Homebuilders are increasingly renting out new homes instead of selling them due to a surplus of unsold inventory and challenging market conditions. Despite a high supply of newly completed homes, builders are reluctant to cut prices amid rising mortgage rates and affordability issues for buyers. Instead, they are turning to the rental market, converting homes to rentals or selling them to investors specializing in single-family rentals. This strategy provides builders with an alternative revenue stream and helps manage inventory, as the demand for rentals remains strong.
Real estate investors purchased 48.6% fewer homes in Q1 2023 than a year earlier, with major U.S. cities, including some in Florida, seeing investor home purchases plunge over 50%. The report shows declining rents and housing values continue to eat at investors' profits, causing them to pump the brakes as interest rates rise. Investors who are still in the market are gravitating toward more affordable properties such as starter homes with 1,400 or fewer square feet, up 37.2% from last year.
Real estate investors in the US are losing money on roughly one in seven homes they sell, with the highest rate of losses since 2016. The hardest-hit markets are those that saw the largest surges in house prices during the pandemic, with Phoenix, Arizona, topping the list with 30.7% of homes sold by investors losing money. High mortgage rates have eaten into investor profits and slowed homebuying demand, pushing down sale prices. However, many housing investors continue to make gains from buying and selling homes, and there are other ways to invest in real estate, such as prime commercial real estate or real estate investment trusts.
Real estate investors are struggling in today's housing market, with 13.5% of homes sold in March going for less than what the investor bought the property for, according to Redfin. Flippers, who buy and sell within nine months, fared even worse, with 20.8% selling at a loss. The Federal Reserve's moves to curb inflation have hit housing speculators, who, like other buyers, have to contend with volatile rates, a lack of supply, and softening prices. Rising mortgage rates have also cut into investor profits, with the typical monthly payment for a home up $300 from a year ago.
