Investor Price Pressure in Housing Market
The average price of homes sold reportedly jumped to about $375,000 by the end of April 2021. This represents a 22% gain over the prior 12 months. But this doesn’t mean that the average home increased in price by 22%. In fact, the average price gain comes from the fact that a greater share of homes sold were luxury homes instead of homes to first time buyers. Sales of luxury homes (priced around $1 million on average) increased more than 40% year over year. Sales of more affordable homes and mid-priced homes barely rose year over year. While speculation has focused on FOMO as a reason for jumps in prices, investor price pressure also factors in.
Investor Purchases
The pandemic dampened enthusiasm for investors purchasing homes to rent out. With uncertainty in the ability to collect rents, evict non-paying tenants, and pay their mortgages, investor purchases fell throughout 2020. This reversed in early 2021 when investors took advantage of low interest rates and bought 1 out of every 7 homes sold according to Redfin. The jump in additional investor purchases focused on lower priced homes, buying 1 out of every 5 homes sold. Second place came in for the highest priced homes at 1 out of every 8 homes sold.
Fannie and Freddie Restrictions
As noted in our prior post, new restrictions began on April 1 for Fannie Mae and Freddie Mac loans. After April 1, Fannie and Freddie loans could not make up more than 1 in 14 loans. In addition, the portfolios of investor loans held by Fannie and Freddie had to drop to 1 in 14 loans over time. We expect the share of homes bought by investors (other than national home investor companies) to decline after April 1. We also expect borrowers to be forced to alternative lenders with higher interest rates. This would make investors slightly less competitive to normal home buyers by increasing the ownership costs to investors. Questions remain whether sufficient private lending at rates acceptable to investors can fill the gap left by restrictions place on Fannie and Freddie.
These restrictions take time to roll through the market. But our Advantageous Purchase Window forecast takes this into account. Be prepared to follow that purchase window. Read Winning Mortgage, Winning Home to better prepare, know what to expect and choose the loan right for you. with investor price pressure in the more affordable segment likely to decrease, keep your eyes on that window for buying.