The Pandemic real estate boom triggered a “investor mania” unlike anything seen in the US housing market since last year’s housing bubble. Average Joes flocked to the market hoping to build Airbnb empires. Institutional investors, such as Home Partners of America, owned by Blackstone, quickly expanded their portfolio of single-family homes. Home builders, eager to strike while the irons were hot, ushered in a record number of “specified” homes. While iBuyers, like Opendoor and Zillowhave stepped up their algorithmic house-buying programs.
Fast forward to October, and that investor mania has been replaced by investor panic. The housing correction in progress—US home prices fell 1.6% between June and August– spooked many investors on the sidelines. This is the first national decline in home prices since 2012.
The decline of investors is logical. Although most housing economists do not foresee a large-scale correction with the major financial crisis, during which US house prices fell 27% between 2006 and 2012, they recognize that this house price correction is stronger than it was in 2006. The lagged Case-Shiller index already shows that house prices are down 8.2% in San Francisco.
For Redfin CEO Glenn Kelman, pandemic housing boom investor frenzy helps explain why house prices are correcting faster this time around. Historically speaking, house prices are sticky. Sellers just don’t want to lower prices unless the economy, like a glut of supply, forces their hand. This is not so much the case for institutional investors and builders. If they think prices are about to drop, they want to get out first. The fact that the pandemic housing boom has seen investors become a higher share of buyers, says Kelman, ultimately makes the US housing market more vulnerable to a faster decline.
“When the shiitake mushrooms hit the fan, you [investors] want to go out first. The way to do this is to determine where the lowest sale is and be 2% below. And if it don’t sell the first weekend, turn it down [again]says Kelman.
In other words, Kelman suggests that real estate investors, including Redfin’s iBuyer businesshelped push home prices up faster during the boom and will drive prices down faster during the correction.
“My perspective is that because builders and iBuyers represent more inventory, it leads to faster remediation. We’re one of them, we’re an iBuyer,” Kelman says. “We’re noticing immediately that fewer people are visiting our website and signing up for tours… We’re sitting on $350 million worth of homes for sale that we bought with our own money, or worse bought with money. borrowed money. And what we’ve always told investors is that we would protect our balance sheet by moving quickly. We don’t have hope as a strategy. We immediately started noting things down.
Why has there been a rush of investors (see charts above and below) into the housing market during the pandemic? A combination of low mortgage rates, record appreciation and skyrocketing rents has simply made it irresistible to investors. It brought everyone out, from home pinball machines, to mom-and-pop owners, to Wall Street juggernauts.
But let’s be clear: Investor mania alone did not drive US home prices up 43% during the pandemic housing boom. Instead, record home price appreciation was spurred by a perfect storm. The ability to work from anywhere saw white-collar professionals both pony up for bigger properties and take off for distant markets like Boise. And historically low mortgage rates, which bottomed out at 2.65% in January 2021, made mortgage payments more affordable even when prices rose. Not to mention, this all happened amid a period of low inventory and favorable demographics for millennial first-time home buyers.
Whereas skyrocketing mortgage rates caused a historic decline in buyer demand, it did not translate into a massive increase in inventory. Most owners are not afraid. So how can house prices fall even though inventory levels are tight? That’s because leveraged investors don’t want to play the wait-and-see game. And all it takes is for one house to fall below its clearing price to reduce the clearings for an entire area.
“As soon as demand waned, we marked down properties, which drove prices down. Every other home for sale in a neighborhood we marked the list now has a comparable sale that every buyer is going to know about and talk about,” Kelman says.
Of course, the so-called investor mania during the pandemic housing boom was not unique. The investor frenzy was particularly fierce in booming western cities like Phoenix, Austin and Las Vegas. It helps to explain why these frothy housing markets are correcting so dramatically right now.
Look no further than this property north of Las Vegas. In May, Opendoor bought the house for $540,800. A few weeks later, Opendoor put it up for sale in July for $581,000. But Opendoor was too late: the Las Vegas real estate market had already changed. Fast forward to October, and the listing has just been pulled from the market after a series of price drops brought its list price to $472,000.
At first glance, one would assume that Opendoor could soon incur a loss of around 13% on the property. Not exactly. You see, when iBuyers like Redfin and Opendoor buy a home, they charge sellers a “service fee” in exchange for the speed of the transaction. On the one hand, this cushions the potential loss for the iBuyer. On the other hand, this buffer means that the iBuyer is less afraid to lower the price.
Not everyone agrees with Kelman. In May, Zillow officials said Fortune this the company’s iBuyer program failed— which notoriously overpriced homes until Zillow announced in November that it would quit the program — did not drive up U.S. home prices during the pandemic housing boom. In Zillow’s eyes, the buying program was simply too small to do that.
While Kelman attributes the speed of the house price correction which was caused by rising mortgage rates for investors and builders, he says other factors were also at play. For starters, he says the U.S. housing market has become more sensitive to mortgage rates in the years following the housing crash of 2008. Second, he says the housing crash has taught sellers and buyers that house prices can indeed fall.
“I think the religion that people had from 1946 to 2008, that house prices always go up, is dead. My parents believed it was literally inconceivable for [home] lower prices,” says Kelman. But this housing “religion” was shattered, he says, by the crash of 2008. “So people respond [now] so that [correction] with almost PTSD, and they withdraw much faster.
Where will property prices head next?
groups like Freddie Mac and the mortgage bankers association expect house prices to decline in the coming years. And companies like Moody’s Analytics and Goldman Sachs predict a national peak-to-trough decline of about 10%. If a recession hits, Moody’s predicts the national decline would be between 15% and 20%. Simply put: the outlook for house prices is everywhere.
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