There’s nothing new about buying homes to rent out or resell at a profit. Residential real estate investing has been part of the American housing picture for generations.
After the housing bubble burst and foreclosures started to flood housing markets across the country, real estate investing took on a whole new level of popularity. By 2011, 20 percent of the homes sold in America were being purchased by investors, according to the National Association of Realtors.
But nearly everything in real estate moves in cycles, and there’s increasing evidence that real estate investing may have hit its peak last year and is now in decline.
A recent national survey of Realtors found that investor purchases fell slightly in 2012, down 2.1 percent from 2011. Normally, such a small dip would not cause concern, but there are a number of reasons investor purchases may not increase further. Foreclosure prices are rising, cutting profit margins, and tenants are using foreclosure rentals as a way toward home ownership, creating significant turnover.
Here are three reasons why the real estate investment boom may be slowing:
1. Foreclosures are drying up and becoming significantly more expensive.
According to recent data from RealtyTrac, foreclosure starts are down 28 percent year-over-year, even as they rose 2 percent from February to March. These slight, periodic increases occur as lenders clean up their shadow inventories—distressed properties awaiting foreclosure—now that they have new processing standards to which they must adhere.
Foreclosed homes are not the deal they once were; in February, foreclosures sold at an average discount of 18 percent below market value, according to NAR. In March—only one month later—foreclosures sold for a discount of 15 percent below market value. Recent RealtyTrac data shows that in some metros, bank-owned home prices are rising at a faster pace than the prices of non-distressed homes.
2. Future rental demand is unclear.
Single-family rentals (SFRs) compete directly with homeownership. Today, many families use SFRs as stepping stones to ownership, whether through lease-to-own programs or simply to save for a down payment. This was shown through a recent National Survey of Renters, which found 60 percent of single-family tenants expect to become homeowners in the next five years.
To some degree, demand for SFRs is tied to barriers limiting homeownership—especially tight lending standards and low inventories of homes for sale.
As these obstacles abate, will more families choose to buy rather than rent? Or is there a growing interest in renting to avoid the risks and costs of owning a home? The answers to these questions are unclear, and that uncertainty means investors may be wary of purchasing more rental properties.
3. The first signs of single-family rental oversupply are here.
Demand was so strong last year for SFRs that it took just 2.6 months to rent the summer supply of homes on the market, according to the National Survey of Renters. Single-family rents rose by 2 percent in 2011 and increased 1 percent through the first half of 2012.
Last November, Sam Khater, deputy chief economist at CoreLogic and a leading expert on the single-family rental industry, said that he expected rent growth to increase “at a strong clip” throughout 2013.
Suddenly, the single-family market has changed. Trulia shocked many landlords by reporting that through the first quarter, rents on single-family homes rose just 0.1 percent year-over-year, compared to 2.9 percent for apartments.
A major reason for this stagnation in the single-family rental market is supply. Nationally, the number of SFRs has increased by almost one-third since the housing market last peaked, according to Jed Kolko, chief economist at Trulia. That’s nearly 4 million more single-family homes rented in 2012 than in 2005.
All of this data points to slowing investor activity. But if there ever were a time to step into homeownership, this may be it.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.