Investors may be more sensitive to rising interest rates than homeowners
The share of single-family home purchases made by investors dropped by 8 percentage points from Q1 to Q2, suggesting that these buyers may be more sensitive to interest rate increases than owner-occupied buyers.
Investor activity in the single-family market reached record highs throughout 2021 and 2022[1]. This activity peaked in February 2022, when investors made 28% of all single-family purchases, the highest monthly share since 2011, according to CoreLogic data. Since then, investor activity has receded each month. Figure 1 shows the share of investor purchases dropping eight percentage points from March (28%) to June (20%). That said, June’s share is still high and would be more in line with 2019 and 2020 peak activity usually reached in January.
Figure 1: Share of Home Purchases Made by Investors by Month, Jan 2019 – Jun 2022
Similarly, the current level of investor purchases has fallen but remains high compared with previous years. Figure 2 shows the number of national purchases by investors, along with the number of purchases made by non-investors. In June 2021, investors set a monthly record by making 147,000 purchases, CoreLogic data shows. This level dropped 37% or to 92,000 purchases in June 2022. That still exceeds the number of investor purchases in that same month prior to 2021; 20,000 more than in 2020 and 18,000 more than in 2019.
Figure 2: Monthly Home Purchases Made by Investors and Non-Investors[2], Jan 2019 – Mar 2022
Is the investor surge over? That is possible but not certain. Investors are likely more sensitive to the recent interest rate increases than homeowners. For homeowners, the decision to buy is often a lifestyle choice, but investors may be considering single-family homes as an alternative to other potential assets. Therefore, rate increases could cause homeowners to look for less expensive alternatives, such as a smaller home or a property in a more affordable neighborhood. But this same dynamic may persuade investors to pursue investment options outside real estate.
However, it would be premature to attribute the investor share decline solely to increased rates. Investors may fear potential price declines since price appreciation reached its zenith in February. Similarly, there could be concerns that rents will not cover expenses in times of high inflation.
Similar trends have been seen recently; investor activity dropped in Q4 2021 but surged again in Q1 2022. June is also the annual nadir of investor purchases, so this could be a seasonal downturn, and investor share could bounce back in Q3 and Q4.
Figure 3 shows that different investor classes have mostly maintained their relative share of total purchases through Q2 2022. Small investors (those who own fewer than 10 properties) were responsible for nearly half (48%) of all investor purchases at the end of Q2. Large investors (those with 101 to 1,000 properties) accounted for 9% of investor home purchases. Mega investors (those with over 1,000 properties) represented 14% of all purchases within that category. The most notable shift was in the decline of medium investors (those with 11 to 100 properties), who made up 32% of investor purchases in March and 28% in June, a modest quarter-over-quarter decrease.
Figure 3: Share of Investor Purchases by Investor Size, Jan 2019 – Jun 2022
Investor presence declined in all price tiers as shown in the Figure 4 overview of Metropolitan Statistical Area (MSA) price tiers[3]. In June, 23% of low-priced home purchases were made by investors, down from 30% in March. This might seem like a relief to first-time homebuyers, who often look to buy in this tier, but any affordability benefits are likely outweighed by higher interest rates.
Figure 4: Investor Shares by Price Tier, Jan 2019 – Jun 2021
Investors are in no rush to sell properties now that demand may be beginning to lessen in the face of higher interest rates. Figure 5 shows the share of homes purchased by investors that were resold within six months through December 2021. Only 17.3% of homes purchased by investors in December 2021 had been resold by July, a 0.9% increase from December 2020 and a 1% increase from December 2019. Given usual seasonal patterns, this share should increase in January.
Figure 5: Share of Investor Purchases Resold within Six Months, Jan 2019 – December 2021
There was little change in preferred locations for investors in Q2. The 10 MSAs with the highest shares of investor purchases are shown in Figure 6. Six of these are in the South and the other four are in the West, with two of the MSAs showing the highest percentage of investors in California. Investors are attracted to locations with strong fundamentals such as high populations and population growth and robust house price growth. The exceptions in these 10 MSAs are San Jose and Los Angeles, which have high home prices and recent population losses.
The composition of investors is very different among the 10 MSAs. Mega investors make up a large share of the total purchases in Atlanta, Phoenix, Las Vegas, Memphis and San Antonio. However, they have little to no presence in the two California MSAs shown below, and they represent a reduced share in other Texas MSAs. Although the investor surge is a national trend, the number of large institutional investors purchasing homes depends on the location. It appears these buyers are most attracted to large MSAs in the South. In the Atlanta MSA, mega investors made more purchases than any other sized investor.
Figure 6: Highest 10 Investor Shares by MSA, Q2 2022
The big question going into Q3 and Q4 of 2022 is whether the investor share will follow historical patterns. In 2019 and 2020, June was the slowest month for investor activity, which then began to tick up until hitting its peak in January. This dynamic is likely still at work, but any further interest rate hikes in Q3 may temper investor activity. The Q2 data give us the clearest signal so far that we are at the beginning of the end of the investor surge.
[1] Using CoreLogic’s public records data, an investor is defined as an entity (individual or corporate) who retains three or more properties simultaneously within the past 10 years.
[2] Non-investors are those who do not meet the CoreLogic definition for an investor (see footnote 1). Only arm-length purchases are considered.
[3] Price tiers pool together all MSA sales for the month and divide them into thirds based on sales price.
