Investors are retreating from pandemic boomtowns like Phoenix, Arizona and Las Vegas, Nevada as home prices continue to fall in those markets, according to a new analysis from real estate brokerage Redfin.
Overall, investors purchased $42.4 billion worth of homes nationwide in Q3, which is down more than 26% from a year ago and more than 30% below the $61 billion total that investors spent in Q2 2022, Redfin found.
Phoenix led the nation with a staggering 49% decline in investor activity in Q3, followed by Portland, Oregon and Las Vegas, which saw their investor activity drop by 47% and 45%, respectively. The new numbers are a stark contrast to investor appetite a year ago, when real estate investors were breaking records for the number of home purchases they were making.
In the report, Redfin defined investors as “any institution or business that purchases residential real estate” using different business types such as corporate trusts, limited liability corporations, and family trusts. This can include small mom-and-pop home flippers who may own a handful of properties all the way up to corporate investors like Blackstone Group, which owns thousands.
To Redfin economist Sheharyar Bokhari, the data shows investors may not return to the market in the near future as declining home prices put them at risk of losing money. In the report, Bokhari wrote that some homebuyers who are still in the market will “no longer face fierce competition from hordes of cash-rich investors like they were last year.”
“It’s unlikely that investors will return to the market in a big way anytime soon,” Bokhari explained. “Home prices would need to fall significantly for that to happen.”
The analysis compared county sale records from January 2020 through September 2022 in 40 of the most populated metropolitan areas in the country.
One reason that investors are uprooting from pandemic boomtowns is that these areas are facing the dual threats of high inflation and declining home prices. Not only do these challenges make it more expensive to renovate homes, but they also jeopardize the profits that investors are seeking.
For example, Phoenix had the nation’s highest inflation rate in Q3 at 13% in Q3 2022, according to Redfin data. That figure includes a more than 18% increase in shelter prices, a 40% increase in gas prices, and a 12.6% increase in the price of groceries. Meanwhile, home prices in the city have fallen by 5.4% to a median price of $435,000 since June 2022.
Redfin data also shows that home prices in Las Vegas have fallen by nearly 10% since June 2022 down to a median sale price of $390,000. The story remains the same in other pandemic boomtowns like Tampa, Florida which has seen its median home sales price decline by 6% since June. And in Austin, the median sale price has dropped by nearly 13% just since June.
Other factors such as a volatile stock market and broad economic uncertainty have also caused investors to prioritize their spending in low-priced markets like Baltimore, Maryland, where the median home sales price to investors was around $146,000, according to the analysis. Additionally, some flippers face further risks in the softening market due to over-leveraging their portfolio or being off on their numbers.