Investors are Stepping Out of the Market

Defying expectations of a housing market drop due to increasing interest rates, the value of the single-familyhome has continued to rise. While this is great news for property owners, buyers may find themselves in a little bit of a pinch when it comes to qualifying for a purchase. 

During the pandemic, homes were selling at record high speeds due to record-breaking low rates. This combination led to an increase in investors coming in and buying up properties at affordable prices with promise for a great ROI (return on investment).  This helped to contribute to the price surge of the last two years. 

Now, with the steep increase in prices and rates, the numbers don’t make sense for most investors. The abundance of new short term rental properties has caused that rental market to be oversaturated. Low vacancy rates mean lower income. For longer term rental investments, the monthly mortgage payment is now higher than the monthly rental payment would cover. With so few homes on the market already, it has become difficult for investors to find a home that can turn a profit.

Most new home communities have HOAs that require a certain percentage of the homes be owner occupied, another deterrent for the investor community. 

With the residential real estate market becoming a turn-off for investors, are they moving to the commercial market?

The answer is no. 

The current work-from-home situation in the nation has caused commercial properties like office space to see a decline in rental income, with some buildings unable to find tenants at all. Over the past year, commercial properties have seen an average decline in property value of 16%. Even more surprising, apartment complexes have seen an average decrease of 20% of their value as well. This is due to over saturation of the rental market during the boom we saw during the pandemic. Rents have leveled out and the commercial real estate market has “corrected”.

The residential market has yet to see such correction, and likely will not. Most experts agree that we’ll continue to see homes appreciate in value over the next year, even if rates continue to creep up. Experts also don’t expect inventory to increase much over the next year. With nearly 61% of homeowners having an interest rate under 4%, it’s unlikely that they’ll give up those rates for anything in the high 7%s. With low inventory and standard demand, it’s extremely unlikely we’ll see any sort of value depreciation (other than the seasonal decrease).

 

HERE’S THE GOOD NEWS

Potential homebuyers have some benefits with investors stepping out of the real estate market. Despite the average mortgage payment being a record-high 42% of median household income, competition among buyers has dwindled. If buyers are ready, willing, and able, it’s a good time to make a purchase. 

Homebuyers who make a purchase today are making smart decisions. They know that if they’re waiting for rates to drop, so are the investors. Lower rates means higher competition in the market and with already low inventory, the options available right now will drop drastically. Lower rates may also mean another boom in the market, sending prices up as buyers are willing to pay  more money for the home.