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The Independent Investor Impact

This piece originally appeared in the November 2023 edition of MortgagePoint magazine, online now.

The headline that is currently dominating media coverage of the housing market is clearly the housing shortage. And that theme isn’t all that different from the end of 2022 when low inventory, high mortgage rates, and inflation were the hot topics.

Consumers have become accustomed to mortgage rates hovering around 6%, and the Fed has backed off on an aggressive plan to knock back inflation.

But the housing shortage isn’t budging and is far from improving. In May 2023, Redfin reported that the number of homes for sale in the United States fell 7.1% year over year to 1.4 million—the lowest level on Redfin’s records, which date back to 2012. To add to the gridlock, 90% of homeowners who have a mortgage, have an interest rate under 6%.

Nobody is moving, unless they have to. Enter the local investor.

Investors Deliver Inventory Even in a Housing Shortage
In a recent study of nearly 1,400 investors, results of which can be found in our Flip Side report from June 2023, we found that individual investors leaned into the market and saw their businesses grow despite the negative news and trends in the traditional housing market.

The United States is lacking about 320,000 listings just to satisfy middle-income buyers’ most critical category of affordable homes. Fortunately, the interests of independent investors align with this critical need, and that means the benefit will be greater than the income made on each home, as those fix-and-flips are put back into the market.

The National Association of Homebuilders projects the construction of 830,000 homes this year, but what goes unnoticed is the forecasted 350,000 home flips involving vacant and uninhabitable properties revitalized by independent rehabbers. Independent investors are taking matters into their own hands and strategically filling in the gaps in housing inventory where the government and new home builders fall short.

Rather than looking for new construction opportunities, however, independent investors are looking for old, distressed, and uninhabitable homes that are overlooked by most homebuyers. In fact, 93% of surveyed investors planned to purchase property in 2023, and many of those properties will be distressed and in need of serious repair.

Investor Markets Grow Where Traditional Markets Decline
When comparing the Redfin traditional market data to investor data, it becomes evident that investors are moving the needle. Five markets experienced double-digit growth whereas the same traditional markets saw more than a 40% decline in homes sold.

While Boston is the big leader for investor-sold homes with 88% growth in sales volume from Q1 2023 to Q2 2023, Houston experienced a 46% growth in sales volume and Dallas saw a 28% growth.

Business continues on an upward trajectory for independent investors, which is great news for the housing market.

So What is the Investor Edge?
Local, independent investors focus on specific neighborhoods. They know contractors, have better access to materials, and truly understand the home values and the impact of market shifts on the streets where they work. They are putting a much-needed supply of homes into high-demand neighborhoods where buyers are looking for more attainable housing options. In fact, independent investors are operating in neighborhoods with price ranges that are 31% lower than the median-priced homes for sale in the same market.

Clearly, there is a shortage of attainably priced homes in the market. The middle-income buyers can afford to buy less than a quarter of listings in the current market. Five years ago, this mid-income group could afford to buy half of all the available homes for sale. It’s an actual crisis.

The independent investor is buying homes that might not be habitable, are probably vacant, and are definitely in need of major repairs. These are the homes that the traditional buyer won’t even consider because they would take much more work than most traditional buyers can and are willing to take on.

And these local investors aren’t just slapping a basic rehab together. They know the design trends, materials, and finishes buyers expect to see in a remodeled home. Investors are generally flipping a better product for buyers, and 80% of the homes they rehab are still receiving at or above the asking price.

Following the pandemic years, you might expect buyers to prioritize homes with great outdoor space and more square footage. That is not the case.

About 30% of homebuyers told investors that they wanted homes with good bones and desirable aesthetics.

Not surprisingly, the top priority for 55% of homebuyers was location and neighborhood. Despite all the changes in the market, the first rule of real estate—location, location, location—still reigns supreme. By leaning into what already works and having the flexibility to pivot on strategy, the investors are in an ideal position and poised to succeed.

Who Are These Supply Creators?
As investors continue to thread the needle in this tight real estate market, they are actually seeing their individual small businesses grow, with 75% of independent investors saying that they experienced growth from the second half of 2022 to date.

Near the end of 2022, many investors were using a fix-and-rent strategy on the majority of their deals. But as the market has shifted, so have the investor’s strategies. Most are utilizing fix-and-flip and fix-and-rent strategies, equally, in 2023.

Not surprisingly, the big challenges for investors remain the same year over year—finding more properties and securing financing. Seventy percent of investors are using a variety of loans to finance their projects and 30% purchase with cash.

What Does the Future Hold?
You could call this housing shortage an opportunity for local investors to flex their muscles and take advantage of market conditions to grow their businesses.

But in reality, the independent investor has always been in the game. They’ve been rehabbing and putting homes back into inventory all along, they just haven’t had the shine of the spotlight. They should. Investors are making a difference when it comes to providing attainable options in the desperately needed, underserved middle-income market.

They’re also creating a space for small business owners to make a mark. Anyone can get into real estate investing if they have the right tools, like-minded mentors, partners, and a proof of concept—i.e. those independent investors who are doing the work, now.

There is plenty of space for the local, independent investor who understands the wants of the average homebuyer and seller and is aligned with the needs of the local community.

About Author: Kurt Carlton

An expert in the real estate space, Kurt Carlton is a solution-oriented, innovative leader who operates with a refreshing, candid perspective. As the Co-Founder and President of New Western, Carlton currently oversees the New Western portfolio of companies, including the company’s consumer brand HomeGo and its lending platform, Sherman Bridge. Along with the CEO, he establishes and oversees the short- and long-term goals, planning efforts, and overall strategies for all aspects of the businesses. Carlton has spent the last two decades in the real estate industry. During the 2008 recession, he saw an opportunity to help rewrite the playbook for the investment real estate industry, thus co-founding New Western. That vision has led to the largest private marketplace for fix-and-flip and fix-and-rent residential investment properties in the U.S., operating in over 40 markets and supplying homes to more than 150,000 investors. Prior to founding New Western, Carlton worked in the mortgage industry and with real estate developments in the U.S. Virgin Islands. He is a licensed real estate agent and mortgage broker in multiple states.

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