The dynamics of the single-family rental investment market of late has been a classic question of whether the chicken or egg came first. Did investor purchases drive up prices and rents, or did an increase in prices and rents attract investors? A bit of both in either a virtuous or vicious circle, depending on your orientation.
According to the CoreLogic analysis, it started with the pandemic, as home prices nationally lifted 41% between 2020 and 2022. "During this period, investor activity in the housing market hit an all-time high. In 2021, investor made 23% of all single-family home purchases, and by 2022, that figure was 25%," they wrote.
The analysis suggests that at first there was generally little correlation between rent increases and investor interest in a given area. But then as rents began to increase, investors would enter that market more strongly, suggesting that investors didn't cause the jump in rents but followed them, at least at first.
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However, there was a greater correlation between house price appreciation and investments. Which makes some sense, especially as sources have told GlobeSt.com in the past that a lot of investors and funds new to commercial real estate came in as the Fed dropped interest rates to keep liquidity available. Many might look at the property price rather than primarily consider the operating income.
And when investors bought, home prices increased. "This is natural since investors bring more demand to the market but do not add supply," CoreLogic wrote. "This contrasts with a reseller who is likely selling one home to buy another, meaning they are adding to the supply and demand pools evenly."
Then started a positive feedback loop in the markets because "the connection between where prices were rising three months ago and investor activity trends is even tighter."
That, however, was then. Markets now have changed. "Home prices have declined 5.1% from their peak in July 2022, and although rents are still growing, they are doing so at a slower pace," the study said. "The locations that investors flocked to during the housing market boom are the same markets that are currently leading the price slowdown. Nevertheless, investors seem undeterred and are still buying in the same locations at a rate well above pre-pandemic levels."
CoreLogic said there were three possible explanations for investors sticking where things were slowing. First, there could be an inertia factor where investors were more comfortable with what they already knew. Second, the investors might think that slowdowns would spread and going to a new area would provide little if any long-term advantage. Third, they might think their current picks were stronger in the long run.
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