Real estate investors plainly think now is the time to buy, according to a new study by Redfin, the national real estate brokerage.
Despite the inventory shortage and strong competition, Redfin reports that “real estate investors purchased 67,943 U.S. homes in the second quarter of 2021 — the highest quarterly figure on record.”
“In dollar terms,” said Redfin, “investors bought a record $48.5 billion worth of homes in the second quarter, up from $38.9 billion in the prior quarter and $20.9 billion a year earlier. The typical home they purchased cost $439,600 — 23.7% higher than a year earlier.”
Highs And Lows
The Redfin figures reflect sales activity since 2000, when it first began to compile data, but why is there so much investor interest? Can it be a good time to be a real estate investor when home prices are soaring, bidding wars are common, and foreclosures are few? Is this the most likely environment to find bargain-basement deals?
Despite apparent barriers, good investment opportunities are plainly out there. The National Association of Realtors (NAR) said that individual investors and second-home buyers represented 14% of existing home purchases in June, up from 9% a year earlier.
A closer look at the real estate market may explain why investors are so active at this time.
Mortgage rates have slipped below 2.8% with the end of the government’s adverse market fee. This rate is very close to the record low, just 2.65%, reached during the first week of January. It’s also a lot less than the 7.9% long-term average. The ability finance and refinance in today’s market means borrowers can lock-in financing for as long as 30 years, regardless of where rates move in the future.
Population And Inventory
Between 2000 and 2020 the US population increased from 280 million to 330 million. That’s an extra 50 million people who need to live somewhere.
If you compare household formations to new construction during the past decade, we’re short about 6.8 million units, according to a June report released by the National Association of Realtors (NAR).
“There are not really any silver bullets,” explains HUD’s Senior Advisor, a past vice president of the Urban Institute’s Housing Finance Policy Center.
While demand is plain — think of rising home prices and widespread bidding wars — there’s little possibility that the inventory shortage will be quickly resolved.
The seasonally adjusted production rate for new homes — a partial solution to the inventory shortage — stood at 676,000 units in June. That’s down from 839,000 units a year ago.
One big reason for reduced new home sales concerns labor. There isn’t enough of it. In May, according to the Bureau of Labor Statistics, there were an estimated 299,000 job openings in the construction trades.
A second reason for limited new home sales is price. Robert Dietz, Chief Economist with the National Association of Home Builders, explains that “higher costs have priced out some buyers, particularly at the lower end of the market. A year ago, 39% of new home sales were priced below $300,000. In June 2021, only 30% of new home sales were priced below $300,000. Thus, while demographic-based demand remains solid, recent softness for new and existing home sales are a warning concerning home price growth.”
Four million properties were in forbearance at the height of the pandemic, a number that has fallen below 1.75 million, according to the Mortgage Bankers Association (MBA).
It might seem as though many homes in forbearance should be available for sale — and often at discount — but that has not been the case. Supported by foreclosure moratoriums and common-sense exit plans, most borrowers in forbearance are now leaving the program and usually with good financial and credit terms.
However, investors need to watch the forbearance effort with care. According to the MBA, about 15.7% of program participants have left the program without a loss mitigation plan and another 1.5% have faced such options as repayment plans, short sales, or deeds-in-lieu of foreclosure.
“As many as 688,000 forbearance properties – those without an exit agreement of some sort – have a strange and fuzzy financial status,” said Rick Sharga, Executive Vice President with RealtyTrac. “Can owners with open forbearance agreements simply sell in today’s hot market and avoid foreclosure or a short sale? Will the $10 billion set aside under the American Rescue Plan — an average of $14,535 per delinquent property — be used to bail out borrowers? Who will qualify for help? The answers are not yet clear.”
Today’s combination of little inventory, rising prices, and low mortgage rates is surely attractive, but even so not every property is investible. There are additional issues to consider. For example:
- Real estate is a localized commodity. It may be that property trends in a given location do not follow soaring national price trends.
- The pandemic is not over. The Delta variant is here and 100 million people above the age of 12 have not been vaccinated, according to The Washington Post. A return of the virus in full force could cause large numbers of people to be terribly sick as well as substantially damage major portions of the economy. A big question for investors is whether eviction moratoriums will continue in the face of another surge.
- Mortgage rates can change. Worries about inflation might cause the Fed to push bank rates higher. Whether mortgage rates will follow is uncertain. Mortgage rates today are already priced below the prime rate, but if mortgage investors get nervous then higher rates are possible.
Lastly, watch the forbearance plans. They’re designed to save homeowners from foreclosure, but some will likely wind up as distressed real estate, properties that may very well interest local investors.