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Data & Analytics

COST OF HOME REPAIRS INCREASES BY 4.1% FROM Q1 2023

Slight Decline in Labor Costs Help Slow Overall Increase in Repairs By Rick Sharga, CJ Patrick Company The cost of home repairs and remodeling in the first quarter of 2024 continued to increase, rising by 0.59% from the prior quarter and just over 4% from the first quarter of 2023 according to the Q1 2024 Verisk Remodel Index. Costs once again set new highs for the past decade, rising over 61% from the first quarter of 2014. The Verisk Remodel Index tracks costs on 31 different categories of home repair, comprising over 10,000 line items ranging from appliances to windows. Data are compiled monthly in over 430 local market areas across the country. “Repair costs rose in each of the 31 categories of home repair that are included in our index, but the rate of increase continues to be slow down from the more rapid increases we had during and immediately after the COVID-19 pandemic,” said Greg Pyne, VP, Pricing for Verisk Property Estimating Solutions. “Labor costs appear to be coming down slightly as well, which has an impact on the overall cost of home repairs.” Quarterly costs rose in all 31 categories included in the report. The cost of framing was still slightly lower on an annual basis, and the only covered category that was not higher than in the first quarter of 2023. Framing was the only one of the six largest categories of expenditure to decline on an annual basis. The other four — cabinets, siding, paint, wood look flooring, and plumbing — all rose between 2.5% and 5.5% over the past 12 months. The cost of exterior doors rose the most compared to the last quarter, increasing by over 3.7%. Only two other categories had a quarterly increase of at least 1% — tile flooring at 1.55%, and interior home painting at 1.03%. East South Central Region Shows Highest Quarterly Increase All regions again experienced cost increases both quarterly and annually, but all of the regions reported quarterly increases of less than 1%. The East South Central Region saw costs rise by 0.72% compared to the fourth quarter of 2023, followed closely by the South Atlantic Region, where prices rose by 0.70%. The New England Region had the lowest quarterly increase at 0.51%, but the largest annual increase at 4.51%, slightly higher than the Middle Atlantic Region at 4.47% and the Mountain Region, where prices rose by 4.44%. The index has risen by 65.88% since its inception in January 2013, and the Mountain Region continued to have the highest overall cost increases over the period covered by the index, rising 70.92 points since the first quarter of 2014. The Mountain Region also has the highest increases over the past decade, with costs increasing by 64.74% since the first quarter of 2014. The Pacific Region (63.83%) and New England Region (62.81%) are the only two other regions that surpassed the national average of a 60.72% cost increase over that 10-year span. Northeastern States Have Both the Highest and Lowest Rates of Increase Delaware had the highest quarterly rate of increase in the country at 1.43%, the only state to surpass a 1% increase for the reporting period. Tennessee (0.90%), Florida (0.87%) and Montana (0.87%) barely missed that threshold. Other states with relatively high rates of quarterly increases included:  »             South Carolina (0.84%)  »             Mississippi (0.82%)  »             Michigan (0.79%)  »             New York (0.77%)  »             South Dakota (0.73%)  »             Wisconsin (0.72%) Rhode Island had the lowest rate of quarterly cost increases at 0.37%, followed by:  »             Colorado (0.38%)  »             Wyoming (0.38%)  »             Alaska (0.41%)  »             New Mexico (0.41%)  »             West Virginia (0.42%)  »             Oklahoma (0.42%)  »             Nevada (0.42%)  »             Washington DC (0.43%)  »             North Dakota (0.44%) For more information, please visit www.verisk.com or contact Rick Sharga at rick.sharga@cjpatrick.com. Verisk is a leading strategic data analytics and technology partner to the global insurance industry. It empowers clients to strengthen operating efficiency, improve underwriting and claims outcomes, combat fraud and make informed decisions about global risks, including climate change, extreme events, ESG and political issues. Through advanced data analytics, software, scientific research and deep industry knowledge, Verisk helps build global resilience for individuals, communities and businesses. For more information, please visit www.verisk.com.

Data & Analytics

A Look Back at 2022 and Ahead to 2023

Where There is Chaos, There is Often Opportunity By Rick Sharga As we prepare to exit one of the most tumultuous years for the housing market in recent memory, there’s a lot to unpack. The market started the year off white hot, with consumers, and individual and institutional investors competing for limited inventory, driving home prices up another 15% from 2020’s already-high numbers. Housing starts were increasing to levels not seen in a decade, and vacancy rates in owner-occupied and rental properties dropped below 1%. But the market’s momentum screeched to a stop as mortgage rates jumped from sub-4% to over 7% seemingly overnight, and prospective buyers faced the prospect of monthly mortgage payments that were 40%, 50% or 60% more than they’d been just a few months earlier. Sales fell immediately, along with builder and consumer sentiment. Weakening demand, worsening affordability, and higher financing costs don’t paint a rosy picture for real estate investors. What’s in store for the coming year? Will the U.S. economy enter a recession in 2023? Probably. The economy has been resilient over the past few years, especially considering the short-term turmoil caused by the COVID-19 pandemic and subsequent government shutdown. Most economic indicators today remain positive — job growth is surging, unemployment very low, productivity high, and consumer spending is strong. Normally, none of this would point towards a recession. But inflation has been running at its highest rates in 40 years, and the Federal Reserve has taken unprecedentedly aggressive action to get it under control, raising the Fed Funds rate more dramatically and more quickly than at any time in the past 20 years. Historically, when the Fed has taken this kind of action, a recession has usually followed. Dating back to 1955, the Fed has raised rates 11 times in order to get inflationary cycles under control. In three cases, the Fed was able to manage a “soft landing” for the economy and avoid a recession. In the other eight cases, it waited too long — inflation had either risen too far or become too persistent – and the Fed had to over-correct in order to slow the economy down. In all eight of those cases, a recession followed, and it seems highly likely that the Fed is driving us in that direction again, given how long it waited to begin addressing inflation, and how difficult it’s been to make any progress. Another historical trend that suggests a recession is heading our way is the Yield Curve Inversion. This phenomenon, an indication that the bond market is anticipating a recession, happens when yields on short term and long-term bonds invert — yields on long term bonds like 10-year U.S. Treasuries become lower than yields on short term bonds like 2-year U.S. Treasuries. The market has been in this inverted position for months now, and the degree of the inversion has been significant. Equally significant is that each of the last seven times there’s been a yield curve inversion, a recession has followed. There’s little reason to believe that we’ll escape making it eight times in a row. Most economists and market analysts believe that while a recession is likely, it’s also likely that it will be relatively mild and short-duration, since the underlying economic factors mentioned above are all strong, and household balance sheets are in good shape, with $4.6 trillion in savings accounts across the country. Will the housing market crash? Probably not. This depends, at least in part, on the definition of “housing crash.” With mortgage rates doubling this year — something that Freddie Mac says has never happened before — affordability became a huge problem for many prospective homebuyers, and home sales have declined significantly. According to Lawrence Yun, the Chief Economist for the National Association of Realtors (NAR), existing home sales in 2022 will fall 15% from 2021 and drop another 7% in 2023. In its October Housing Forecast, Fannie Mae projected a drop of 17.9% this year and 21.8% next year for existing homes and 19.6% and 12.6% for new home sales. Sales volume has definitely “crashed,” but prices haven’t followed suit. Unlike the 2008 market meltdown that led to a 24.7% decline in national home prices according to the Case Shiller Home Price Index, prices have continued to increase on a year-over-year basis, even as the number of homes sold has dropped. According to NAR, as of October, home prices have risen on an annual basis for a record 126 consecutive months. The rate of home price appreciation has slowed down considerably; according to Freddie Mac, national home prices rose by 2% in September, down from 14% increases just a few months prior. More recently, there’s been downward pressure on pricing — according to a report by ATTOM, the median sales price of homes dropped 3% nationally between the second and third quarters, marking the first quarterly decline in years. But there’s little indication of an impending crash in home prices. Supply remains low at about three months – half of what represents a healthy, balanced housing market — and demographically-driven demand remains, as the largest cohort of young adults in U.S. history marches towards the prime age for household formation and home ownership. There’s still more demand for the few homes that come to market, and the odds are that inventory will remain low in 2023. Homeowners with sub-4% mortgage rates are unlikely to rush to purchase a new home with a 7% mortgage and will probably sit tight and wait for market conditions to improve before listing their homes. Builders have reversed course since home sales began falling off, with housing starts declining by double digits each of the last three months. Homeowner equity, a record $29 trillion, gives current homeowners an enormous cushion against home price declines, and a hedge against losing their homes to foreclosure in the event their household finances take a turn for the worst. According to ATTOM, almost half of all homeowners with an active mortgage are “equity-rich,”

Fix and Flip

THE CHALLENGING ROAD AHEAD?

The Bottom Line is the Bottom Line By Rick Sharga The fix-and-flip market hit what was probably an all-time high in the first quarter of 2022. According to ATTOM’s first-quarter 2022 U.S. Home Flipping Report, 114,706 single-family houses and condominiums in the United States were flipped in the first quarter, representing almost 10% of all home sales in the quarter — the highest level since at least 2000. The first quarter total was up from 6.9% during the fourth quarter of 2021, and from 4.9% in the first quarter of 2021. The jump in the home-flipping rate during the first quarter of this year marked the fifth straight quarterly increase. It also represented the largest quarterly and annual percentage-point gains since 2000. Conditions in the housing market for the past two years have been ideal for fix-and-flip investors, who traditionally do very well when conditions include high demand from homebuyers, low supply of homes for sale and rapidly rising home prices. All three of those characteristics have been in abundant supply over the past few years. Demand was driven largely by demographics as the largest cohort of Millennials (the largest generation in U.S. history) has crept closer to prime homebuying age. Homebuilders have grossly underbuilt since the end of the Great Recession, leading to an historic undersupply of housing. This supply and demand imbalance led to rapid home price acceleration. The COVID-19 pandemic actually accelerated some of these trends: the Federal Reserve acted to keep interest rates lower in order to bolster the economy through the pandemic-driven recession, leading to the lowest mortgage rates ever recorded, further fueling demand. Prospective homebuyers leapt at the chance to become homeowners because of how affordable these interest rates made homeownership. People having the newfound ability to work from home fled from rental properties in high cost, high tax cities to buy houses in more affordable locations. All of this activity exacerbated the supply/demand imbalance and drove home price appreciation into the high double-digit range (over 40% annually in markets like Boise, Idaho and over 30% in St. Georges, Utah) with little impact on affordability because of the low mortgage rates. High demand. Low supply. Rapidly rising home prices. A perfect scenario for flipping. But if you are a fix-and-flip investor, hold off on popping that champagne cork just yet, especially if you are just getting started in the field. It is possible that the first quarter numbers represented a peak for this cycle rather than heralding an even stronger market yet to come. There are several possible storm clouds on the horizon for flippers, and they all bear watching. Profits and Profit Margins are Shrinking While the ATTOM report highlighted the dramatic increase in the number of properties flipped, it also showed that as home sales by investors spiked, the gross profits on those deals remained below where they were a year ago, and in a more striking trend, profit margins dipped to their lowest point since 2009. Among all flips nationwide, the gross profit on typical transactions as reported by ATTOM (the difference between the median purchase price paid by investors and the median resale price) stood at $67,000 in the first quarter of 2022. While that was up 5.5% from $63,500 in the fourth quarter of 2021, and represented the first increase since late 2020, it was 4.3% less than the $70,000 level recorded in the first quarter of 2021. Profit margins, defined as the gross profit divided by the original purchase price, fell for the sixth quarter in a row, as the gross flipping profit of $67,000 in the first quarter of 2022 translated into just a 25.8% return on investment compared to the original acquisition price. The national gross-flipping ROI was down from 27.3% in the fourth quarter of 2021 and from 38.9% a year earlier. It sat at the lowest point since the first quarter of 2009, when the housing market was slumping from the effects of the Great Recession in the late 2000s. This return on investment also was less than half the peak of 53.1% for this century, which hit in late 2016. Gross profits and profit margins declined despite record sales prices on flipped properties — the median price of homes flipped in the first quarter of 2022 increased to another all-time high of $327,000. That was up 10.5% from $296,000 in the fourth quarter of 2021 and 30.8% from $250,000 a year earlier. Both increases stood out as the largest for flipped properties since 2000. So how could profit margins decline even as resale prices on flipped homes continued to shoot up? Essentially, fix-and-flip property prices appreciated more slowly than investors had anticipated when they purchased them. Rising mortgage rates are beginning to slow down home price appreciation, and buyers have become more selective – and less willing to outbid other buyers for properties. This is having a predictable impact on profit margins for investors. Not included in the ATTOM analysis — but putting even more pressure on flipping profits — are the rising costs of materials and labor. Limited availability of both labor and building materials is also extending the time needed to make repairs, which is likely increasing holding and financing costs for investors. The bottom line is that the bottom line is getting tighter, and fix-and-flip investors need to sharpen their pencils when it comes to valuing a property and estimating repairs in order to avoid a financial catastrophe. Demand Appears to be Weakening Rising costs and slowing home price appreciation are worrisome, but what about the buyers? From all indications, demand is beginning to weaken pretty significantly: »          May marked the tenth consecutive month of existing home sales being lower than the prior year’s and the fifth consecutive month of lower sales than the prior month »          Pending home sales — an indicator of future closings – has declined on a year-over-year basis for 12 consecutive months »          The Mortgage Bankers Association Purchase Loan Application Index, which tracks how

Fix and Flip

Factors Affecting Fix and Flip Investors

But Help Is on the Way…Eventually by Rick Sharga Most fix-and-flip investors will agree that a housing market with high demand, low supply, low-cost capital, and rising prices is their ideal scenario. And generally speaking, that characterizes today’s market. But like many generalizations, this one does not hold up well upon further scrutiny. Partly, this is due to excesses in all the categories mentioned above. Supply of homes for sale—both new and existing homes—has never been lower. Homebuilders have under-built for the last decade, and existing homeowners have been staying put longer and longer: the average tenure of a homeowner today is almost 12 years, more than double the length of time a homeowner stayed in place a decade ago. And consumer psychology has also played a role, since prospective home sellers first hesitated to list their home during a global pandemic, and now are concerned that if they sell their home there is nothing for them to buy. At the same time, demand has been driven to a high level by demographics—namely, the largest cohort of Millennials (the largest generation in U.S. history) is rapidly approaching the prime age for home ownership. The COVID-19 pandemic played a role as well, accelerating the movement of urban renters to become suburban homeowners. Also driving demand were historically low mortgage rates. Sub-3% rates on 30-year, fixed-rate loans bolstered affordability, and in many cases made it less expensive to make a monthly mortgage payment than to pay rent. This huge supply/demand imbalance led to bidding wars, which in turn led to massive price increases (15% year-over-year), and to properties spending almost no time on the market. The median number of days-on-market dropped from almost 60 in June 2020 to 37 in June 2021 according to the Federal Reserve Bank of St. Louis. And in many markets, the actual days on market could be measured in weeks…or even days. So, all the factors that normally play out in favor of fix-and-flip investors have been so extreme that they have made it extraordinarily difficult for flippers to prosper. Limited supply is good; virtually no supply makes it hard to find anything to buy. Rising prices are good—they make it easier to capture ROI; prices that rise so fast they eat away all the margins are not so good. Low-cost capital is useful unless it turns traditional homebuyers into well-funded competitors for this limited inventory. Home Flipping Falls to Lowest Level in 20 Years It is probably not a surprise that the fix-and-flip market has flopped in recent quarters. According to a recent report from RealtyTrac’s parent company ATTOM Data Solutions, flips accounted for only 2.7% of home sales in the first quarter of 2021—the lowest level since 2000. This was down from 4.8% of home sales in the fourth quarter of 2020 and 7.5% of sales a year ago. The number of homes flipped dropped significantly, and so did the gross margins, due at least in part to the rapidly escalating cost to purchase a home. According to ATTOM, the gross profit on a flip in the first quarter of 2021 was 37.8%. This was down from 41.8% a year ago, and is the lowest margin reported by ATTOM since 2011. Unsurprisingly, ATTOM noted that the percentage of homes flipped dropped in over 70% of the markets covered in its report. There were two other interesting items in the ATTOM report, both of which reflect the reality of the current housing market. First, the percentage of homes purchased with cash by fix-and-flip investors jumped to just over 59%, highlighting the importance of being able to move immediately on a potential property without having to wait for financing. Second, the length of time between purchase and flip dropped to 159 days—the fastest turn times since the third quarter of 2013, and an indication of how strong demand from homebuyers is today. Help is on the Way…Eventually One of the factors undoubtedly hampering fix-and-flip investors today is not just the lack of inventory, it is the lack of foreclosure inventory. While foreclosure activity was running well below historical levels prior to the pandemic, the federal government’s foreclosure moratorium and CARES Act mortgage forbearance program effectively stopped almost all foreclosure actions over the past 18 months. In its mid-year foreclosure report, ATTOM concluded that foreclosure activity was down by 61% compared to the first half of 2020, and 78% compared to 2019. Fix-and-flip investors have historically been ideal buyers of foreclosure inventory, and part of a win/win situation for the housing market—buying below-market properties that needed repairs, getting the properties ready for occupancy, and selling them, often to first-time buyers. While there are other types of properties that fit this buy/fix/flip model such as homes from probate sales or bankruptcies, homes in previously underserved communities, and homes where the owners simply have not kept up with maintenance over the long term, foreclosure properties have been a mainstay for most flippers, and have been in increasingly short supply during the pandemic. That situation may be on the verge of changing. The Biden Administration has indicated that the foreclosure moratorium will have ended by July 31. The Consumer Finance Protection Bureau (CFPB) which regulates how mortgage servicers execute foreclosures, had been expected to put rules in place which effectively would have made it impossible to initiate foreclosure proceedings on defaulted borrowers until the end of 2021. But, somewhat surprisingly, the CFPB rules actually included several carve-outs that should result in foreclosure properties entering the market over the second half of the year. Specifically, the Bureau stipulated that loans that had been in foreclosure prior to the moratorium—some 250,000 in all—would be eligible for immediate processing, as would vacant and abandoned properties. The CFPB also allowed foreclosures to begin in cases where the borrower was “unresponsive” to servicer outreach, or where the servicer had exhausted all loan modification options unsuccessfully. At RealtyTrac, we are now expecting to see several small waves of foreclosures—one shortly after the moratorium expires, made up

Valuation

ROI Starts with Understanding the True Value of the Property You Are Going to Purchase

The Bottom Line for Investors is Still the Bottom Line by Rick Sharga Perhaps nothing is more important to the success of a real estate investor than properly valuing a property. Over-paying for an investment property is one of the most common mistakes made—particularly by inexperienced investors—and can often be the difference between making a reasonable return on an investment and financial ruin. To a certain extent, investors buying properties to rent have a little more latitude than fix-and-flip investors, since they probably have a longer time horizon, and are less dependent on making a short-term profit on a sale. But, particularly in the case where a property is financed, the costs of over-paying can add up over time in terms of higher interest payments and lower monthly cashflows. And ultimately, when it’s time to sell the property, the profit will be smaller since the purchase price was higher than it should have been. But ultimately, most properties go up in value over time, so the rental property investor can make an error in valuing a property and still come out ahead in the long run. This is especially true in a housing market like today’s, with high demand and low inventory driving home prices to unprecedented levels. According to a recent report by RealtyTrac parent company ATTOM Data Solutions, median home prices nationwide rose 16 percent year over year in the first quarter of 2021 and were up at least 10 percent in most markets across the country. During what has now become a nine-year U.S. housing-market boom, equity has continued to improve because price increases have widened the gap between what homeowners owe on mortgages and the estimated market value of their properties. Freddie Mac recently noted that homeowner equity had increased to a record $23 trillion, as overall housing stock values rose to over $33 trillion. The ATTOM report said that the percentage of homeowners considered “equity rich,” (homeowners whose mortgage debt was less than 50 percent of their home’s value) had risen in 41states from the fourth quarter of 2020 to the first quarter of 2021. On the other end of the spectrum, homeowners who are seriously underwater on their loans (owing more than 125 percent of their home’s value) decreased by 49 percent during the same period. But the ATTOM report did suggest that some markets might be better than others for investors looking for good deals. For example, there are parts of the country where there are still a large number of homeowners who owe more than their homes are worth and might be candidates for short sales with their lenders. The top 10 states with the highest shares of mortgages that were seriously underwater in the first quarter of 2021 were all in the South and Midwest, led by Louisiana (13 percent seriously underwater), West Virginia (10.5 percent), Illinois (10.4 percent), Arkansas (9.2 percent) and Mississippi (9.1 percent). These are also all states where home prices are still affordable enough that an investor can buy a property, rent it out at a reasonable rate, and generate positive cashflow—something not as easy to do in some of the higher priced states like California, where the median property price is now over $800,000. Clearly, even though home prices don’t always go up in a straight line, the odds are in an investor’s favor if they plan to hold a property for any significant period of time. A small overpayment by a rental property owner—especially in one of the lower-priced markets noted above—can look somewhat trivial a decade later when a property has doubled in value, assuming the landlord has charged market-priced rent and kept the property occupied most of the time. For fix-and-flip investors, valuations can be a lot less forgiving The two most common mistakes made by fix-and-flip investors are overestimating the value of a property and underestimating the cost of necessary repairs. A 10 percent swing on these estimates, especially in an expensive market, can wipe out most or all of the profits. Flippers are also sometimes victimized by market timing—paying top dollar for a property expecting home prices to continue rising, only to see a market correction. In today’s red hot housing market, the temptation is to spend whatever it takes to buy a property, since prices have now gone up nationally for over 110 consecutive months, and demand continues to outpace supply. But it’s important to watch trends carefully, and to remember that local market conditions don’t always play out the same way the national headlines might suggest. Just to use two items from recent news headlines to put this into perspective, consider supply chain disruption and inflation—both results in one way or another of the COVID-19 pandemic. Flippers need to factor in material costs to their repair estimates. It seems unlikely that many of them planned on lumber prices increasing by almost 300 percent in the past year, but that’s exactly what happened. They probably also didn’t factor in appliances being on back-order for six months or more, yet real estate investors, homebuilders and homeowners alike are all still waiting for that new washer and dryer. For an investor with relatively high cost financing, extra months waiting to market the property can mean lower profits. As for inflation, many market analysts warn that if inflation continues to rise, mortgage rates are likely to follow. Most housing market experts agree that an increase in interest rates by as little as a point could seriously weaken demand among prospective homebuyers due to the historically high price of homes—affordability has been propped up by low interest rates and would suffer significantly if those rates suddenly went from 3 percent to 4 percent. Usually, this scenario results in home price appreciation slowing down, or even prices falling slightly. That’s good news for a flipper getting ready to buy a home, but not good news for a flipper who just bought one and now needs to sell it at a profit. Due to competition

Single-Family

Investors Face Challenges Today, See Better Times Ahead

The RealtyTrac Investor Sentiment Survey™ by Rick Sharga Individual investors today face unprecedented challenges in the real estate market. Limited supply, soaring prices, and unprecedented competition from both institutional investors and traditional homebuyers. How do investors feel about market conditions today? Is the investment market better or worse than it was a year ago, and will it be better or worse six months from now? What are the biggest barriers to success for investors? And are they anticipating relief to come in the form of an influx of foreclosure properties? RealtyTrac recently completed its first RealtyTrac Investor Sentiment Survey™, surveying 150 individual real estate investors across the country to find out how they viewed the market, what problems and opportunities they faced, and what their impression was of today’s environment for real estate investing. These investors are representative of the majority of real estate investors—the typical mom-and-pop investors who purchase between 1-10 properties a year. It is these individual investors who exert the most influence on market conditions. Nearly 90% of the 19 million single family rental properties in the country are owned by these mom-and-pop investors, while the largest institutions—collectively— own less than 2%. The fix-and-flip market similarly is populated by thousands of small investors who average about one flip a month, but who now face competition from the so-called iBuyers like Opendoor, Offerpad and Zillow, who essentially do flipping at scale. The respondents to the RealtyTrac survey were almost evenly divided between fix-and-flip investors and those who purchased properties for the purpose of renting out these homes. How do they view today’s market, and what do they expect in the future? Some of their answers might surprise you. Three Challenges for Investors Today: Inventory, Rising Prices, and Competition from Homebuyers About 45% of investors believed that the investment market is worse or much worse than it was a year ago, but almost 40% believe that conditions will improve in the next six months. The investors cited three primary challenges in today’s market: lack of inventory, rising prices and competition from traditional homebuyers. The lack of available inventory was overwhelmingly cited by investors as the most daunting challenge—over 68% of the survey respondents listed this as one of the three biggest problems facing investors today, and over 60% believe this will still be a problem six months from now. Supply of existing homes for sale is at the lowest levels ever reported by the National Association of Realtors® (NAR). Similarly, the National Association of Homebuilders (NAHB) has reported that new home inventory is at its lowest levels since they began reporting this data in 1973. And even foreclosure inventory is at historically low levels according to RealtyTrac. Meanwhile, demand from homebuyers is growing rapidly. This demand is being driven by three factors. First, historically low interest rates, which improve affordability, and actually make it cheaper to pay monthly mortgage payments on a 30-year fixed-rate loan than it is to pay rent in many markets. Second, demographic trends. Millennials, the largest generation in U.S. history, have the largest cohort of their age group arriving at the prime age for 1st-time homebuying. And Gen-Xers are hitting their peak years for move-up buying. Finally, the COVID-19 pandemic accelerated the transition of urban renters to suburban homeowners, as tenants left high-cost cities (especially New York City, San Francisco, San Jose and Seattle). The unprecedented demand has created an unusual market dynamic for individual investors: instead of competing with larger institutional investors, mom-and-pop investors find themselves competing with more traditional consumer homebuyers. Over 36% of those surveyed cited this competition as one of their three biggest challenges, edging out the fourth most-cited challenge, the rising cost of materials, which was cited by just over 32% of the respondents. The increase in home prices was identified as the second-biggest challenge (over 58%) by the investors. Fix-and-flip investors found these prices to be more problematic than rental investors, which makes sense since flipper ROI depends to a great extent on the ability to buy a property at enough of a discount to be able to spend money on repairs and still turn an acceptable profit. And while investors generally expect market conditions to improve, they’re less optimistic about home prices. About 56% of those surveyed expect prices to continue to rise over the next six months, with 18% expecting the prices to go up by more than 5% during that time. Interestingly, investors don’t appear to be concerned with their ability to secure financing today, although they’re less certain about that in the future. Only 8% cited access to capital as a barrier today, while over 15% are concerned that it might be an issue six months from now. And, while just under 9% are concerned about rising interest rates today, almost 33% believe that rising rates are coming their way in the next six months. Will Foreclosures Provide Relief? Foreclosure activity today has virtually ceased due to the government’s foreclosure moratorium and the CARES Act mortgage forbearance program. Since these programs began, RealtyTrac data has shown year-over-year declines in foreclosure actions of between 70-80% a month. And the inventory of homes in foreclosure is now at the lowest level ever recorded in the RealtyTrac database. While it’s unrealistic to expect that default activity won’t rise somewhat after these government protections expire, the investors answering the survey aren’t expecting a flood of distressed properties. About 37% of the respondents believe that foreclosure activity will return to its normal, historical level (about 1% of mortgage loans in a given year), while 30% said that foreclosures will surpass normal levels, but remain well below the levels seen during the Great Recession. With a record $21 trillion in homeowner equity, it’s likely that most homes in default will sell prior to the foreclosure auction, and very few will ultimately be repossessed by the banks and subsequently listed for sale. Continued challenges with low inventory and rising prices, higher interest rates, and ongoing competition from homebuyers—and yet these investors

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