SEATTLE – Roughly one of every seven (13.5%) U.S. homes sold by an investor in March sold for less than the investor bought it for, according to a new report from Redfin. That’s comparable with February’s 14.5% rate – the highest since 2016.
It’s also nearly triple the share of a year earlier and compares with a record low of 2.8% in May. By comparison, 4.8% of overall U.S. March home sales sold at a loss. For the analysis, Redfin included 40 of the most populous U.S. metropolitan areas, defining and “investor” as any institution or business that purchases residential real estate, including both large companies and mom-and-pop investors.
While most housing investors – six out of seven – still reaped gains, those gains have shrunk.
The typical investor who sold a home in March sold it for 45.9% more ($145,714) than the price they paid, down from 55.3% ($173,458) a year earlier and a pandemic peak of 67.9% ($199,274) in June 2022. Those gains don’t necessarily equal profits, however, because it doesn’t include any money spent to improve the property.
“I recently showed one of my buyers a three-bedroom single-family home in Glendale that was listed by an investor,” says Phoenix Redfin agent Van Welborn. “My client ultimately found another house they liked better, and the investor ended up losing about $20,000. The investor bought the home for $450,000 and sold it for $480,000, but put $50,000 of work into it. The house also sold below the $550,000 list price after sitting on the market for almost four months.”
The challenge: Rising mortgage rates and falling buyer demand
Investors are making less money selling homes – and losing money in some cases – because the housing market has slowed dramatically in response to rising mortgage rates.
Higher mortgage payments have eaten into investor profits and sent the typical homebuyer’s monthly payment up nearly $300 from a year ago. That, in turn, has slowed homebuying demand and pushed down sale prices. As a result, the share of investor-owned homes selling at a loss has increased.
While many investors buy homes in cash, they’re still sensitive to high interest rates because they often take out loans to get that cash.
“You might wonder why investors don’t just wait to sell until the housing market bounces back,” says Redfin Senior Economist Sheharyar Bokhari. “Many long-term investors who rent their properties out are doing that, but many flippers – especially those who bought recently – can’t afford to.”
Bokhari says it’s expensive to hold onto non-selling homes that aren’t producing income because “the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases. Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses.”
Roughly one in five (20.8%) homes sold by flippers in March sold at a loss, higher than the 13.5% share for investors overall. Redfin defines a flipper as an investor that bought a home and resold it within nine months.
Investors who rent out their properties are also seeing returns shrink in some areas. The median U.S. asking rent fell 0.4% year over year in March – the first annual drop in three years – and 13 major metros saw larger declines. Owners of short-term rentals are getting hit as well. The Airbnb market is oversaturated with supply, and authorities are imposing tougher restrictions on hosts, driving some to sell.
Overall, investor activity fell significantly from the height of the pandemic, when record-low mortgage rates and soaring homebuyer demand drove up investor purchases.
Top metros for profits and losses
In Phoenix, 30.7% of homes sold by investors in March sold at a loss – the highest share of the 40 metros Redfin analyzed and more than double the national rate. Next came Las Vegas (28%), Jacksonville (20.9%), Sacramento, Calif. (20.2%) and Charlotte, N.C. (17.4%).
In general, the highest percent of losses – both investors and individual buyers – were in metro areas where home sales soared during the pandemic. Pandemic boomtowns are seeing home prices and sales fall relatively quickly because housing costs surged to unsustainable levels during the pandemic. Elevated mortgage rates then added fuel to the fire.
Investors are less likely to lose money in affordable areas and select South Florida markets, which have held up relatively well. In Virginia Beach, Va., 1.7% of homes sold by investors in March sold at a loss. It was followed by West Palm Beach (2.4%), Miami (2.5%), Fort Lauderdale (2.5%) and Warren, Mich. (2.6%).
Affordable markets’ housing demand fared relatively well because prices didn’t overheat as much during the pandemic, and higher mortgage rates don’t make as much of a difference on lower-priced homes.
Redfin agents say that small, individual investors are often the ones offloading their properties now, while many large investment companies are waiting on the sidelines for the market to improve.
“Most of the investors I see selling now are mom-and-pop investors,” says Las Vegas Redfin real estate agent Shay Stein. “They’re selling because their long-term tenants are moving out, they want to put their money elsewhere, or they just want to get out because they have heartburn from 2008. The best time to sell would’ve been late 2021 or early 2022, but many of them are thinking that the next best time is now because the economy and home prices could slow further.”
But one type of institutional investor isn’t waiting to sell: iBuyers.
Many iBuying companies ceased or slowed operations in the last two years and have been offloading inventory. That’s likely part of the reason that some markets where iBuyers had a large presence, including Phoenix, Charlotte and Las Vegas, have seen an uptick in the share of investor-owned homes selling at a loss.
“My colleague recently represented a couple that purchased an iBuyer home for $610,000, substantially below the $760,000 list price and the $708,200 price that the iBuyer paid for the home,” Stein says. “The appraisal also came in at $680,000, so the buyers walked away with $70,000 in equity. The house sat on the market for 166 days before selling.”
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