By Kurt Carlton, president, and co-founder of New Western
The headlines near the end of 2022 were dominated by a real estate market in flux–low housing inventory, rising mortgage rates, and inflation. And while buyers and sellers in the traditional retail real estate market stood still and developed a wait-and-see perspective, an interesting silver lining appeared in the single-family home investor market. Not only did investors’ rehab businesses grow in 2022, they’re actually leaning in and doing more business in 2023.
But why?
In 2021, people were buying homes and migrating across the country. The frenzy was palpable. But for investors looking for a deal? They couldn’t get a foot in the door, let alone get an offer accepted. Home prices skyrocketed and the housing market began an interesting shift across the country. Buyers retreated, sellers stuck to their guns on price, and suddenly, transaction activity slowed.
This created room for the mom-and-pop rehabbers and solopreneurs in the fix-and-flip and fix-and-rent markets to step in and start making deals. They understand their local neighborhoods, come prepared, and have access to financing. This scenario is practically the definition of luck–when an opportunity comes along, you’re prepared for it.
Where are those demand markets?
Investor-sold homes increased year-over-year in cities like Tulsa and Oklahoma City, even though retail sales were down. These two cities are ripe for growth in 2023 with an increase of 51.4% each in year-over-year homes sold.
Raleigh, North Carolina has seen year-over-year demand rise in both the retail sales market and the investor-sold market with investor-sold homes up 44% at year-end. Interest continues to rise in this city and the surrounding metros.
But as traditional buyers and investors migrated to new cities looking for affordability, demand rose in some areas and declined in others. In pandemic hotspots like Denver, Nashville, and Austin there was a major decline in the volume of homes sold in both the retail real estate market and investor markets.
Another silver lining, at least for buyers who purchase rehabbed homes from investors, is that rehabbed homes typically sell for 31% less than traditional retail homes in the same market. Investors have already put more affordable options on the market, even in some of the pandemic boom towns like Raleigh, NC; Austin, TX; Nashville, TN; and Phoenix, AZ.
The youth movement also makes an impact in new markets.
Gen Z and millennial migration has opened up opportunities in both the retail and investor markets that didn’t exist before. They are moving to what they consider more affordable cities and prioritizing weather, lifestyle, and remote work. There’s a trend among investors 18-29 years old who are looking to make their first investment purchase and who have already bought a single-family home to fix and rent.
These two generations are moving around the country and creating affordable options in mid-sized metros and college towns that are traditionally cheaper like Columbus, Ohio; Madison, Wisconsin; Fargo, North Dakota; Raleigh, North Carolina and Lincoln, Nebraska.
So what’s the outlook for single-family home investors looking to grow in 2023?
Local investors should expect less competition and eventually a more predictable outcome. Small investors who leverage their local know-how and nimble operations have a home-field advantage when it comes to finding opportunities in their neighborhoods.
Long-term investors should look to opportunistically acquire rentals at favorable price points due to unfavorable rates. If you’re a cash buyer, you’ll be in the driver’s seat. If you can produce cash flow with a rate in the high, single digits you only have upside as the environment improves.
The exit of iBuyers from the investor market, like Redfin and Zillow, opens up options for individual investors to scoop up deals and provide inventory in their local neighborhoods by putting renovated, liveable homes back on the market. The mom-and-pop investors are uniquely positioned to thrive because they know their neighborhoods and have local expertise.
Gen Z and Millennials will impact the housing market in new ways as both lean into real estate as an investment strategy and hedge against inflation. Their mobility and interest in forming households in untapped, affordable markets will result in the growth of mid-metros.
As rent becomes more affordable than mortgages, the opportunity arises for investors who have chosen to lean into a fix-and-rent strategy in 2023.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.