The economy may be cooling, but houses are still hot commodities. Home prices rose 20.4% year over year in April, according to the latest data from the S&P CoreLogic Case-Shiller Index. Currently, the median sales price for a new home in the U.S. is just shy of $450,000, and is nearly $408,000 for existing homes.
Those prices, combined with mortgage interest rates that are hovering around 6%, have given would-be homebuyers less wiggle room than they had even a year ago when the real estate market was still firing on all cylinders. Suffice to say that many buyers are frustrated and angry at their inability to find and purchase a home over the past couple of years.
The question, though, is who’s to blame? Investors and home flippers, attracted to the market due to low borrowing costs and appreciating home values, make for an easy target. But they may not be the right target.
The primary driver behind increasing home costs is lack of supply—there simply aren’t enough homes on the market to satisfy buyer demand. And that problem is exacerbated by investors who are outbidding would-be buyers to purchase investment properties that they then rent out or flip for a profit, rather than make their primary residence.
The share of homes sold to investors during the first quarter of 2022 averaged 28% per month, which is an increase of 9% from the first quarter of 2021, according to the Harvard Joint Center for Housing Studies’ State of the Nation’s Housing 2022 report, citing data from CoreLogic. Between 2017 and 2019, that figure was 19%.
Further, home flipping—a process that entails purchasing a property, making some upgrades, and then relisting it at a much-increased sale price—is also on the rise. During the first quarter of the year, nearly 115,000 single-family homes were flipped, comprising almost 10% of home resale transactions, per data from Attom. The typical profit on those flipped houses during that time frame was $67,000.
While investors and flippers have added to the demand side of the equation, they didn’t affect the supply. And that, experts say, is where the problem persists.
“The investors are out there,” says Sarah Knight, a broker at Windermere Real Estate in Spokane, Washington, “but they’re not the ones that are driving up prices. I think desperate homebuyers are.” Knight adds that it comes back to a lack of options for buyers, which has led to bidding wars, driving prices way up. “The thing about investors is that they have bottom lines,” she says. “They’re not emotional about getting a house like many homebuyers are, who want to live in the home.”
Knight’s sentiment was echoed by researchers from Freddie Mac, who wrote in a recent analysis, “[A]lthough investors are certainly contributing to the affordable housing shortage, they are not the driver of the tight supply of homes available for purchase.”
Again, it comes back to the imbalance between supply and demand. In 2021, there was a national housing shortage of 3.8 million units, according to Freddie Mac. That shortage—combined with homebuyers with cash to burn and low borrowing costs (up until recently)—is the primary driver of housing prices, not merely investors and house flippers.
“Maybe investors and house flippers will drive prices up a bit,” Knight says. “But they’re not going crazy with their bids.”