Is the Market for Real Estate Investment Drying Up?
The last few years have been a buyers’ market for real estate investors. Real estate prices fell to bargain levels after the housing bubble burst, while interest rates stayed at record lows. For years, institutional investors and cash buyers were able to find good deals as most other buyers stayed on the sidelines. This was helpful for lenders who were able to replace some of their lost business by working with investors. However, this wave could be over. Over the past year, real estate investment has slowed down, and there’s a good chance this market is drying up completely.
Real estate investment is falling
Over the course of 2014, there has been a sizable decrease in real estate investment, according to Housingwire. Institutional investors — investors who buy at least 10 properties in a year — only purchased 4.3 percent of single-family homes and condos in the second quarter of 2014, down from 5.3 percent a year ago. It also represents the lowest percentage of sales to institutional investors since the end of 2010.
Smaller investors are also less active. All-cash purchases, which are typically made by investors, fell to 33.9 percent of all sales in the third quarter compared to 36.9 percent in the second quarter.
Why real estate investment is drying up
The decrease in investment real estate is mainly a product of a recovering housing market. While the housing market is still nowhere near its peak, things have improved significantly and prices are starting to go back up. There are also fewer distressed sales and foreclosures which were ways for investors to find deals.
At the same time, interest rates have started to go back up, especially now that the Federal Reserve is winding down its QE program. This makes it more expensive for institutional investors to borrow money to buy homes. Finally, a stronger stock market and economy mean investors have more options for their money. Some are even branching out of real estate into other markets.
Replacing lost investment real estate business
As long as these trends continue, lenders should anticipate that the market for investment real estate will continue to slow down. The good news is that activity from traditional buyers is up, which could give lenders the opportunity to replace this lost business. In areas where lenders are seeing fewer purchases from investors, they should start marketing to more traditional buyers who are now more likely to buy a home. A research firm like Equifax can help lenders find these new prospects with specialized marketing and acquisition research tools. These tools can help find traditional buyers who are in the financial position to buy a home now that the economy has recovered.
Investors haven’t disappeared from real estate; instead, they’re focusing on markets that are still struggling where deals are still available. Lenders should focus their marketing for investment real estate in these locations rather than stronger housing markets. The states that are currently seeing the most activity from real estate investors are Florida, Texas, Ohio and Tennessee. These are the best areas to look for institutional investors and for buyers making cash purchases.
Investment real estate has been on a strong surge for the past few years but that run seems to be coming to an end. Lenders should prepare for this shift and start looking for other sources of business, such as traditional homeowners.
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