Investors are buying half as many homes as last year, new report finds

Investors fled the housing market in the final months of 2022, purchasing roughly half the number of properties they bought in the previous year.

Home purchases by investors dropped 45.8% year over year in the fourth quarter and declined 27% from the third quarter, according to a Redfin analysis. Dollarwise, investors bought $31 billion worth of homes in the period, down 42.7% from a year earlier and down 27.5% from the third quarter.

Their absence was acutely felt in some pandemic boomtowns where investor home purchases fell nearly 70% year over year in the fourth quarter.

Higher mortgage rates and concerns that prices would fall more made the math untenable for many investors, a major reversal from a year earlier.

"In 2021 and early 2022, we had rental hedge funds purchasing a lot of homes in the valley because rental rates had soared along with home prices," Shay Stein, a listing agent for Redfin in Las Vegas, wrote to Yahoo Finance. "As the market turned, they stopped making offers at the pace they were."

Boomtown to bust

Popular cities during the height of COVID-19 — such as Las Vegas, Phoenix, and Charlotte, North Carolina — saw real estate investment activity decline sharply at the end of 2022. Las Vegas and Phoenix, in particular, led the fourth-quarter drops in investor purchases, down 67% and 66.7%, respectively.

Other cities that showed significant declines in investor activity were Nassau County in New York, Atlanta, Charlotte, Nashville, Sacramento, Riverside in California, and Orlando, Florida.

Hedge funds and home-flipping companies have drastically slowed their investing due to overall market conditions and higher borrowing costs. Real estate agents said iBuying companies — instant-buying companies that use technology to buy and sell properties quickly — have especially slowed their pace.

"I think a lot of the iBuyers and large rental companies like Progress Residential slowed their buying because they had already bought so much in Phoenix and many of those homes were just sitting on the market," Heather Mahmood-Corley, an agent in Phoenix, wrote in an email. "A lot of the iBuyers are losing money on their homes and they've had them on the market 200+ days."

That’s quite the reversal from a year ago.

Investor home purchases in Las Vegas increased by 105.5% in 2021 compared with 2020, while investor purchases made up 28.4% of Phoenix's property market in the fourth quarter of 2021, according to the Nevada Current.

At one point, iBuyer programs in Las Vegas would make “VERY aggressive offers,” Stein wrote. But as the market turned, the companies still in the market are making “very conservative offers that are less likely to be accepted,” Stein said.

Rent and home prices decline

Investors have been spooked by the more unfavorable market conditions. Mortgage rates in the fourth quarter neared 7%, and home prices began to soften.

In the boomtowns, prices have been trending downward since mid-2022. For instance Phoenix's average home price fell 13% since May 2022, while Las Vegas's price dropped 13.2% since June 2022. The average price in Austin, another popular boomtown, saw average prices dip 20% since May of last year.

Rent has also declined — or growth has slowed considerably — in popular pandemic cities, a big disincentive for investors who look for rental properties.

For instance, rental prices in Phoenix declined 6.7% year over year at the beginning of this year, the biggest drop among the 50 most populous metropolitan areas, according to Redfin's recent rental numbers. Las Vegas rents registered a less than 1% gain in the last seven months, increasing $11 from $1,835 to $1,846.

The slowdown in rental price growth has been particularly noticeable in the West. The most significant annual rent decline occurred in states like Nevada, Arizona, and Oregon. The pandemic boomtowns have also seen some of the biggest drops.

"Pandemic boomtowns, like Austin, have already been in decline…basically since summer. That's also true for Phoenix, Las Vegas, [and] a lot of the Utah boom towns," Daryl Fairweather, chief economist at Redfin, previously told Yahoo Finance. "I think it depends on how trendy the place got during the pandemic — if it got trendy, it means it probably was overvalued."

The investor market is expected to continue to cool well into 2023, according to the real estate agents Yahoo Finance talked to, especially if mortgage rates remain high and prices cool even more.

"I would anticipate cash offers to remain at the levels we have seen the last few quarters due to hedge fund activity slowing significantly, two of for iBuyers shutting down, and non-investor cash buyers having less equity in their homes to parlay into a new home," Stein said.

Rebecca is a reporter for Yahoo Finance.

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