Investors Are Controlling the Housing Market (Not How You Think)

0:00You may be hearing that investors are swinging the entire real estate market and not for the better. But the data is actually a lot more nuanced. Investors play a significant role in the market, but a new report indicates that it's far more complex than these headlines about hedge funds buying up would-be affordable homes let on. Let's dig in to what's really going on.

0:27Hey everyone, I'm Dave Meyer and this is On The Market. Our guest today is Rick Sharga. Rick is the founder and CEO of CJ Patrick Company, a market intelligence firm for companies in the real estate industry. Rick is a super sharp observer of everything that's happening in the housing market, so I'm going to ask his opinions on what role investors play in the market, what's happening with inventory and mortgage rates, and how these trends might develop moving into next year. Let's welcome Rick back to the show. Hey, Rick, welcome back to On The Market. It's great to see you again. Always a pleasure to be with you.

1:02I think you might be our most frequented guest of all time on On The Market. So thank you for always being here. It's always a pleasure to have you. Well, the reason we always have you is of a great perspective on the housing market. So let's just start big picture. We're sitting here in August 2025. Feels like the market's transitioning. There's all sorts of strange stuff. What's your big picture view? Well, you know, Dave, we've had this conversation over the last couple of years, and when mortgage rates doubled back in 2022, a lot of people were predicting that we'd see home prices crash, 20%, 30 % declines.

1:35And we talked back then about the more likely scenario being that we'd see a market take three to five years to kind of transition into a market that could handle these higher mortgage rates and higher home prices. And it really feels to me like we're in year three of a five-year transition period. Slow home sales, price appreciation has slowed down to a crawl, actually gone negative in some markets. And I really feel like we're going to be seeing another probably 12, 18, maybe 24 months of this kind of just slow, lackluster, unexciting home sales. I couldn't agree more. It's just that you're describing everything that we're seeing on the ground.

2:17So you said a transition period, Rick. So what are we transitioning from? Like, what would you call the previous market? And what are we transitioning to? Right now, we're experiencing a couple of things. The big shock was a payment shock when those mortgage rates doubled. We'd never had mortgage rates double in a calendar year in history, according to the researchers at Freddie Mac. That happened in a few months back in 2022. So then we're transitioning into that kind of payment shock. And we had probably 75 % to 80 % of people with a mortgage who had mortgage interest rates below 5%. We're going to see 4 million or so homes trade hands every year.

3:02And as that happens over three, four, five years, the percentage of people with those low mortgage rates gradually gets smaller and smaller. So by the time we come out of this transitional period, we're going to have more homeowners who are actually at current market rates. And so that shock of going from a 3 % mortgage to a 6 % mortgage, 7 % mortgage won't be as severe. But the other thing that we're suffering from right now, candidly, and nobody talks about this really, is when mortgage rates were historically low, 2.5%, 3%, we had a lot of sales pull forward. Back in 2021, we had about 6.2 million existing home sales.

3:46That was at least a million more than we probably would have had normally. and some of those sales would have happened in 23 and 24 and maybe even 25, but people jumped into the market early. And I think we're still seeing a little bit of a hangover from that kind of buying exuberance we saw back in 2021 and early 2022. I do think that's an important point. A lot of people have said, oh, we hit a bubble in the housing market price-wise. Clearly that hasn't happened because we haven't had a pop, but volume-wise, there was almost a bubble, right? Like the volume, just the total amount of home sales went up and that has sort of popped.

4:25The pendulum has swung back in the other direction, essentially, and we're sort of at the low end of the spectrum. Yeah. And so economists talk about a reversion to the mean, which basically just means that pendulum swinging back and forth as you just described it. But demographically speaking and from a population standpoint, the market does continue to underperform. We have millions of people coming of age to either form a household or buy a house every year. And right now, they simply can't find anything they can afford. So a couple of the trends in the market will ultimately reverse that. We're seeing inventory of homes for sale up 27, 28 % year over year.

5:08By the end of this year, we'll probably be back to pre-pandemic levels. As more inventory comes to market, you have more competition among sellers, which means that there's negotiation and pricing, which means that home prices will either flatten or maybe come down a little bit depending on which market you're in. And that'll improve affordability for those prospective buyers. So demographics really should be a tailwind for the housing market that eventually will pay off in higher sales. When you said that we're transitioning, which I agree we are, you said you think we're in year three of five.

5:42So you think we're going to be stuck here for two more years? Is that kind of your read? Unfortunately, yes. I think we're going to be stuck here for two more years. I've been trying to be optimistic forecasting sales the last couple of years, and it's come back to bite me. I was hopeful that 2024 was the bottom and that we would see a modest increase in home sales this year. As we record this, the National Association of Realtors has just released its July report on home sales, and they were up about 0.8 % month over month and a little bit up year over year from what was a really weak July a year ago.

6:20But we're still looking like we're going to close the year right around 4 million homes being sold, existing homes, which would be flat from last year or maybe even a little bit below last year's. But in a historical context, super low, right? Like a normal year is like five and a quarter, just so everyone knows, right? What we should be seeing for our population right now is probably a little bit north of five, yeah. But again, there's an affordability gap. The Atlanta Federal Reserve believes there's almost a$50 ,000 gap between the median salary and what the median salary should be for somebody to be able to buy a median price home.

6:58So it's the worst affordability we've really seen in the past 40 years since the 1980s when mortgage rates were at 18 and 20%. So it just takes time to narrow that gap. Yeah, I was looking at some affordability study. It was based on CBRE actually, a commercial real estate company. And they looked at it all these different ways, like household income to median home price. When you look at affordability and factor in mortgage rates, when you look at how big of a raise you would need to be able to afford, and everything just bad. It's just affordability is just brutal across the board. And I guess that is sort of the thing that has a lot of people pointing to a crash because they see low affordability.

7:41The only way to fix this is if prices come down quickly. Well, that's the knee jerk reaction. And most people that are espousing that idea are still suffering PTSD from 2008. When we saw home prices go up as rapidly as they did and then crash. But the big difference between then and now is what I would refer to as forced selling. Back in 2008, you were an unqualified bar, never should have gotten a loan. You got an adjustable rate mortgage at 0 % interest, 2 % interest, and then it adjusted to 6 % or 7%, you couldn't make a payment. So you had to sell the house. And you sold it at a time when the market was oversupplied.

8:27You were going into foreclosure. There were 10 million people that got a foreclosure notice in a few years. And it became a race to the bottom. In this market, you're dealing with homeowners who've amassed $36 trillion in equity, are sitting on a mortgage rate lower than when they bought their house, probably, which means their monthly payments likely went down when they refinanced. They don't have to sell. And if they don't have to sell, what's their motivation to give you a 20 % or 30 % haircut? I agree. There's none. I always tell people who are predicting home prices are going to come down 20%.

9:03I always say, you go first. Yeah, exactly. You sell your house for 20 % loss. So you'll see boomers aging out of their properties gradually. You'll see some of those properties coming to market. And a boomer might be able to get less than full value on the house because they've amassed tens or hundreds of thousands of dollars of equity. And they're probably not buying another house. But by and large, the people that are selling right now are people that are either leveraging the equity they build up to buy their next house or they're people that have to sell. And there's a death in the family, a birth in the family, a wedding, a divorce, a job loss, a job transfer.

9:42and that works out to about 4 million sales a year. And I think gradually again over time, what happens is instead of a price crash, you have home price appreciation slow down or in some markets go negative slightly and you see wages go up and wage growth right now is outpacing home price appreciation and it's outpacing inflation. So if wages are going up 4 % to 5 % a year, inflation's at 2.7%, home prices are going up 2%. You know, gradually that wage improvement narrows the gap a little and mortgage rates ultimately will come down at least a little bit, not back to where we were. But that combination of home prices not even keeping pace with inflation, of wages going up and of mortgage rates coming down does start to at least narrow that affordability gap a little bit.

10:32I think this is the most important concept and prediction in the housing market right now, because I think people generally understand that the affordability, the current levels of affordability are unsustainable. It's just this can't go on forever this way. And so people who don't have your knowledge of the housing market say there's going to be a crash. But as you said, without force selling, a crash is extremely unlikely. We talk about this on the show very often. you can't just have a crash just because prices are going down modestly. That's a normal correction that happens in housing cycles.

11:07You need the element of forced selling to be the catalyst to go from a correction to a crash. There's just no, of course it could happen, but there's no data evidence that that's happening right now. And so it just seems unlikely. But what Rick is saying is sort of what I've started calling the great stall here. I'm trying to come up with a name that like helps people understand what is going on. And it's a really important idea that home price affordability can get better without a crash. It can also get better without a significant drop in mortgage rates. It can also get better without real wage growth going to the moon.

11:46it's a combination of those three things that from everyone frankly i respect in this industry everyone seems to think that's what's going to happen of course sometimes wisdom of the crowd sometimes people are wrong but like people really understand the data here all are saying that the most likely scenario is that affordability will get better over time but it's going to be a little more boring it's not going to be as dramatic as people think it's going to be with a crash or anything like that. It's just a gradual improvement of wage growth. It's a gradual decline of mortgage rates. And it is home prices in real inflation-adjusted terms going down modestly probably for what Rick thinks is another two years or so.

12:29So I think people just really need to wrap their head around this, that it doesn't have to be dramatic. It can be kind of boring. And there are other things going on right now. We have an unusually large number of properties that are undergoing a list price reduction. About 42 % of properties on the market have had a reduced price, which is almost 10 percentage points higher than normal and very unusual for this time of year. Usually spring and summer months, you see very little in the way of list price reductions. So sellers are kind of getting some religion. And again, as we get more inventory, there's more negotiating power for the buyers.

13:06But the other aspect of that is that everybody would get excited. Oh, you know, four out of 10 properties are having a list price reduction, but the median reduction is less than 5%. And you have to assume the seller is listing the property for more than they bought it for. So it's not like this is a huge drop in price. It's a 5 % or less a drop in price in order to close a sale. So to your point, we don't always see home prices go up in a straight line. Very often, they kind of go up in a sawtooth manner, up a little bit, down a little bit. And I do think we're in the down a little bit phase in probably about half the country.

13:47But this is one of the biggest dichotomies I've seen in terms of pricing really in the last 25 years that I've been watching this industry. It's not necessarily the range of price differences. It's that in about half the country, we see prices going up and about half the country, we see prices going down. And there's a very strong correlation to how much inventory is available in those two disparate trends. So if you're in the Northeast or Midwest, odds are you're seeing prices continue to go up. If you're in the Southeast, if you're in the Southwest, parts of the Pacific Northwest, you're probably seeing property values go down a little bit.

14:25So it really just depends on where you are. I'm definitely seeing that. I operate in Denver and in the Midwest and I live in Seattle. So I'm actually starting to operate in Seattle too. And Denver's seeing one of the bigger corrections in the country consistently. It's not like huge numbers, but it's just been consistently soft for years. And we are seeing a lot of the metro area down there. Seattle's starting to see a lot more inventory come on the line. Places I invest in Michigan, they're just humming along. But I guess my Rita situation, Rick, is just with so much going on, I feel like everything's softening.

14:59So not necessarily everything's going to turn negative, but the places that have, you know, like place like Milwaukee that have surprisingly amazing appreciation, like six, 7 % year over year this year, like they might still be positive real growth, but it's going to, it's going to soften still. And I just, my advice to the audience, feel free to disagree, but my read on the situation is that everything's going to slide a couple percentage points down. So if it's doing great, still might be positive, but it's going to be a little bit slower. And if you're sort of teetering on the edge, it might go into a correction.

15:29Yeah, I don't disagree with anything you just said. I think that is the general trend. I know people kind of question how accurate a lot of Zillow forecasts are, but their home price heat index, if you will, has seen the overall numbers go from a strong seller's market a couple of years ago to a neutral market today. And it looks like it's trending pretty much toward a buyer's market nationally as we move into the coming months and maybe the next year or two. And I think, you know, you have a buyer's market that tends to be characterized by home prices that are flat or falling, more inventory than there is demand in longer days on market.

16:10And, you know, I probably just described the Denver market to you and maybe Seattle as well. So certainly seeing that in Texas and Florida right now, and those markets have other exacerbating conditions in Florida. Not unusual to see somebody paying more annually for their home insurance than they're paying on their mortgage. Texas, we've seen property taxes skyrocket. So there are other factors that are making it difficult for home sales and home prices to accelerate. Absolutely. Well, I think this is good advice for our audience to heed here is just expect things to cool off generally around moving from a seller's market to a buyer's market.

16:49agreed. A lot of people are skeptical about Zillow. They've actually been fairly accurate the last year or two, just calling that out. But I do think, look at a lot of different sources of data, and all of them are showing the same trend. Some of them might be showing year over year remaining positive, negative, flat, but all of them are showing a softening. So everything is just getting weaker might not be the right word. And maybe even more balanced is potentially a better word. And it might go past balance to a buyer's market, but we're sort of in this shift right now. And I don't know if I can name a single data source that's showing a different trend.

17:24Do you know of any? Yeah. Yeah. So it's kind of everyone. All right. Well, that's a great summary of the housing market. I want to turn to some of the work you're doing, Rick, your company, CJ Patrick, talking about the role investors are playing in the housing market right now. But we got to take a quick break. We'll be right back. Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend. A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity.

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20:30Welcome back to On the Market. I'm here with Rick Sharga from CJ Patrick, and we are shifting our conversation from a discussion of just what is going on in the housing market to talking about the role investors are playing in the single family market today. Rick, tell us a little bit about your research. Yeah, I recently did some research with a company called Batch Data, where we took a look at investor activity in the residential market. And a couple interesting, at least from my perspective, notes that came out of that. First, investors collectively own about 20 % of the single family properties across the country.

21:06And that's basically anything that on the deed is recorded as a single family house. So it's probably a little bit limiting in terms of the scope, but 20%. And if you look at purchase activity in the first quarter, about 26 % of all home purchases were made by investors. So it's a huge and very significant part of the overall market. And to a certain extent, it's probably providing a lot of necessary liquidity to the housing market because one of the things that's just underneath the surface of that data is that it's not a question of investor activity kind of skyrocketing over the last couple of years.

21:48The percentage increase is really driven by a subsequent drop in the number of consumers that are buying houses. Right. So the absolute number is not moving that, right? Yeah, it's up about 9 % year over year. Oh, total volume is up. But still, the number is sort of inflated a little bit by the lack of traditional homeowners coming into the market. And by the way, before anybody jumps on that, it's not that investors are pricing out or competing with potential homebuyers. There's just not the demand that we would normally see because of the affordability issues we talked about earlier. And the other thing that was very telling and actually kind of confirmed some of the things I believed and things you and I have talked about over the years is for all the press and all the government attention that the institutional investors are getting, the overwhelming majority of investor purchases and investor-owned properties are by small investors.

22:4990 % of the single family homes that are owned by investors are held by investors who own fewer than 10 properties. It's wild. The institutions collectively, in our study, own about 2.2 % of all the homes in that category of investor-owned homes. And they've been net sellers for the last five quarters consecutively. So the biggest institutions have actually sold off about twice as many homes as they've purchased over the last five quarters. So all the kerfuffle about Wall Street gobbling up Main Street, the numbers just don't support it at all. Yeah, that's super interesting. I have a lot to dig in there, but I just want to – do you know John Burns and his company?

23:30Yeah. So he was on the show. It was a year or two ago. But he said the 600-pound gorilla in the room of the single-family homes is not institutional investors. It's the BiggerPockets audience, which I honestly had never really thought about. But it's true. You know, there's this stat what 90 % of all rental properties are owned by people with 10 units or fewer. According to Rick's study, that's only expanding, right? The share of investors who own rental properties is going more towards mom and pop, smaller investors than it is to institutional investors. That is not what the media shows, but that's just the case.

24:09And honestly, I believe personally that having rental properties are an important part of society and our housing mix that we have in the United States. And like, I think it's a good thing that small local investors are the ones who are buying it over institutional investors. Because personally, I know that I care a lot about my tenants and the way I run my business. And I'd like to think that I'm sure there are still bad landlords out there, but that I'd like to think that small businesses are going to be taking care of their tenants and thinking more holistically about it than these large institutions that have like 20 different businesses that they're running and adding it to some massive portfolio.

24:44But that's just my take. No, I think you're right. I think for a small investor, you're dealing with an actual tenant. Whereas if you're an institution, you're probably looking at a line item on your spreadsheet. And you do have to maintain profitability and positive cashflow over time. But it's a different kind of relationship between landlord and tenant in that case. The other thing, by the way, that we're seeing, And I think this actually is one of the reasons we're seeing net sell-offs by the larger institutions, is a lot of the money that they would have been spending on buying individual properties, they've now diverted into build-to-rent projects.

25:23So they're working with builders and building entire communities of single-family properties to rent out. And that's actually adding inventory to the market and certainly not competing with traditional homebuyers. So you made a really, really important point, Dave, in that rental properties are a critical part of our housing ecosystem right now. One of the realities is as affordability has become worse over the last few years, people still need somewhere to live. So if they can't afford to buy a house, it stands to reason they're going to want to rent something. And a lot of these folks have growing families, would probably prefer to rent a house rather than an apartment.