Residential turnover – the share of owners or tenants who move each year – is driving real estate. When turnover decreases, the earning potential of agents and brokers also decreases.
In 2021, tenant turnover fell to 15.6% from 17.0% in 2019, the lowest in a decade. Owners’ turnover decreased less significantly to 7.0%, about the same level as in 2019.
Low turnover rates in 2021 are due to the moratoriums on evictions and foreclosures which prompted financially insolvent residents – who would otherwise have been forced to move – to stay put. However, the immense investor interest in real estate, along with historically low mortgage interest rates, managed to drive up the volume of home sales and inflate prices to record highs. So while real estate professionals suffered from a lack of interest or ability to compete with occupiers, their suffering was tempered by higher transaction costs in the competitive housing market in 2021.
While moratoriums are now a thing of the past, watch out that turnover continues to decline in 2022-2023. The 2023 recession is already painfully felt in the housing market, with sales volume and prices falling in the second half of 2022.
Homeowners who need to sell anytime over the next few years should list now before prices drop further. Although declining, current price levels will not be seen again for a few years recovery, to begin around 2026. For sellers who don’t need to sell for the next five years or more, they will simply hold out until prices return to current levels. On the other hand, today’s homebuyers are better off until prices have bottomed out, which is expected to happen here in California around 2025.
Chart updated 01/11/22
2021 | 2020 | 2019 | |
Owners’ turnover | 7.0% | 7.2% | 6.9% |
Tenant turnover | 15.6% | 17.7% | 17.0% |
Table of Contents
The importance of turnover
Without turnover, transactions don’t happen, homes don’t sell, and tenants stay put. In other words: no income for real estate professionals.
The number of people who leave their homes each year is indicative of both the will and aptitude owners and tenants to move. Turnover rates are highest when jobs are plentiful, wages are rising, starts are increasing and employee confidence in the economy is high.
But given the economy’s upward trajectory in 2021, along with rising home sales volume and soaring home prices, the 2021 sales decline is a bit of a deal breaker. head.
But there are two outliers that had an unprecedented impact on revenue in 2021:
- the foreclosure and eviction moratoriums which allowed financially insolvent landlords and tenants to stay housed during the pandemic; and
- a jump in property investmentwhich has propelled sales volume and prices into the stratosphere while reducing options for buyer-occupiers and renters.
Investors crowd out buyer-occupiers
As the economy remained on shaky ground during the pandemic and global events shook the global economy, investors shunned many of their go-to investment products in search of a refuge for their funds. This is why US Treasuries fell to historic lows in 2020 – even if the yield was low, a yield was at least certain, as it was backed by federal government security.
So, lacking other safe forms of investment – and seeing the potential for lucrative returns – investors have invested in real estate in 2020-2021.
Investor purchases accounted for 18.4% of U.S. home sales in the fourth quarter of 2021. That figure was up sharply from 12.6% a year earlier and the highest level since record-keeping began on investor purchases in 2000, according to Redfin, a national real estate agency.
Here in California, the investor share in Q4 2021 was:
Three out of four investors paid all in cash for the purchase of their home, making it nearly impossible for homebuyers dependent on mortgage financing to compete. Additionally, investors end up paying lower purchase amounts on homes than buyer-occupiers, according to RealtyTrac, reflecting the seller’s preference for an easy cash sale.
But when the presence of investors increases, it creates more problems for end users real estate – the bread and butter of a real estate professional’s livelihood. Regular buyer-occupiers find it impossible to compete with cash-rich investors who can close quickly and without surprises.
However, while investors are a legitimate concern of homebuyers who depend on mortgage financing, they can be a natural and even helpful force when the market is turning. For example, when prices fall during a recession, investors can provide much-needed support in the form of cash and liquidity, even in the face of reduced turnover.
Related article:
Investors watch for future interest rates
Investors save the day?
But there is a difference between regular absentee shoppers and speculators.
Absent buyers are any type of buyer who buys without the intention of occupying the house, including long-term investors and short-term investors who make major improvements to the house to sell it for a profit. However, speculators – sometimes called flippers – buy on the belief that prices will rise quickly and significantly enough to generate a profit through market momentum.
Fins contribute nothing, providing little or no improvement to the property while letting it rest vacant long enough for its value to increase.
When speculators rise beyond the point of stability, the market can become artificially inflated, with houses simply changing hands, completely removed from market principles. To some extent, that’s what happened in 2021, with historically low mortgage interest rates providing the extra fuel.
Now that prices are plummeting, investors are rapidly withdrawing from the real estate market. Once prices are low, speculators looking to take advantage of low prices and pent-up buyer demand will become more common, providing a bounce “dead cat” during the next drop in sales.
These speculators will help propel the market towards its next price boom, which is expected to kick off around 2026-2027.
Watch for the next sustainable development recovery to begin with the return of home buying end users, at which point sales will reach healthy levels. The additional and necessary factor of the considerable increase in residential construction will be felt and a more stable economic recovery from the recession of 2023 will begin.
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