Investor activity increases for the first time in 2 years

A new Redfin report highlights a slight uptick in real estate investor activity, with purchases increasing 0.5% year-over-year in Q1 2024, the first increase since mid-2022. California markets experienced significant investor activity, especially in San Jose and Oakland, with investor purchases rising by over 20%.

Source: Redfin (June 2024)

According to Redfin, investors are becoming more active due to increased profits. Homes now sell for 55% more than the purchase price, up from 46% the previous year. Overall, investors bought 19% of homes sold in the first quarter, the highest share in almost two years. 

“Investors are reaping bigger profits than they were a year ago. The typical home sold by an investor in March went for 55.2% more ($174,616) than the investor bought it for. That’s up from 46.3% ($146,586) a year earlier. Just 5.3% of homes sold by investors sold for a loss, down from 13.7% in March 2023.”

Investor purchases

Source: Redfin (2024)

Ana Teresa Solá of CNBC reports on the popularity of real estate investing, highlighting that a recent Gallup survey found that 36% of Americans ranked real estate as the “top long-term investment,” beating out stocks and mutual funds (22%) and gold (18%).

Bloomberg’s Prashant Gopal, Patrick Clark, and Scott Carpenter report on real estate investors, highlighting that apartment syndicators backed by Wall Street loans are still in trouble. “Six out of the seven borrowers with the most exposure to CRE CLO loans are apartment syndicators…Together, those firms have almost $4 billion in outstanding debt financed through the securities, with three-quarters of the volume composed of loans that are maturing this year.”

Diana Olick of CNBC comments on investor activity and its impact on primary residence purchases. Citing a Moody’s Analytics report, Olick notes that the relationship between the two is weak. Little evidence supports the notion that investors crowd out homebuyers from the market.

Jobs report

Jeff Cox of CNBC reported on last week’s job report, which showed another strong reading for the U.S. economy. Specifically, 272,000 jobs were added in May, surpassing expectations and easing concerns about a labor market slowdown. This is up from 165,000 jobs added in April. The unemployment rate rose to 4% for the first time since January 2022. 

Jobs report

Source: CNBC (June 2024)

Alicia Wallace, Krystal Hur, and Bryan Mena of CNN reported on the data, highlighting that the stock market dipped last Friday as investors processed this stronger-than-expected May jobs report. The report led to swings in the stock market, as some investors see strong job gains as a sign that the U.S. economy is unlikely to slide into a recession and that the Federal Reserve was unlikely to cut interest rates anytime soon.

Josh Schafer of Yahoo! Finance notes that the new data “highlights the difficulty the Federal Reserve faces in determining when to lower interest rates and how quickly. Overall, the economy and labor market have held up, and inflation has remained sticky, building the case for holding rates higher for longer. Yet some cracks have emerged, such as signs of inflation pressuring lower-income consumers and rising household debt.”

Finally, Danielle Hale of Realtor.com reports specifically on mortgage rates and that bond traders anticipate slower growth and lower inflation. This causes bond yields and, ultimately, mortgage rates to drop. This will keep rates below 7% but far from the 3.5-5% we saw over the past decade.

Affordability

Dana Anderson of Redfin reports on housing affordability and its ranking among young voters in the U.S. 91% of Gen Z say that housing affordability is the top issue for them when considering who they will vote for in the presidential election. This was ranked above other items, including the economy, abortion, gun rights, and foreign wars. Millennials, Gen Xers, and baby boomers ranked the strength of the overall economy as their top factor when choosing a president. 

Affordability important to Gen Z

Source: Redfin (June 2024)

Redfin Senior Economist Elijah de la Campa comments on the survey results: 

“Housing affordability is a cornerstone of this year’s presidential election because even though the economy is fairly strong, unemployment is low and wages are rising, buying a home feels impossible for many Americans…This is particularly the case for young people, who have seen the  cost of starter homes increase twice as fast as incomes. Young people care about other political issues, like immigration and abortion rights, but they’re more likely to cite housing affordability as a factor in their vote because it directly impacts the roof over their head, their lifestyle and their ability to build wealth.”

The Fannie Mae Home Purchase Sentiment Index (HPSI) dropped 2.5 points in May to 69.4 as consumer attitudes toward homebuying reached an all-time survey low. Last month, only 14% of consumers thought it was a good time to buy a home, down from 20% last month, and 64% believe it’s a good time to sell, down from 67%. Consumers expect home prices and mortgage rates to increase over the next year.

EY released a new report on this issue, highlighting that the U.S. faces a significant shortage of affordable rental homes. There is a deficit of 7.3 million rental homes available to low-income renters, with only 34 affordable homes available for every 100 extremely low-income renter households. The best way to encourage more affordability is to enable and incentivize local municipalities to upzone for greater density and reduce red tape for new development.

We have seen an increase in the build-to-rent asset class, according to Bailey Schulz of USA TODAY. These communities are becoming increasingly popular as more cannot afford a down payment on a home. In 2023, approximately 97,000 residential homes were built to rent, marking a 45% increase from the previous year. Despite the growth, build-to-rent housing still makes up a relatively small portion of the market, accounting for an estimated 7.9% of all single-family housing starts in 2023.

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