Investors Fleeing Housing Market as Bubble Deflates [Peter Schiff]

NOVEMBER 30, 2022  BY MICHAEL MAHARREY

In another bad sign for a housing bubble that is quickly deflating, investor purchases of single-family homes tanked in the third quarter.

Meanwhile, overall home sales continue to tumble and prices are falling.

During the easy-money, low-interest-rate boom created by the Federal Reserve in the wake of the pandemic, investor money poured into the housing market. With mortgage rates now skyrocketing and home values beginning to decline, investors are starting to run away.

Investor purchases of single-family homes plummeted by 32.3% in the third quarter compared to the same quarter in 2021, according to data collected by Redfin. Other than the second quarter of 2020, during the COVID lockdowns, it was the steepest percentage drop in investor home purchases since the housing bust prior to the 2008 financial crisis.

According to Redfin, investor purchases declined by 26.1% on a quarter-over-quarter basis. This was the largest quarterly decline on record with the exception of the start of the pandemic.

Investors are also accounting for a smaller share of home purchases. In the metro areas tracked by Redfin, investors bought about 65,000 homes. That accounted for 17.5% of all houses purchased, down from 19.5% in Q2.

Why are investors pulling out of the housing market?

They’re worried about losing money with “substantial home-price declines.”

Nationwide, housing prices are up just 3% year over year—the slowest annual growth since 2020—and they’re already lower than a year ago in some metros. It’s also expensive to borrow money due to high interest rates, which makes investing less attractive because it eats into profits. And for investors who are landlords, slowing rent growth is making it more challenging to reap large returns.”

Redfin said, “It is unlikely that investors will return to the market in a big way anytime soon.”

Prices have already started to fall, although tight housing inventories continue to provide some support to the market. US home prices dropped for the third straight month in September (the latest available data).

Overall, existing home sales fell for the ninth straight month in October, dropping by 5.9%, according to the National Association of Realtors. Except for the drop in sales during the initial COVID lockdowns, this was the lowest level of existing home sales since December 2011.

Meanwhile, the 30-year mortgage rate has spiked to a 20-year high approaching 7% in many areas. The last time we saw mortgage rates over 6% was right before the housing bubble popped leading to the 2008 financial crisis. Until mid-April, mortgage rates were in the 4% to 5% range.

The influx of investor money into the housing market underscores the impact of the Federal Reserve’s easy money policies. The Fed blew up a housing bubble when it artificially suppressed interest rates and bought billions of dollars in mortgage-backed securities. Low mortgage rates combined with rapidly rising home prices are a recipe for a housing bubble. With cheap loans readily available, investors swooped in to make big profits.

But now the central bank has pricked the bubble by pushing interest rates up.

What the Fed giveth, the Fed taketh away.

Mortgage rates began to fall in late 2018 as the economy tanked and the Federal Reserve ended its post-2008 rate hike cycle. Rates continued to fall as the Fed pivoted back to quantitative easing and then dropped through the floor with the rate cuts and QE infinity in response to the coronavirus. The big spike in mortgage rates we’re seeing today started as the Fed began talking up monetary tightening to tackle raging inflation.

We expect the housing bubble to continue to deflate as we move into 2023. Just how fast the air comes out and the impact on the broader economy remains to be seen.

This article was originally published on schiffgold.com. Read the original article. Republished with permission.