Why Investors Are Becoming Home Builders’ Top Customers

Rising Rates

Mortgage rates are on the rise, with the average rate for a 30-year fixed mortgage near 4.7% this month, up from just below 3% at this time last year. Simply put, the added cost of carrying a mortgage means fewer people will be able to afford homes.

Over the last year, hundreds of thousands of new homes were built and sold. The bulk of these transactions involved individuals and families who intended to live in the property they bought. That’s started to change, as investors holding on to billions in cash are still eager to buy up homes and then rent them. What’s more, the investor class is willing to buy in bulk, which home builders prefer, as opposed to selling individual homes on the open market.

Rental Investors

Home builders have been busy in recent months, as the available housing stock is well below pre-pandemic levels. Tight supply is contributing to a rise in prices. Investors are stepping in, looking to snatch up these brand-new properties. During the fourth quarter of 2021, over 25% of homes bought by investors were new-construction.

Analysts say investors see upside potential beyond available inventory. Traditional buyers, squeezed out of the purchase market, are expected to seek out a comparable rental, as a desire for more space is the most typical reason to move in the first place.

Land Values

Market observers say the trend linking home builders and investors is likely to last a while. For one thing, new homes are being built at a rapid pace, with 799,000 single-family homes under construction last month. That’s a 28% increase over February 2020. At the same time, advisory firm Zelman & Associates estimates large investors have around $67 billion in capital ready for purchases.

Going deeper, rental investors impact land prices, especially in hot markets. The same buyers who are showing interest in rental properties are bidding up land prices, which affects builders, and the prices they charge for completed homes. This causes entry-level buyers to be increasingly priced out. New homes are being built, which may not mean much to traditional home buyers eyeing rising mortgage rates, but for investors with cash it’s a big opportunity.

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