Lew Sichelman

Small-time investors who flocked to the housing market in recent years have done well. But it’s now time to sell, said one of the nation’s top housing economists. 

Lawrence Yun, chief economist at the National Association of Realtors, believes now is the right time for investors to take their gains and head for the exits. In other words, take those profits and get out while the gettin’ is good.  

Of course, Yun has something of an ulterior motive: He’d like to see more houses available to the hordes of people struggling to buy homes, and it is his association’s members who sell the bulk of those houses. 

Still, there’s no denying that investors in single-family houses and condominiums have done pretty darn well in recent years. Over the last three years, for example, the typical house value has “soared” by 35.5 percent, according to NAR’s figures. And over the last five years, values leapt by 50.8 percent. 

As a result, investors have built up a ton of equity, just like owner-occupants. ATTOM reports that almost half of all mortgaged residential properties are “equity rich,” meaning what their owners owe is half – or less – of what their places are worth. 

Huge Build-Up of Equity 

The typical American homeowner now has more than $274,000 in equity, said Selma Hepp, chief economist at CoreLogic. So, the average seller – including investors – would pocket more than a quarter-million dollars after paying off their loan. 

Then there’s the money investors collect every month from tenants: Rents have gone up in recent years, just like house values.  

NAR reports that rents have risen more than 16 percent over the last three years, and nearly 25 percent over the last five. The national median rent is more than $2,000, Zillow reports, and it’s likely even more for rental houses. 

NAR’s Yun points out that all of these gains took root when low-cost financing was plentiful. Now, though, mortgage rates are bouncing around the 7 percent level. Prices in many places have become static or are falling, and rents are being rolled back. 

All real estate is local, so the situation may be entirely different in your market. But from 30,000 feet, it appears that investors have played out their hands. 

Take house prices, for example. NAR’s latest figures indicate that price increases are moderating, largely because many would-be buyers have been pushed to the sidelines by high loan rates. 

In June, the national median price for existing homes, including condos, was $410,200 – the second-highest price since NAR began maintaining records. The record high was $413,800, set the previous June. 

Low Inventory Keeps Prices High 

Home prices remain high because there aren’t enough houses for sale to satisfy the buyers who aren’t scared away by 7 percent mortgage rates. Redfin reports that in July, new listings were down more than 21 percent from a year earlier. And Altos Research reports inventory in early August was down 10 percent compared to the same week a year ago.  

The number of houses for sale is only half of what it was pre-pandemic. And it’s likely inventory will remain below 2022’s levels for the rest of the year, said housing blogger Bill McBride. 

Meanwhile, real estate research company Yardi Matrix reports that rent increases are slowing down nationwide. In May, rents rose less than 0.5 percent after previously advancing by twice that, month after month. (Disclosure: I write regularly for a publication owned by Yardi.) 

Dwellsy’s data for July shows declining rents in two of the three segments it tracks – down $15 a month for two-bedroom apartments and $5 a month for three-bedroom units. (The price for one-bedroom apartments was flat.) 

Competition Rising 

Mom-and-pop investors and landlords have one more thing to consider, Yun points out: competition. Apartment construction is roaring along at a 40-year high. That means more choices for renters, likely at lower rents, as everyone jockeys for tenants.  

Owners of single-family rental houses may not necessarily see a new apartment tower as competition. But they should certainly view well-heeled Wall Street investors, who are gobbling up large tracts of single-family houses to rent, that way. 

At the same time, competition for the relatively few houses for sale could benefit investors, especially if their properties are considered starter homes. Houses with 1,400 square feet of living space, or less, have pretty much gone the way of the dinosaurs, according to a new report from Point2 (another Yardi company). 

Such houses used to be the first step up the property ladder. Now, “it’s not just the concept of a starter home that’s pretty much disappeared, but the home itself,” writes Point2’s Alexandra Ciuntu. 

Indeed, the share of starter homes was halved between 2001 to 2021 – from 13 percent of the total houses sold down to a meager 7 percent. 

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.