What’s Scaring Wall Street Away From the Housing Market – and Should It Scare You?
Written by
John Csiszar
Edited by
Amen Oyiboke
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One of the consequences of the coronavirus pandemic in the United States was plummeting interest rates and falling home prices. This offered an opportunity for both institutional investors and individual homebuyers to pick up property at a low cost. In 2022 and 2023, however, the housing market changed dramatically, and Wall Street began aggressively pulling back.
Discover:
According to data from John Burns Research and Consulting, 90% fewer homes were bought by institutional investors in January and February of 2023 compared with the same time period in 2022. Invitation Homes, the largest owner of U.S. single-family homes, actually sold more properties than they bought in the first quarter of 2023.
So, why are institutional investors turning their backs on the housing market, and what does it mean for you as an individual? Read on to learn more.
Interest Rates Are High
One of the primary reasons that institutions are pulling back from the housing market is that interest rates have skyrocketed in recent years. Although they have softened a bit in recent months, they still remain at near 40-year highs. Buyers that were getting mortgage rates as low as 2.65% just a few years ago may now be facing loans with 6%, 7% or even rates. Particularly for businesses running on thin margins, there just isn’t enough profit in housing deals at these rate levels.
So Are Prices
The one-two punch that has hit the housing market in recent years has been the combination of high mortgage rates and high property values. Combined, they have made buying nearly any type of property much more expensive. As institutional investors are profit-driven, they’ll naturally avoid areas in which it’s more difficult to make money. This doesn’t mean that the housing market is a bad investment, at least in the long run. It just means that institutions see other options as offering more opportunity at the current time.
Outstanding Mortgages Have Low Rates
One of the reasons pricing is tight in the housing market is that there is exceptionally low inventory. Part of the reason for this is that more than half of outstanding home mortgages carry an interest rate less than 4%. With current rates above 6% in most markets, those with rates in the 2% to 3% range are less likely to want to sell their homes and move into new ones. Even moving into a smaller, lower-priced house can end up costing more if mortgage rates have doubled. Thus, inventory levels remain low, and supply-and-demand factors help keep prices high.
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What Should You Do?
How you as an individual should react to the housing market depends on a wide range of variables. But while the factors that affect institutional investors also apply to individuals, this doesn’t mean you should necessarily follow the trend and avoid the housing market right now. If you’re an investor – or someone looking to trade into a new home – you’ll have to do the math to see if a potential deal works for you. For example, if you currently have a 3% mortgage and are thinking of looking into upsizing, you’ll have to face the double whammy of both higher prices and higher mortgage costs. But still, the move might make sense if you can buy in a depressed area or otherwise find a good deal.
If you’re a first-time home buyer, on the other hand, the math might still work out for you. As you won’t be giving up a 3% mortgage to get one in the 5% to 6% range, you won’t be sliding into a higher payment. Although a 6% mortgage might seem high based on recent years, over the long-term history of the housing market, it’s still slightly less than average. In other words, you shouldn’t necessarily be deterred from buying your dream home simply based on mortgage rates. If rates actually fall in coming years, as many are predicting, you may be able to refinance into a lower rate.
The Bottom Line
The bottom line is that you should never be “scared” of the housing market. Regardless of the current market situation, assess your personal financial situation, do the math, and serve the needs of you and your family. Institutions often have different motivations than individuals, so you shouldn’t always act in concert with Wall Street’s moves. But it does pay to understand the factors in the housing market that may be influencing their choices, as they may also apply to you.
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