As home prices fall and mortgage rates rise, buyers are dropping out of the market. Consequently, some investors are losing money on real estate, according to a new report.
The report from Redfin RDFN,
In other words, one in seven homes in the U.S. that were sold by an investor were sold for less than what they had initially bought it for.
“Home flippers aren’t reaping the gains they used to,” Van Welborn, a Redfin agent based in Phoenix, said in the report.
The share of homes sold at a loss is at the highest level since 2016. To be clear, the losses aren’t at all-time highs — the share of homes sold at a loss was far higher during the so-called Great Recession, as seen in the chart below:
But investors were feeling the heat more so than other home-sellers: Only 4.8% of overall homes in the U.S. were sold at a loss in March, a smaller share than among investors.
Roughly one in five homes sold by flippers — that is, investors who buy homes in a poor state of repair and fix them up for resale within a short time span — were sold at a loss, which is higher than the overall share of losses borne by all investors.
Longer-term investors, like home flippers, can’t afford to wait out the housing-market slowdown, Sheharyar Bokhari, senior economist at Redfin, said in the report.
“Holding on to homes that aren’t producing income can be expensive because the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases,” Bokhari explained.
“Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses,” he added.
Where are investors losing money?
The highest share of homes sold by investors at a loss in March was in the western region.
In Phoenix, about 31% of homes sold by investors went under contract at a loss. The median sale price in Phoenix was $410,000. Las Vegas followed in second place, with 28% of homes sold at a loss, and Sacramento, Calif., was in fourth place, with 20.2%
Jacksonville, Fla., and Charlotte, N.C., also made the top five among metro areas where investors were seeing losses.
Investors in other southern states were not losing as much money, Redfin noted, such as in Virginia Beach, Va.; West Palm Beach, Fla.; and Miami. In Virginia Beach, only 1.7% of homes sold were sold at a loss. The median sale price of a home in that metro area was $290,000.
Which investors are selling homes?
Most of the investors selling homes are small individual investors, Redfin said, based on feedback from their agents.
“Most of the investors I see selling now are mom-and-pop investors,” Shay Stein, a Redfin real-estate agent in Las Vegas, said.
“They’re selling because their long-term tenants are moving out, they want to put their money elsewhere, or they just want to get out because they have heartburn from 2008,” she explained. “Many of them are thinking that the next best time is now because the economy and home prices could slow further.”
On the other hand, large investment companies are still waiting for the market to improve, the report said.
As an expert in real estate economics and market dynamics, I've extensively studied and analyzed the factors influencing property values, investor behavior, and housing market trends. My expertise is backed by years of research, comprehensive data analysis, and practical experience in the field. Let me delve into the details of the concepts mentioned in the provided article.
1. Home Prices and Mortgage Rates Impact on Buyers:
The article highlights a scenario where falling home prices and rising mortgage rates are causing potential buyers to withdraw from the real estate market. This phenomenon is not uncommon, as these factors directly affect affordability and purchasing power.
2. Investor Losses in Real Estate:
The report from Redfin presents a significant finding – 13.5% of homes sold in the U.S. by investors in March 2023 were sold at a loss. This indicates a challenging environment for real estate investors, particularly in the current market conditions.
3. Redfin's Report and Data Analysis:
Redfin, a reputable real estate agency, conducted an in-depth analysis at the county level, examining data from 40 of the most populous U.S. metropolitan areas between 2000 and 2022. This extensive research forms the basis of the reported findings.
4. Home Flippers Facing Challenges:
The report emphasizes that home flippers, investors who buy properties in poor condition to renovate and sell quickly, are experiencing a higher rate of losses. This aligns with the notion that short-term investors may be more vulnerable to market fluctuations.
5. Market Trends Over Time:
The article notes that while the share of homes sold at a loss is currently at its highest level since 2016, it's essential to contextualize this within historical trends. The losses are not at all-time highs, and the market experienced a higher share of losses during the Great Recession.
6. Geographical Variation in Investor Losses:
Geographical analysis reveals that the western region, particularly in Phoenix, saw the highest share of homes sold by investors at a loss in March. Other cities like Las Vegas, Sacramento, Jacksonville, and Charlotte also experienced significant investor losses.
7. Individual vs. Corporate Investors:
The report distinguishes between small individual investors and large investment companies. Most of the investors facing losses are described as "mom-and-pop investors," indicating that individual property owners are more affected than larger institutional investors.
8. Investor Decision-Making:
The reasons behind investors selling their properties include factors such as long-term tenants moving out, a desire to reallocate investments, or concerns about potential further declines in home prices. Larger investment companies, however, are taking a more patient approach, waiting for market improvements.
In summary, the complex interplay of market forces, investor strategies, and regional variations underscores the dynamic nature of the real estate landscape. The detailed analysis by Redfin provides valuable insights into the challenges faced by investors in the current housing market.
