Investment Sales Increased in the Second Quarter
Over the past ten quarters, investor home buying growth outperformed total home sales. While total home sales declined by 2.6 percent over the year in the second quarter of 2019, investor home buying grew by 5.4 percent. Despite a prolonged period of declining home inventory, rising prices, and rising rates, investment sales continued to see fairly stable growth since 2014, albeit not as high as the few years immediately following the recession when home prices bottomed.
As non-investment home sales slowed, the investment share of total sales rose from 7.1 percent in the second quarter of 2018 to 7.7 percent in the second quarter of 2019. Currently, the second quarter of this year has seen the highest second quarter investment share since 2013.
More Homes for Sale Advertised as ‘Investments’
On the supply side, the share of active home listings which are advertised as investment opportunities has continued to increase over the past several years. In the second quarter of 2019, the share of listings mentioning “investment” grew to 4.5 percent, up from 4.1 percent the previous year. This trend indicates that homebuyers have increasingly faced competition from investors, as Realtors® have positioned and advertised more properties as investment opportunities.
Flipping Activity is at a Post-Recession High
Home flipping is also increasingly popular. In June, home flipping represented 3.7 percent of sales, up from 3.4 percent last year and 1.8 percent during its lowest point during the recession, in December 2008. The share of home flipping has grown consistently for 42 straight months. Early this year in February, the share of flipping sales reached 5.1 percent, very close to the pre-recession peak of 5.6 percent in April 2005.
The Top Investment Markets
We ranked a list of the largest 100 metros across the country by their investor share of sales in the first half of 2019.
The top investment markets had an average investor share of sales of 15.9 percent in the first half of 2019, compared to an average of 8.5 percent for the full list of 100 metros that were analyzed. On average, the investment share of sales grew by 153 basis points in the first half of 2019 compared to the previous year, whereas the share in the metros in the full analyzed list only grew by 23 basis points.
The share of flipping sales in the top 10 markets was 12.7 percent on average, compared to 8.8 percent for the list of 100 metros overall. Over the past year, the share of flipping sales in the top 10 markets grew by 211 basis points, compared to 89 for the full list of 100 metros. In the top 10, flipping activity was highest in Phoenix, Las Vegas and Tampa, with a share of 19.5 percent, 18.1 percent, and 16.9 percent, respectively. Over the past year, the share of flipping sales grew most in Phoenix, St. Louis, and Tampa, by 520 basis points, 410 basis points, and 270 basis points, respectively.
Investment in the top 10 markets was fueled by more household growth and employment growth, coupled with favorable investment metrics such as lower price to income ratios and lower gross rent multipliers.
|Metro||2019 H1 Investor Share||2018 H1 Investor Share||YY Change|
|St. Louis, MO-IL||18.8%||18.8%||0.0%|
|Miami-Fort Lauderdale-West Palm Beach, FL||17.0%||15.7%||1.3%|
|Tampa-St. Petersburg-Clearwater, FL||16.2%||12.4%||3.8%|
|Las Vegas-Henderson-Paradise, NV||15.7%||14.4%||1.3%|
On average, the number of households grew by 1.7 percent over the past year in the top 10 markets, compared to growth of only 1.3 percent in the full list of 100 metros. Within the top 10, Orlando, Las Vegas, and Phoenix led the way in household growth, with growth rates of 3.2 percent, 3.0 percent, and 2.2 percent, respectively.
Employment growth was also strong, increasing 1.8 percent over the year in the top 10, compared to only 1.2 percent in the full list of 100 metros. Within the top 10, employment growth was strongest in Phoenix, Las Vegas, and Orlando, with growth rates of 2.9 percent, 2.6 percent, and 2.3 percent, and 2.3 percent, respectively. The unemployment rate in the top 10 was similar to the full list, with an average rate of 3.6 percent compared to 3.7 percent overall. Orlando, Birmingham, and Tampa had the lowest unemployment rates among the top 10, with 3.1 percent, 3.3 percent, and 3.4 percent, respectively.
Home price increases are another good indicator of demand that could attract investors. However, too much of an increase could be a sign of an overheated market. Typically, markets with home price increases between 5 and 10 percent show attractive steady growth. On our top 10 list, Tampa, Birmingham, Miami, Memphis, and Columbus fall into this sweet spot range. Las Vegas, with a median sale price growth of 16 percent over the past year, looks to be overheated, whereas Orlando and Phoenix, each with 11 percent growth, are close to a healthy growth range. On the other hand, Philadelphia and St. Louis showed little price growth over the past year, but they do have greater affordability.
The sale price-to-household-income ratio is both a measure of affordability and a measure of whether a market is overpriced. The more that home prices stray from incomes, the greater the risk that prices will eventually fall. The top 10 markets had an average price-to-income ratio of 3.7 compared to an overall price-to-income ratio of 3.9 for all 100 metros. Within the top 10, St. Louis, Columbus, and Memphis had the least price risk, with ratios of 2.8, 3.0 and 3.3, respectively. Conversely, Las Vegas, Miami, and Phoenix, also in the top 10, had greater risk than average, with ratios of 4.7, 4.6 and 4.1, respectively.
The Gross Rent Multiplier, which is the ratio of the sale price to annual rental income (before accounting for property taxes, insurance, and utilities), is another indicator of potential risk, measuring how many years it would take for the property to pay for itself in gross rental income. On average, the markets in the top 10 list have a Gross Rent Multiplier of 15.6, compared to 16.7 for the list of 100 metros overall. Within the top 10, the Florida markets of Tampa, Miami, and Orlando have the lowest gross rent multipliers, at 13.6, 13.8 and 14.6, respectively. Conversely, Las Vegas, Phoenix, and Birminghamhave the least favorable Gross Rent Multipliers- with 20.4, 17.2 and 16.2, respectively.
On the supply side, investors look to housing starts to determine what kind of competition to expect from new inventory and how that could impact demand for a flipped home or rented space. On average, the top 10 markets have had a similar pace of construction than the full list of 100, with 11 starts per 1000 households over the past year. Investors in Orlando, Phoenix and Tampa face greater competition as these metros have had 19, 17 and 15 starts per 1000 households over the past year. Conversely, investors in Philadelphia, St. Louis and Birmingham will face less competition, with only 5, 6 and 6 starts per 1000 households over the past year.
Given that the share of investment sales has been rising since 2008 and the share of flipped sales has nearly hit a pre-recession peak, it is likely that we are looking at the maturation-stage of the real estate cycle. Despite a rise in the share of homes listed as investment opportunities, fundamentals continue to tighten as the inventory of homes for sale across the country once again begins to tighten and a prolonged period of price increases has shifted to decelerating price growth across the country. This will lead to slower returns for investors, especially flippers. Among the top investment markets, those that strike a balance between population growth, employment growth, price growth and construction will continue to be favourable for investors. However, after a cycle flush with both good cash flow and price appreciation, it is likely that investment opportunities going forward will be primarily driven by cash-flows rather than price appreciation.
Realtor.com defines an ‘investment sale’ as one purchased by a buyer with a corporate or non-individual name on the deed records, excluding non-arm’s length transactions. We define a ‘flipped’ sale as one which has occurred within 12 months of initial purchase of the property at a gross profit.
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