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 believe that the future is brighter. And with a sizzling hot housing market and recovering economy, they just might be right.
