Good news for homebuyers: Investors may be giving up on an expensive housing market

Professional investors may be scaling back their home purchases, which could be a good development for frustrated home buyers who are struggling to compete with investor high offers, quick closings, and cash-only offers.

Investors who typically rent their properties to renters bought 8.2% of homes in December 2022, according to the Realtor.com® Fall 2023 Investor Report. That's down from a peak in February 2022 when they bought 8.9% of homes on the market. However, it was slightly higher than in December 2021.

The report shows that investors took a little longer to react to the increase in mortgage interest rates than home buyers did, since most of them submitted offers in cash.

The report focused on investors who are buying a property to own and rent out, and removed the housing fins as much as possible.

"We've seen investor activity start to decline, which means the typical homebuyer will be competing with fewer investors," says Hannah Jones, an economic data analyst at Realtor.com. “We've heard this over and over again during the [COVID-19] pandemic. A family is looking to buy a house, but they received a higher price offer from investors."

From January to June 2022, investors accounted for 8.5% or more of all home sales. But by June, mortgage rates had risen, rents seemed to have peaked, cutting into the potential profits of homeowners, and "the economic outlook became more unclear and the fear of a possible recession", the report states.

It should be noted that it's not just home buyers who are better able to compete now.

Smaller investors, typically those with fewer than 50 properties, have also been buying more homes since the big ones pulled back last summer. In December, mom and dad real estate investors accounted for 72.8% of all investor purchases, compared to a low of 52.6% the previous October.

Although investors and first-time home buyers and others may want the same properties, they have vastly different motivations and considerations, says Jones.

"When it comes to making a decision to buy a home, a typical family considers, 'Should we buy now, and can we afford to buy where we want?'" says Jones. "It has a lot more to do with personal circumstances."

In contrast, investors think more about the return on their investment - both in terms of buying and selling the property later, as well as how much rent can be charged on it. Investors also have more access to cash, while households often depend on getting a mortgage.

These differences can be clearly seen in purchasing activity in 2022. Investors accounted for more of the purchases, in large part because regular home buyers pulled back as mortgage rates rose. For the full year, non-investors purchased 16.6% fewer homes compared to 2021, while investor purchases increased by 6.4%.

It took until the middle of the year – when both home prices and rents peaked – for investors to start pulling back.

"Once the prices went up that high, the return on investment became a little more difficult for investors," says Jones. "They are no longer incentivized to compete like they used to be. And when the rents cooled, the value proposition weakened."

Today's investors are chasing the same thing as many home buyers: lower prices. In 2022, 12.2% of all home purchases in the South were by investors, as were 9.3% of all purchases in the Midwest. These two areas generally offer lower house prices than the Northeast and West.

"The affordable price is driving so much out of the market right now," says Jones. "The traditional cheap areas continue to see more investor activity. But they also see more activity from traditional home buyers."

To reach its findings, Realtor.com examined transaction records for single-family homes, condos, townhomes and row homes from January 2000 to December 2022. The data was national as well as the 263 metropolitan areas with more than 100 investor sales in 2022.