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Poor Market Conditions Make Real Estate Investors Turn Sour

Katie Jensen
Sep 29, 2021

48% of investors believe that the investment market is worse or much worse than it was one year ago.

KEY TAKEAWAYS
  • 48% of investors believe that the investment market is worse or much worse than it was one year ago, and 36% believe that conditions will remain the same over the next six months. 
  • 63% of investors listed the rising cost of homes as the primary challenge to real estate investing, while 57% of investors believe the it’s lack of inventory.
  • Competition from traditional homebuyers (28%) fell from the top three problems listed amongst investors and was replaced by increased material costs (36%).
  • Nearly 27% of  investors believe that competition from traditional homebuyers will continue to be a challenge six months from now.

According to the Realtytrac Investment Sentiment Survey of over 300 individual real estate investors, 48% of respondents believe that the investment market is worse or much worse than it was one year ago, and 36% believe that conditions will remain the same over the next six months. 

“Real estate investors continue to face the dual challenges of low inventory and rising home prices,” said Rick Sharga, executive vice president at Realtytrac, an ATTOM company. “Coupled with strong competition from traditional homebuyers and rising material and labor costs, it’s no wonder that individual investors believe that the market is less favorable today than it was a year ago.”

Nearly 63% of investors listed the rising cost of homes as the primary challenge to real estate investing, while 57% of investors believe the it’s lack of inventory. Competition from traditional homebuyers (28%) fell from the top three problems listed amongst investors and was replaced by increased material costs (36%). 

The unprecedented demand from traditional homebuyers has created an unusual markert dynamic for individual investors; instead of competing with larger institutional investors, mom-n-pop investors find themselves competing with consumer homebuyers. Nearly 27% of  investors believe that competition from traditional homebuyers will continue to be a challenge six months from now.

The typical mom-and-pop investors purchase between 1-10 properties a year, and they happen to exert the most influence on market conditions. Nearly 90% of the 19 million single-family rental properties in the country are owned by mom-and-pop investors, while the largest institutions own less than 2%. Meanwhile, the fix-and-flip market is populated with thousands of small investors who average about one flip a month. However, they now happen to be facing competition from iBuyers like Opendoor, Offerpad, and Zillow, which are institutions that do flipping at scale. 

“Investors are more optimistic about the future than they are about current market conditions,” Sharga added. “But they do worry about inflation – about 81% of the investors surveyed were concerned about inflation causing material and labor costs to rise, making affordability an issue for prospective homebuyers and renters, and increasing the costs of financing.”

Although previous Realtytrac surveys were split between fix-and-flip and buy-and-hold investors, respondents to the Fall 2021 investor sentiment survey included more investors who purchased properties for the purpose of renting them out. ATTOM Data intimated this might be a reflection of current market conditions, since the number of flips was down year-over-year in the second quarter, as were flippers’ gross profits. 

Additionally, the lack of foreclosure activity throughout the moratorium and the CARES Act forbearance period has had an enormous impact on real estate investing. While August foreclosure activity was up by 27% from July numbers, it was 70% lower than August of 2019, prior to the COVID-19 pandemic, and the implementation of the government foreclosure prevention programs. Also, the inventory of homes in foreclosure is now at the lowest level ever recorded in the Realtytrac database, contributing to the extreme shortage of homes available for sale.

Even though default activity is expected to rise when the moratorium and forbearance period expires, investors answering the survey don’t expect a flood of distressed properties to enter the market. About 30% of the respondents believe that foreclosure activity will return to its normal, historical level (about 1% of mortgage loans in a given year), while 33% said that foreclosures will surpass normal levels, but remain well below the levels seen during the Great Recession. It’s likely that most homeowners in default will be able to sell their properties prior to the foreclosure auction, considering they collectively hold a record $23 trillion in homeowner equity. Very few are estimated to be repossessed by the banks and listed for sale.

 

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