“Our data shows that home resale activity across the U.S. declined in the second quarter of 2023,” said Rob Barber, CEO of real estate analytics firm ATTOM. “At the same time, profit margins on typical home resales increased by nearly 5 percentage points, from about 22.9% in the first quarter to 27.5% in the second quarter.”
“…the return on investment (ROI) on home flipping these days is certainly not that high. [however]This is well below the level of 44.6% recorded in the second quarter of 2022 and well below the recent peak of 60.8% recorded in the second quarter of 2021.”
Unfortunately, Barber added, current profit margins “can easily be wiped out by reselling maintenance costs — primarily mortgage payments, renovations and property taxes.” This reality likely contributed to many fixer-and-flippers switching to the role of short-term landlord in the SFR market.
According to ATTOM data, while the home resale rate (resales as a percentage of total home sales) declined quarter-over-quarter in the first half of 2023, the actual number of home resales increased slightly during that period. Home resales increased slightly from 82,180 in the first quarter of this year to 84,350 in the second quarter. During the same period last year, there were roughly 130,000 home resales per quarter, according to ATTOM data.
Real estate analytics firm CoreLogic also released a report in August tracking investor home purchases in the SFR market in the second quarter of this year, finding that such purchases were down by 90,000 homes compared to 2017. CoreLogic defines an investor as an individual or entity that has owned three or more properties at the same time over the past 10 years.
“Throughout the second quarter of 2023, we will [100 to 900 properties] Big Investor [1,000 or more properties] “Activity was slow in April, May and June,” the CoreLogic report said. [of this year]large investors and very large investors each made between 7,000 and 9,000 purchases per month. [or a total of 21,000 to 27,000 in each category, which translates to a market share of between 8% to 10% each month].
“… For mega investors, this is a significant decrease from the high of 17% of all investor purchases recorded in June 2022. … For small investors, [three to nine properties] There were 38,000, 46,000, and 38,000 purchases. [122,000 total] April, May, June [2023]Each.”
The CoreLogic report noted that SFR investors are increasingly becoming smaller investors with three to nine properties under management. The June report noted that this group “accounted for 47% of investor purchases, the highest level since 2011.” Still, the CoreLogic report noted that even among the smaller investor group, buying activity in the second quarter of this year was “significantly down compared to 2021 and 2022.”
“Inventory levels remain subdued, in part because many owners are unwilling to sell and give up the low interest rates that current borrowers secured by refinancing during the pandemic,” the report continues. “This trend could be behind increased activity from smaller investors. [in the SFR sector] Members of this group may have chosen to rent rather than sell their properties in recent months.”
The increase in privately owned rental housing may also be due to longer holding periods for fix-it-and-flip investors.
Arvind Mohan, CEO of Kiavi, a renovation and resale financing company, said his company's data showed that just before the pandemic, 45% to 50% of homes purchased by renovation and resale investors were sold within six months of the purchase date in 2019. Last year, that figure fell to 33%, but jumped to 42% as of the first quarter of this year.
“One assumption is that … resellers are holding onto the properties for a long time,” Mohan said, “which means they’re being rented out. [as an SFR] Or get more out of your HPA [home price appreciation].”
Other data points indicate that the SFR and reform-and-flip sectors remain active and opportunistic, but deal flow is at much lower levels than last year due to high interest rates and low home inventory, a situation that sector leaders expect to continue into 2024.
Changing market trends
There are about 75 mega SFR companies across the country, managing more than 1,000 single-family rental properties, a figure that has remained fairly constant for the past three or four years, said Brandon Luwowski, senior research director at HouseCanary, a real estate tech company that provides residential real estate analytics to institutional investors, financial institutions and other clients.
However, Lwowski added that HouseCanary's data shows a big shift in the mid-size SFR market segment (companies managing 50-99 SFR properties), with numbers dropping from around 700 in 2021 to fewer than 300 this year.
LD Salmanson, CEO of Cherre, a leading real estate data integration and analytics platform focused on the SFR market, said the largest SFR players (institutional investors), who currently control 3% to 5% of the SFR market, are shifting their strategy this year from open market home purchases to build-to-rent (BFR) opportunities.
The National Association of Home Builders estimates that 69,000 BFR homes were started last year, up 33 percent from the previous year. This estimate includes only homes that builders build and hold for rental. It doesn't include homes sold to another entity for rental use, but the trade group estimates that homes sold for rental could boost single-family housing starts by more than 5 percent of the total.
“They are [large institutional SFR entities controlling thousands of rentals] They're supply-hungry, and they're not just buying what's on the market,” Salmanson said. “They're buying what's in the future. [new-home] supply [from builders]This means we are also securing future demand.”
He added that smaller SFR operators (those with 10 or fewer properties) control more than 80% of the SFR market, but at the top end of the market, the largest operators are acquiring the mid-sized companies in the market, which helps explain House Canary's data showing a decline in mid-sized SFR operators over the past few years.
“The big strategy we're looking at right now is [for the largest institutional SFR players] “It's a portfolio buyout,” Mr. Salmanson said. “If it's 100 to 250, or even 50 to 250, [SFR units]These are the main portfolios [targets].”
While the SFR market is essentially stagnant until market conditions improve and become more favorable for the sector, Salmanson remains bullish on the long-term outlook due to market trends favoring renting over buying for many individuals and families.
“About 110 to 115 million [existing] “Between 15 and 16 million single-family homes in the U.S. are SFR,” he says. [SFR number is] It will double by the end of this decade…”
The rise of private ownership
“The big picture is that the market is changing,” said Fred Matera, chief investment officer at Redwood Trust, which runs CoreVest, a division focused on providing business loans to buy investment real estate. [SFR/fix-and-flip] Historically, this industry has been a core customer base for CoreVest.”
“These smaller investors are setting lower equity return targets than larger institutional investors, who are much more vulnerable to rising global inflation. [investment] “For equity investors, this is the worst return the market has seen in 12 to 18 months,” he added. “This helps explain why, at least in the current market created by tight monetary policy, individuals and small investors are able to pay higher prices for homes and tolerate lower returns than institutional investors.”
In other words, the rise of the retail investor is driven by their ability to tolerate low profit margins as inflation continues to drive up costs while strong home prices allow retail investors to still earn modest investment returns.
“Today, there are more financing options available to investors than ever before, and private investors are certainly more likely to purchase investment properties,” Matera added. “We are seeing this trend especially in terms of the demand for DSCRs. [debt-service coverage ratio] product, … [which is] It's designed for these types of investors.”
Still, low housing inventory is creating a tough operating environment for privately owned housing companies, as evidenced by the number of private label securitizations (PLS) that include DSCR loans as part of the collateral pool. [typically up to about half of the loans by count] Compared to 2022, there has been a significant decrease so far this year.
According to PLS data provided by Kroll Bond Rating Agency, as of mid-October this year, there had been 49 PLS transactions collateralized by DSCR loans totaling $18.6 billion, compared with 90 transactions totaling $35.1 billion during the same period last year.
But the picture for large institutional securitizations has been tougher this year, with only three PLS transactions issued through mid-October. Those securitizations were valued at $1.1 billion and involved pools secured by a total of 4,346 properties. In 2022, 13 transactions were valued at $9.1 billion and involved pools secured by a total of 30,247 properties, according to KBRA data. (Of course, while securitizations are the primary liquidity outlet for institutional investors, not all of the properties they buy end up being securitized.)
“You know, there's a million homes on the market right now,” says Kurt Carlton, co-founder and president of New Western, a national private real estate investment marketplace that serves about 150,000 investors. “In 2006, there were 4 million homes on the market. So there's a severe lack of inventory.”
“…But don't forget, there is a way out. [institutional] language [players from the open market] And IBuyers, that whole segment of the market has disappeared. [or is far less active as buyers]And they were a big part of the market.
“Independents are [or mom-and-pops] It's about regaining market share. … I think the consistent theme here is that there is still very strong demand for housing. And I don't think that's going to go away. So I don't think property values are going to plummet.”
Still, Kiabi's Mohan isn't too optimistic about the housing market and its prospects for investors over the next year, saying the market is currently weathering an environment of “low inventory and high interest rates.”
“I think what we’re seeing now is essentially a continuation of that trend,” he added. “So we’re in a bit of a slump now and things have stalled out.
“And I don't see anything imminent that's going to really drive any big changes in 2024. It's kind of a transitional year for the markets as we look at inflation and the interest rate markets and the implications that are included there.”
Rick Sharga, CEO of CJ Patrick, a market intelligence and business advisory firm specializing in the real estate and mortgage industry, predicts that if rising financing costs are not curbed soon, they will likely lead to “some declines in home prices” in the near future. He said that large institutional investors who are currently sitting on the sidelines in the public markets “may be waiting to buy on the dip and holding onto their capital until they can maximize their buying opportunities.”
“If you look at remodel and resale investors and single-family rental property investors, things will gradually improve through the end of this year and into 2024,” Sharga said. “The overall reason for optimism is [including rental rates and home prices] The long term still favors real estate investors. The math is right.
“Millennials and Gen Z members are reaching adulthood and family-starting age, and the vast majority of them want to live indoors.”