MReport October 2021

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62 | M REPORT SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Survey Finds Investors Leery About Current Housing Market Low inventory and high prices push investors from the market, but sentiments remain optimistic about future conditions. A new survey has revealed that real estate investors are not viewing the market as favorably as they once did in light of low inventory and rising costs. The survey by RealtyTrac, a property information company, found that 48% of the 300 sur- veyed individual real estate inves- tors believed that the investment market is worse or much worse than it was a year ago. In addition, almost 63% of survey respondents listed the rising cost of homes as a major challenge for residential real estate investing, while 57% said the lack of available inventory as the second-biggest challenge. "Real estate investors continue to face the dual challenges of low inventory and rising home prices," said Rick Sharga, Executive Vice President at RealtyTrac. "Coupled with strong competition from tradi- tional homebuyers and rising mate- rial and labor costs, it's no wonder that individual investors believe that the market is less favorable today than it was a year ago." Looking forward, 36% of inves- tors do not see the market condi- tions improving in the next six months. This sentiment is not just caused by low inventory and high prices, but also competition from other buyers (28%) and increased labor and material costs (36%). "Still, many investors believe that ongoing competition from homebuyers will continue to be a challenge, and 27% said it will likely remain a top concern six months from now," the report said. "The unprecedented demand from homebuyers has created an unusual market dynamic for individual in- vestors: instead of competing with larger institutional investors, mom- and-pop investors find themselves competing with more traditional consumer homebuyers." According to RealtyTrac, the 300 investors that were surveyed were representative of investors as a whole—most were "mom- and-pop" investors who purchase 1–10 properties a year are those who exert the most influence on market conditions. "Nearly 90% of the 19 million single-family rental properties in the country are owned by mom- and-pop investors, while the larg- est institutions—collectively—own less than 2%," the report found. "The fix-and-flip market simi- larly is populated by thousands of small investors who average about one flip a month, but who now face growing competition from the so-called iBuyers like Opendoor, Offerpad, and Zillow, which are essentially institutions that do flipping at scale." "Investors are more optimistic about the future than they are about current market condi- tions," Sharga noted. "But they do worry about inflation—about 81% of the investors surveyed were concerned about inflation causing material and labor costs to rise, making affordability an issue for prospective homebuyers and renters, and increasing the costs of financing." What to Expect When Foreign Investors Resume Purchasing As COVID-19-mandated travel restrictions begin to loosen, foreign investors may flee the coasts and begin exploring single-family homes inland. A s signs that the second wave of COVID-19 is beginning to wane and travel restrictions loosen, foreign investors are looking to re- turn to the U.S., potentially driving up home prices in an already record-breaking market. According to a MarketWatch article by Jacob Passy, foreign invest- ment is at a 10-year low. "These travel bans haven't just hurt the hospitality sector—it's also led to a significant downturn in international investment in U.S. real estate," Passy said. "International buyers only purchased 107,000 resi- dential properties in the U.S. between April 2020 and March 2021, a 31% decrease from the previous year, according to data released in July by the National Association of Realtors. It represented the lowest level of foreign investment in a decade." It is not just travel bans that are restricting foreign investments, but backups at consulates and embassies have limited the number of visas be- ing issued. In addition, foreign investors are less likely to purchase property sight unseen, unlike many Americans during the pandemic who purchased properties digitally with the rise of video walkthroughs and 3D technology "They are used to touching and feeling their investments, because for them, the U.S. is their safety net," said Edward Mermelstein, Founder of One and Only Holdings, a New York-based advisory firm for high-net- worth investors. "For them to not be able to look at and experience whatever they're putting their money into is a psychological issue." According to, the share of purchases by out-of-country buyers dropped from 12% in the Q1 of 2020 to just 8% in Q1 of 2021. The downturn was especially prominent among the top buyers of U.S. real estate. China, Canada, and Mexico rank among the largest buyers of American homes and condos, but the dollar volume of invest- ments from these countries dropped by 50% or more this year. Markets on the East and West Coasts will benefit the most from the return of foreign investment, based on past investments. "For the past 13 years, Florida has represented the top destination for foreign buyers, representing 21% of international purchases," Passy said. "In 2021, California came in second at 16%, followed by Texas (9%) and Arizona (5%), with New Jersey and New York close behind at 4%. Where foreign money flows now that travel is easier, home prices will likely increase." "The travel ban likely contributed to an easing of demand from for- eign buyers of U.S. real estate, but that didn't do much to slow the rapid rebound in the U.S. housing market in the second half of 2020 and so far in 2021," said Daren Blomquist, VP of Market Economics at Auction. com. "Adding the foreign buyer demand back into the mix will likely only add more fuel to fire of the already red-hot housing market." While cities such as Los Angeles, Miami, New York, and San Francisco have traditionally seen the most foreign investments in the past due to their strong housing markets, Blomquist said he predicts that more money may be headed to single-family housing which has seen major growth since the start of the pandemic. "I wouldn't be surprised to see the investment thesis of foreign investors shift to more affordable, less dense inland housing markets given the pandemic-accelerated shift toward those types of markets and away from the higher-cost, denser housing markets on the coasts," Blomquist said.

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