it’s become harder for investors to reap profits given elevated interest rates along with slowing rent growth and declining home prices.

Another reason for the dramatic annual decline is investor home purchases in Q1 2022 were near record highs. On a Q/Q basis, investor purchases fell 15.9% compared with the 14.7% quarterly drop in overall home purchases.

Even so, “they’re still scooping up a bigger share of homes than they were before the pandemic, which can create challenges for individual buyers at a time when there are so few homes for sale,” said Redfin Senior Economist Sheharyar Bokhari. He explained how prospective homebuyers have been left with less affordable options to choose from as “investors have gravitated toward more affordable properties.”

To be sure, Investors’ retreat from home purchases has coincided with that of individual homebuyers. For the week ended May 26, mortgage applications pulled back for the third consecutive week, driven by higher borrowing costs as well as a shortage of homes. In addition, first-time buyers need to account for hidden expenses when budgeting for a home, including utility bills, property taxes, insurance and maintenance, all of which can add up to over $14K a year for the average U.S. homeowner, according to a recent Zillow (NASDAQ:Z) (NASDAQ:ZG) report.

Redfin showed that investors who are home flippers are finding it more difficult to turn a profit because they don’t want to resell homes at a loss in the wake of declining prices. Many investors buy homes with cash, but they’re still vulnerable to high interest rates as they often take out non mortgage loans to cover expenses. As such, roughly one of every seven, or 13.5%, homes sold by an investor in March sold for less than the investor purchased it for, a hair under the seven-year high in February.

Interestingly, homebuilders D.R. Horton (NYSE:DHI) and KB Home (NYSE:KBH) each noted an improvement in housing demand during the quarter, despite a climb in mortgage rates. Other homebuilders: PulteGroup (NYSE:PHM), Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), Beazer Homes USA (NYSE:BZH), Tri Pointe Homes (NYSE:TPH) and Meritage Homes (NYSE:MTH). Slowing rent growth could hinder profits for investors who are landlords (i.e., renting out homes rather than flipping them), such as Invitation Homes (NYSE:INVH) and American Homes 4 Rent (NYSE:AMH).

Since housing varies throughout the U.S., it’s important to look at how individual metros fared during the quarter to see where investor purchases were most and least concentrated. The most impacted metro featured Nassau County, New York, recording a 67.9% annual drop in investor home purchases, followed by Atlanta, Georgia (-66%) Charlotte, North Carolina (-66%) and Phoenix, Arizona (-64.2%).

Baltimore, Mayland, meantime, saw the smallest decline (-8.8%) in investor purchases. Next came Providence, Rhode Island (-9.6%), Seattle, Washington State (-15.5%).