Investor purchases of residential homes as a share of all residential home sales increased sharply year-over-year, according to First American Data & Analytics, rising from 10.5 percent in May 2021 to nearly 18 percent in May 2022.
“Increasing investor participation in the residential housing market has coincided with remarkable growth in house prices, leading some to attribute the worsening housing affordability crisis to the increase in investor participation,” First American Senior Economist Xander Snyder said in a release. “However, an equally plausible explanation is that rapid house price appreciation enticed greater investor participation in the market.”
First American research shows house price growth and investor participation are positively correlated, Snyder said.
“While there is substantial variation from city to city, we found cities with a larger investor share of sales generally experienced greater house price growth over the last year,” he said. “For example, Phoenix, Atlanta and Jacksonville had the largest investor share in May as well as some of the fastest year-over- year house price growth rates in the country.”
Investor purchases could be driving the house price appreciation, or it could be the other way around, Snyder said. Or both.
“There could also be a third factor driving both the growing investor share of purchases and house price appreciation simultaneously – a pandemic-driven surge in housing demand against a limited supply of homes for sale,” he said. “The recent growth in demand to own residential properties is, in part, a consequence of a pandemic-induced flight away from densely populated cities and corresponding increase in demand for remote working space.”
This migration accelerated demand in key markets, Snyder said, contributing to record house price appreciation. As people became priced out of the purchase market, they turned to the rental market, which contributed to rents growing at a record pace.
“The combination of rapid rent growth and house price appreciation attracted even more investors flush with capital,” he said. “This explanation is compelling in part because annual house price growth was already in the double digits before the investor share picked up in the second half of last year. In other words, there’s a strong case to be made that house price growth was influential in driving up the investor share.
“If greater investor participation continues to contribute to elevated demand relative to limited supply, then house prices are likely to remain positive despite rising interest rates. If house price growth is enticing greater investor participation, then we would expect to see declining investor participation in the residential housing market as house prices decelerate,” he said.
Although investor participation remains near all-time highs, mortgage applications were down 16 percent year-over-year in July, which Snyder said indicates a smaller buyer pool that may translate to slower price growth.
“However, the ongoing housing shortage will continue to make home prices particularly responsive to changes in demand,” he said. “So, which came first, greater investor participation or faster house price growth? Perhaps, neither. It seems that both were predated by pandemic-accelerated demand amid a historic supply shortage.”