Investor buying of U.S. homes plunged 30% in the third quarter, the largest drop since the 2008 financial crisis as rapidly rising mortgage rates cool the once red-hot housing market.
Companies bought around 65,000 homes in the cities tracked by real-estate brokerage firm Redfin, compared with 94,000 homes during the same time one year ago, according to a new analysis published on Tuesday. It marked the worst quarterly decline in more than a decade, barring the second quarter of 2020 when the pandemic brought home-buying activity to a screeching halt.
In total, investor purchases accounted for 17.5% of all homes that were sold – down from 19.5% in the second quarter as firms pull back amid the prospect of substantial price declines.
“It’s unlikely that investors will return to the market in a big way anytime soon. Home prices would need to fall significantly for that to happen,” said Redfin senior economist Sheharyar Bokhari. “This means that regular buyers who are still in the market are no longer facing fierce competition from hordes of cash-rich investors like they were last year.”
HOME PRICES COULD PLUNGE 20% AMID RISKS OF ‘SEVERE’ CORRECTION, DALLAS FED SAYS
Nationwide, home prices are up just 3% year over year, according to Redfin, the slowest annual growth since 2020. In some markets, prices are already much lower than they were just one year ago.
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved six straight interest rate hikes, including four 75-basis-point increases in June, July, September and November, and have shown no sign of pausing as they try to crush stubbornly high inflation.
The average rate for a 30-year fixed mortgage fell to 6.61% in the week ending Nov. 17, sharply lower than 7.08% the week prior, according to recent data from mortgage lender Freddie Mac. Still, it is significantly higher than just one year ago when rates stood at 2.98%
Painfully high inflation and rising borrowing costs have already proven to be a lethal combination for the housing market, forcing potential buyers to pull back on spending.
Analysts are warning of a rapid slowdown in the housing market, with home prices expected to decline as much as 20%, according to an analysis from Dallas Fed economist Enrique Martínez-García.
Martínez-García said the Federal Reserve’s efforts to slow housing demand could spill over into the broader economy: A “pessimistic” scenario where the central bank continues to aggressively hike interest rates and prices fall between 15% to 20% could shave as much as 0.5 to 0.7 percentage points from the personal consumption expenditure, a data point that measures inflation-adjusted spending.
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“Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the price correction and setting in motion a negative feedback loop,” he warned.