According to an analysis from Reventure Consulting CEO Nick Gerli, the math behind the investor exodus is straightforward: The 10-year Treasury currently yields 4.0%, while single-family rental properties typically generate a 4.9% cap rate. The narrow 0.9% spread marks a shift from the 2011-2022 period when the gap averaged around 3.0% and peaked at 4.4% in 2020.
“Everyone likes to think there’s some big conspiracy about investors buying homes or not buying homes,” Gerli said on X, formerly Twitter. “There isn’t. It’s just math.”
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Data from Redfin confirms the investor pullback, showing purchase volumes have plummeted over the past two years after surging in the immediate aftermath of the pandemic. The current rate environment offers little incentive for capital deployment, as the 4.9% cap rate typically results in negative returns after accounting for debt service costs.
Gerli sees two potential catalysts that could bring investors back – either 10-year Treasury yields need to drop below 3.0% or cap rates must rise above 6.0%. However, achieving higher cap rates would require steep price declines, as national rent growth remains modest at 2-3% annually, with some markets seeing decreases.
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The shift in investor activity coincides with broader market dynamics highlighted in ATTOM’s third-quarter 2024 U.S. Home Sales Report. Homeowner profit margins slipped to 55.6%, down one percentage point from the previous quarter and two points year-over-year, which continues a gradual decline from the 64% peak in 2022.
“The latest price and profit numbers provided another round of generally good news for homeowners, tempered by a bit of a downside,” said Rob Barber, CEO of ATTOM. “Home values remained at or near record levels around large swaths of the country, keeping seller profits far above historical levels.”
For investors seeking better yields, Gerli said there are opportunities in Southeast markets, particularly in Alabama, Georgia and South Carolina, where unlevered returns of 7-8% remain available. Those areas often benefit from lower insurance and property tax rates, creating a competitive advantage.
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The institutional investment landscape reflects the dynamics. ATTOM reports that institutional buyers accounted for 6% of single-family home and condo sales in the third quarter of 2024, down from 6.2% in the previous quarter and 6.6% year-over-year. The highest institutional activity was concentrated in Alabama (9.1%), Tennessee (8.9%) and Oklahoma (8.4%).
Looking ahead, market observers like Gerli note that changes in either interest rates or property values will likely be necessary to restore the risk-adjusted returns that previously attracted widespread investor interest in residential real estate.
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