I don’t know if it’s a surprise to anybody, but I saw this article talking about how investors bought a lot of properties for flipping and turned them into short-term rentals or something else. I want to talk about the investors.
I also want to talk about the housing crash. You know, this housing bubble, because now we’re seeing two sides to this issue. It’s also a lot clearer now what’s going to happen if everything continues the way it is right now.
So let’s jump right into this.
This article is from Fortune and it says investors—including Wall Street—helped to drive up home prices during the pandemic housing boom. Here’s the proof.
According to the article, “Since the onset of the pandemic housing boom, investors have flooded the U.S. housing market. There are small players like mom-and-pop landlords and Airbnb hosts who are adding to their property portfolios.”
Man, they were doing it fast. We all watched that happen.
Here’s the thing that I want to stress out from the article:
However, even as investors piled into the housing market, many real estate insiders over the past two years hesitated to attribute much, if any, of the boom to investors. In their view, numerous factors drove the housing frenzy. Historically low mortgage rates, spurred by the Federal Reserve's response to the COVID-19 recession, attracted all types of buyers. (Source: Fortune)
I just have to disagree with this. Real estate insiders said that? I don’t think so. We’ve been telling everybody, myself included, and the whole real estate world, “Hey, a big chunk of these buyers are actually investors.”
In fact, we’ve been saying this since day one: that investors have been outbidding first-time homebuyers on opportunities to become homeowners. So, I am not sure who the “real estate insiders” are that Fortune got this from. Even NAR called it earlier this year when they showed that 30% of all purchases in Q1 of 2022 were from investors. That is a pretty massive chunk of home sales.
“In the first quarter of 2022, investors made up a record 28% of single-family home sales, according to a report published last week by the Harvard Joint Center for Housing Studies,” Fortune continues.
They also say, “That finding is backed up by a separate Redfin analysis, which looked at all home sales (unlike Harvard’s single-family home analysis). In the first quarter of 2022, investors made up a staggering 33.1% of home sales in Atlanta. Not far behind were Jacksonville (32.3%), Charlotte (32.3%), Phoenix (29.0%), and Miami (28.2%).”
Why are these stats important? Think of the implications now that investors are slowly pulling back on purchasing these homes—the demand is starting to slow down in some of these areas. What happens if some of these “mom-n-pops” decide to back out [of the market]?
That’s why it's important for us to track these investors. Where are they buying? How much are they buying? How many are actually no longer buying?
Let’s be clear: the vast majority of investor home purchases in America are still made by small or midsize investors: ranging from average Joes owning an Airbnb rental to individuals who’ve spent years amassing a hefty portfolio of rentals. According to the Harvard study, 74% of investor purchases in September were made by investors with portfolios of less than 100 properties. The remaining 26% of investor purchases were made by groups with property portfolios of at least 100 units. (Source: Fortune)
That gives you a clear indication of who’s purchasing what, such as Blackstone and all of these big companies that made these purchases. Fortune also has a lot of great graphs in this article, so you can check that out.
Redfin.com has a great piece with a graph showing investors' home purchases falling for the second straight quarter. According to Redfin’s data, after peaking in Q3 of 2021 (at 93,260 homes), it went down in Q4 of 2021 (to 87,910 homes) and Q1 of 2022 (to 77,829 homes).
It is worth noting how much it is falling and what areas they were purchasing in before to indicate the fall. Because if we track this, some of that demand is still being picked up by these first-time homebuyers who weren’t able to get in [when investors were hot on purchasing properties]. So, what happens when demand from investors starts waning? That’s the concern.
I don’t always agree with Dave on everything, but on this, I agree with him. Just a disclaimer: Some of you might like what he’s saying, some might not, so it is up to you to read the whole thing on Dave’s Instagram post and form your own opinion. But, because I read the data daily, and I get this stuff directly from the people publishing it, and I get to talk to economists, and I just read data all day, I agree with him on this.
Dave posted a series of snapshots of an article he wrote.
He says, “Inflation. Recession. High interest rates. High fuel cost. Labor market disruption, including the Great Resignation. Supply chain shortages. Bear market And the hits just keep coming… When you’re operating on fear, fight or flight chemicals flood your brain and your critical thinking skills shut down. Higher thought patterns and analysis are only possible when a perceived threat is lowered. You don’t ever make good decisions based on the ‘thinking’ you do when you’re afraid or angry. And the news cycles right now will make you both angry and afraid several times a day if you let drama in.”
Dave continues by saying, “In 2008, demand fell dramatically below supply, and house prices actually went down. That was the first time we had seen any substantial and sustained house price drop in almost 100 years. Even then, prices recovered within a few years.”
“Bottom line,” Dave writes, “We still have too many buyers chasing too few houses. So for the next five years, we will continue to see house prices INCREASE, certainly not crash.”
That’s on the other side of what I’m hearing about the housing crash.
Personally, I think it is hard to see five years into the future and confidently say that house prices will go up, but at the very least, I agree with Dave that the housing market is not going to crash right now.
Fortunately, we now hear a lot of people say, "Hey, it looks like we’re getting into a neutral market.”
That is the stance I am taking—we are heading into a neutral market. There was no crash. There is no bubble. I am showing you, though, that you need to pay attention to the investors. If there are fewer investors, obviously there’s going to be more inventory and less demand.
If the Fed raises the rate a lot more than they’re saying they are going to, and they surprise the mortgage world, then we’re going to see mortgage rates rise more. But check out the mortgage rates today (June 29th). They dropped to below 6%.
You have to understand the world we’re in. Look at the data and see what’s happening. Stop listening to these people on YouTube or social media that have no understanding of the real estate world. Stick to the people that have been doing this for years, who invest in and who own a ton of real estate.
Pay attention to who you listen to because it matters. Don’t make decisions based on overreaction.
Take everything that you are seeing on the news, weigh it out, look at the facts, and form your own opinions with a clear mind.
Honestly, if the market starts turning around and I see that there’s a housing crash coming, I’ll tell you. But right now? We’re just easing into a normal, or neutral, market.
In a normal market, you don’t expect homes to sell in two weeks. The average is three months on the market. Don’t freak out. That was the average a few years ago (before the pandemic).