Are Boston condo investors leaving the market?
Boston Condos for Sale and Apartments for Rent
Investor purchases fell 3.9 percent year-over-year in the fourth quarter, according to a Redfin analysis. This marks the largest annual decline in a year, as investors bought just over 47,000 homes, the lowest fourth-quarter level since 2016.
The decline was particularly pronounced in Florida, where investor purchases plunged 27.5 percent in Orlando, 21.3 percent in Miami and 14.5 percent in West Palm Beach. Chicago and Atlanta also saw significant drops at 23.3 percent and 18.4 percent, respectively.
Several factors are driving this investor pullback: a slowing housing market with high prices and mortgage rates, lackluster homebuying demand and plateauing rents, economic uncertainty surrounding inflation, tariffs and the new presidential administration, as well as elevated interest rates making financing more expensive.
The condominium market has been hit hardest: investor purchases of condos dropped 13 percent year-over-year to the lowest fourth-quarter level since 2012. Rising condo fees and insurance costs due to worsening natural disasters have made condos less attractive investments.
Despite the overall decline in purchases, the total value of investor acquisitions increased 6.3 percent year-over-year to $36.5 billion, matching the rise in home sale prices during the same period.
Redfin defines investors as any institution or business purchasing residential real estate, including both institutional and mom-and-pop investors, based on county-level home purchase records across 39 major metropolitan areas.
Are Boston condo investors leaving the market?
A year ago Boston condo mortgage rates were roughly 4.1%, while the current rate is approximately 6.2%. So, rates today are much higher, yet demand for Boston condos for sale is the same. That’s a powerful statement.
How does this rise impact real cost of capital? To answer that question, let’s look through Boston real estate investors’ lenses for a moment.
A Boston property investor’s balance sheet calculates a rate of capitalization (“cap rate”) that factors in debt service and net income and is weighed against the yield of what is considered to be a “risk free” investment such as a 2-year Treasury. During the 2015–2019 period, the risk : return ratio for leveraged ownership of a Beacon Hill apartment was palatable because the return on the Treasury bill was almost nothing.
But now, not only are mortgage rates significantly higher, that same T-bill is returning 4.5% without the expense and effort of a Seaport condo transaction.
So, Boston condo investors purchases — we can safely assume — have waned, but end-users have filled the void. Said differently, investor demand for downtown Boston is down, but homeowner demand is up. Despite mortgage rates. Despite the real cost of capital.
