Denver just passed an “affordable housing program” with new requirements for low-income housing. Multifamily will…
According to a recent Redfin study, investors purchased almost 17% of all houses in metro Denver, up from 9% a year ago. “Investors are expecting rents to increase in the coming years,” said Redfin Chief Economist Daryl Fairweather. What does this mean for real estate values in Denver in the short term and long term?
What percentage of homes are investors purchasing in the Denver metro area?
Investors are snapping up homes at an unprecedented pace across the country, including in metro Denver. Investors purchased a record 18.2% of the homes sold nationally in the third quarter, or 90,215 homes worth $63.6 billion, according to a study from the Seattle-based real estate brokerage Redfin. In dollar terms, investors bought a record $63.6 billion worth of homes in the third quarter, up from a revised $58.8 billion in the second quarter and $35.7 billion a year earlier.
In Denver, investors bought 17% of all homes in the third quarter of 2021, this is up from 9%. This equates to 2,831 homes with a value of 1.7 billion dollars. The buyers of these homes are both Institutional investors and local smaller investors.
Why should we focus on the percentage of investment purchases?
The huge increase in purchases by investors in Denver and throughout the country is astounding. The bet for the investors is that rents and values continue to climb. Unfortunately, real estate cannot go up forever. What happens when rents flatline and values decline?
There was an important study done by the Urban Institute in 2013 that was the most extensive analysis of investment properties that I have seen. Here are the key findings:
“Investment properties are 15 percent more likely to default, controlling for loan and property characteristics.
Again, the higher default rate, with all else held constant, is consistent with the literature. Investors have fewer personal ties to the properties and neighborhoods and are not subject to costs associated with eviction, making them more likely to default than owner-occupants (Belsky and Richardson 2010; Fisher and Lambie-Hanson 2012; Gerardi, Shapiro, and Willen 2008; Haughwout, Peach, and Tracy 2008). Focusing on Chelsea, Massachusetts, Fisher and Lambie-Hanson (2012) found that local investors had 1.8 times the foreclosure risk of owner-occupants. Haughwout, Peach, and Tracy (2008) found that investors were significantly more likely than owner-occupants to default when confronted with a downward movement in house prices or negative equity.”
What does the amount of investment homes being purchased tell us about real estate values?
Based on the study above if there are more investment homes in an area and market values decline, these areas are 15% more susceptible to default than a traditional owner-occupied property. As the percentage of homes bought by investors increase, the downside risk also increases substantially.
Redfin Chief Economist Daryl Fairweather said, “Investors are expecting rents to increase in the coming years, even though home prices are high, they are waiting for rents to grow and there are no signs that prices will decline.”
Unfortunately, this optimism is a bit misplaced. There will always be another cycle and it is not possible for prices to continue to increase at their blistering pace. Interest rates are currently increasing substantially while at the same time inflation is cutting into purchasing power of buyers. These two factors will eliminate much more growth in values of the next several years and likely will lead to a slight decline in values.
Investors piling into Denver at record numbers is a warning sign. With prices as high as they are there is no way that rents can rise fast enough to justify the prices. Furthermore, interest rates are moving up substantially which will further dampen the return on an investment property. Denver is at an inflection and peaked sometime this past summer. The only way for real estate to go is flat at best or likely down. As the market goes down, historical studies show a substantially higher default rate for rental homes. Look for this trend to rear its head in Denver as the market changes. If you are in the real estate market, now would be a good time to sell and to sit tight if you are buying.
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Written by Glen Weinberg, Owner Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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