With the real estate sales market floundering, investors who buy old houses and renovate them for resale (“flippers”) are finding themselves unable to resell their investments. Many of these investors are becoming reluctant (or unwilling) landlords, and others are pulling back from the real estate investment game altogether.
A recent study by Campbell/Inside Mortgage Finance found that 48% of investor-purchased properties are being held as rental properties as of July 2011, up from 28% this time last year.
At the same time, the percentage of properties purchased by investors has been dropping for several months, down from 23% in April to 19.6% in July. This trend is in some ways surprising, as it’s usually investors and speculators who start buying up discounted investments of any kind, when they appear to be at the bottom of a down-cycle.
The problem is that many investors are either unwilling or unable to hold real estate long-term. Either they do not have the borrowing power for a long-term mortgage, or the rental income potential of the property is not sufficient to justify leasing, or the investor is simply not interested in property management.
Contributing to the weak demand among buyers are several factors, most of which are well-publicized. Lending has tightened up, leaving many would-be buyers unable to qualify for a mortgage. Many Americans are opting to lease instead of buy, which has manifested itself in the declining homeownership rate within the US. More people are cohabitating, and, of course, the unemployment rate remains painfully high, cutting a deep gash in the pool of would-be homebuyers.
With the buying demand low among homeowners, a feedback loop is created, where investors are showing less demand and involvement in the real estate market, because they aren’t confident that they can resell. In many cities, more than half of real estate transactions are made by all-cash investors, and a drop in demand among them could spell trouble if they decide to put their cash elsewhere.
The federal government is even changing its approach to housing inventory. Between Fannie Mae, Freddie Mac, and the FHA, Uncle Sam owns roughly 250,000 properties, which until now it has been trying to sell individually. Now, the Treasury Department and HUD are looking for ways to either lease many of these properties (by hiring private property management companies) or sell off bulk inventory to large-scale investment firms.
The market is swinging towards more renters, more rental properties and, inevitably, more landlords. With demand shifting away from home-buying and towards leasing, many flippers will need to reevaluate their business model and consider buying with the intent to lease, instead of reselling for immediate liquidation.