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Investors pullback from markets like San Francisco, while diving into places like Indianapolis

Investors are notably stepping back from high-cost markets. Here's why

In the wake of the ongoing mortgage rate shock, investors have significantly altered their strategies, leading to marked shifts in regional housing markets.

Parcl Labs, the fast-growing player in the residential real estate data space, continuously examines home sales across the nation to uncover the markets witnessing a surge in investor activity and those from which investors are retreating. Parcl Labs' analysis produces a metric they call the "Investor Purchase to Sale Ratio," which is designed to quantify investor participation in the largest housing markets across the nation.

Here's how to interpret the “Investor Purchase to Sale Ratio”, according to Jason Lewris, co-founder of Parcl Labs: “A 1.00 here would represent for every investor [home] purchase, there was 1 investor [home] sale, so 1:1 harmony. Anything above 1.00 would indicate investors are purchasing more units than selling and under 1.00 would be the inverse.”

On an aggregate basis, investors are pulling back in markets such as San Francisco, San Jose, San Diego, Sacramento, Los Angeles, Riverside, Portland, Ore., Chicago, Phoenix, and Austin.

While on an aggregate basis, investors are buying up more in markets like Indianapolis, Philadelphia, Denver, Milwaukee, New York, Nashville, Charlotte, Jacksonville, Fla., Miami, and Columbus, Ohio.

Why the investor pullback in markets like San Francisco?

Investors are notably stepping back from high-cost markets where the price-to-rent ratios have veered significantly away from historical norms. In such markets, it becomes more economical to rent rather than purchase properties, which translates into a dearth of investment opportunities. Essentially, a substantial portion of homes available for sale in cities like San Francisco and Austin fails to yield positive cash flow for investors.

Why are investors diving into markets like Indy?

Conversely, markets that are attracting increased investor activity tend to exhibit more balanced price-to-rent ratios. In these markets, investors are more likely to find properties that offer the potential for positive cash flow.

The pandemic housing investor frenzy has been replaced with a lull

From the perspective of investors, today's housing market stands in stark contrast to what was observed in 2020 and 2021. During the Pandemic Housing Boom, a unique confluence of historically low interest rates, ready access to capital, escalating rents, and soaring property values presented an irresistible opportunity for investors. This dynamic attracted investors of various sizes, from individual mom-and-pop landlords to Airbnb hosts and institutional giants. At the peak of the pandemic-driven housing demand surge, Invitation Homes—which owns 82,837 U.S. single-family homes—was a net buyer of 1,523 homes in Q3 2021, while American Homes 4 Rent—which owns a portfolio of 58,693 U.S. single-family homes—acquired a net total of 1,292 homes in the same quarter.

However, this investor frenzy gradually waned as interest rates began to rise in the spring of 2022. In the first half of 2023, both Invitation Homes (-205 homes) and American Homes 4 Rent (-300 homes) were net sellers. While these figures may not signify a substantial investor selloff, they do indicate that the investor housing boom has come to an end.

One final thing, if you haven't already, go follow Parcl Labs and Jason Lewris on X.com (formerly Twitter). The hyperlocal housing data and insights that Parcl Labs is producing, including what you see above, are simply outstanding.