ORANGE COUNTY, Calif. — Single-family home investors pulled back from the hot housing market in the fourth quarter of 2021 but expect to pick up investment activity as the summer home buying season arrives and before mortgage rates increase.
"There's a strong possibility that investors will be active in the market before rates go up," said Thom Malone, an economist at CoreLogic.
According to a CoreLogic report released in April, investor activity in the single-family housing market slowed down late last year after hitting "historical peaks in the second and third quarters of 2021."
Last October, nearly 27% of homes bought nationally were purchased by investors. Investor activity then dropped to about 25% and 20% of homes purchased by November and December, respectively.
The Los Angeles-Long Beach-Anaheim MSA area mirrors the national trend, Malone explained, adding that Southern California will be a popular investment destination once things pick back up.
"The 2021 surge is something that we have never seen before," said Malone. "It's unexpected, and what's behind it all is not entirely clear yet."
The CoreLogic report comes as the once hot housing market begins to cool because of rising mortgage rates.
The coronavirus pandemic accelerated the demand for housing. A combination of high demand, cheap money and work from home policies led to a homebuying rush, record high year-over-year price increases and shrunken inventory.
The increased demand has led to bidding wars and competition among first-time homebuyers and investors — flippers and landlords — seeing the high returns.
With Russia's invasion of Ukraine and inflation rising to 40-year-highs, the federal reserve has aggressively increased rates to temper inflation.
The feds, who met Wednesday, increased rates again 50 basis points, or 0.5%, and expect to continue raising rates several more times this year and a couple of times next year.
According to The New York Times, the fed's raising interest rates does not necessarily affect mortgage rates since the latter tracks the yield on 10-year Treasury bonds. Still, expect mortgage rates to go up, The New York Times report states.
In the latest Freddie Mac Primary Mortgage Market Survey released on April 28, the average 30-year mortgage rate is 5.1% — a 2% jump from 3.1% on Dec. 30, 2021.
As mortgage rates rise, some investors will jump into the market before it gets too high, Malone noted, adding that most investor activity comes from landlords and not house flippers.
"Rent is up," he said. "Rent went up in January and February."
Malone added that if rates continue to rise, it's hard to see investors sticking around the market when price appreciation is perhaps at 5% year-over-year, instead of the 20% year-over-year.
"Investors are going to put their money elsewhere," he said. "How they react to interest rates and whether they increase or decrease activity will be interesting. Investors are most likely to leave the market when interest rates go up."
For first-time homebuyers or those just wanting to buy a home, the report means that although investor activity waned late last year, it will pick up, and they will face more competition as the summer buying season heats up.
"It's just extra demand in the market," said Malone.