Inflation worries fuel investor pessimism for near-term market outlook

How do real estate investors feel about the current prospects of the real estate market compared to how it’s been? Ask and you’ll likely hear one of two things: It’s either worse — or much worse.

That’s the biggest finding from the Winter 2021 RealtyTrac Investor Sentiment Survey, which found that about 32% of investors feel that conditions are “worse” than they were one year ago. Another 17% indicated that conditions are “much worse.” Thirty percent think that conditions have essentially stayed the same over the past year while 15% think conditions are “better” and 6% think they are “much better.”

The reasons investors cite for their pessimism are a familiar refrain. Some 63% of survey respondents pointed to the low availability of for-sale homes as the top challenge in residential real estate investing today, with surging home prices (60%) and increased material costs (15%) also high on investors’ lists of issues.

“Similar to our last two surveys, the problems of low inventory and rising home prices are those most often cited by individual investors across the country,” said Rick Sharga, executive vice president at RealtyTrac. “Together with supply chain disruptions, which have caused product shortages and increased material costs, it is not surprising that individual investors think that the market is not as healthy today as it was a year ago.”

Investor pessimism about the market extends to the near future. Forty-three percent of respondents in RealtyTrac’s study believe that the outlook for real estate investments will be about the same in the next six months, with another 31% indicating they believe it will get either worse or much worse.

The reasons for negativity moving forward include much of the same, with the short inventory (57%) and accelerating home prices (46%) top of mind. Increased building-material costs (35%) also are high on the list of obstacles while rising interest rates (34%) have come into prominence after being less of a perceived hindrance (14%) in the previous quarter.

One growing concern is the impact of inflation on the market. Thirty-nine percent of respondents think that higher inflation will push the costs of labor, materials and supplies even further upward, increasing the difficulty of earning an adequate profit from real estate assets. Additionally, 30% of respondents believe that more inflation will further drive mortgage rates upward, denting affordability and softening demand.

“A looming concern is that of inflation,” Sharga said. “About 88% of the investors surveyed were concerned about inflation having an impact on their business, whether that was due to higher material and labor costs, higher interest rates, or rising consumer prices that might weaken demand from potential homebuyers and renters.”


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