Real Estate Investors Thrive Amid Surging Mortgage Rates

Despite the recent surge in mortgage rates that has left many home buyers rattled, one group has remained remarkably active in the real estate market this summer. According to a new report by CoreLogic, real estate investors, especially smaller mom-and-pop buyers, have continued to steadily purchase properties. In fact, investors accounted for 26% of all single-family home purchases in June, maintaining a consistent share of around 25% since the beginning of this year.

Even with mortgage rates above 7%, investors are undeterred and continue to invest in real estate. Surprisingly, nearly 60% of these investors finance their home purchases with a mortgage. This is higher than the 67% of non-investors who rely on mortgages to buy a home, as highlighted by Thomas Malone, an economist at CoreLogic.

CoreLogic states, “The year 2021 witnessed a surge in investor activity, and they have held a market share that is on average 8% higher than in 2020.” The report also adds that while there has been a slight decline in investor activity since early 2023, there is no indication that the share will return to pre-pandemic levels anytime soon.

The report attributes the recent dip in home investor purchases to seasonality, as owner-occupied buyers tend to be more active during the summer months. Interestingly, while purchases by owner-occupiers decreased by over 40% between 2019 and June 2023, investor purchases during the same period increased by 12%, according to Thomas Malone.

It is worth noting that larger investors frequently purchase homes with cash, offering them a competitive advantage in the market, as Malone pointed out.

Rising Interest Rates Drive Demand for Rentals

The surge in interest rates has led to soaring unaffordability for prospective home buyers, resulting in a robust demand for rental properties. This trend has not gone unnoticed by investors, who continue to seize opportunities in the market and show no signs of stopping anytime soon. These findings were reported by CoreLogic, a leading provider of real estate data and analytics.

Using public records data, CoreLogic identified investor purchase activity, categorizing an investor as an individual or corporate entity that simultaneously owns three or more properties within the past decade. The data revealed a stark contrast between purchases made by buyers intending to live in the properties and those made by investors. From 2019 to June 2023, purchases by prospective homeowners plummeted by over 40%, while investor purchases surged by 12%.

Although the proportion of homes purchased by “mega-investors” (entities possessing a thousand or more properties) has declined by nearly half since its peak in June 2022, smaller investors have stepped up their game. In fact, buyers owning between 3 to 9 properties accounted for a significant 47% of investor purchases in June, marking the highest level seen since 2011.

The state of California witnessed the most substantial investor activity, with investors acquiring 34% of homes. Following closely behind were D.C., with 33%, and Georgia, with 32%.

One likely reason behind the uptick in small investors entering the market is the persistent shortage of homes available for sale. This scarcity in inventory translates into higher demand for rental properties. Consequently, rental rates have become increasingly unaffordable, providing investors with a strong incentive to remain actively engaged in the market compared to owner-occupied buyers.

In conclusion, the current environment of high interest rates has resulted in an unprecedented level of unaffordability for home buyers. As a result, the demand for rental properties has surged, attracting a plethora of investors. While the share of homes purchased by mega-investors has declined, smaller investors have filled the gap. The scarcity of for-sale inventory has further intensified this trend, leading to rising demand for rentals. As the market continues to evolve, investors are expected to remain a prominent force in the real estate landscape.