An increasing number of local housing markets are shifting from being overvalued to having increased affordability and more purchase opportunities, according to real estate investors who buy distressed properties at auctions. This shift is resulting from home price corrections in some local markets that investors once considered overvalued. And these price corrections are leading to a slight shift in investor strategy — away from fix-and-flip transactions and toward renovate-and-rent projects.
These trends are evident in a March 2023 survey of nearly 450 Auction.com users from across the country. The vast majority of these buyers are local community developers who purchase fewer than 10 investment properties per year. Forty-two percent of the buyers surveyed described their local market as “overvalued with a correction possible.”
That was the most common answer among four possible market descriptions in the survey, but it was down from the 55% share of buyers who described their market that way in a 2022 Auction.com survey. Meanwhile, the percentage of buyers who described their local housing market as having “soft fundamentals with select opportunities” more than doubled, rising from only 11% in the 2022 survey to 24% this year.
Broken down by U.S. region, the survey data paints a more nuanced picture of where acquisition opportunities are beginning to emerge as the result of a home price correction already in progress in some overvalued markets. The West region had the highest percentage of buyers who characterized their local market as overvalued (51%), but that was down from the 63% share in the 2022 survey. A home price correction is already in full swing in some Western markets, particularly in coastal California.
Many neighborhood developers in the West expect this correction to continue in 2023. Forty-three percent of West region respondents said they expect flat or declining home prices in their local markets this year, the highest among any region and up from only 7% who expected flat or negative price growth in 2022. Nationwide, nearly one-third of local developers who bought via Auction.com were expecting flat or declining home prices in their local market in 2023. That was nearly double the 17% share from the prior year’s survey.
Continued home price declines in 2023 are likely to open up more purchase opportunities for local investors, which may explain why more respondents are describing their markets as having “select opportunities.” The West, which had the highest share of buyers who forecast price declines, also saw the largest increase in buyers who described their local market as having select opportunities.
Buyers had the most aggressive acquisition expectations for 2023 in the two regions with the highest expectations for price declines in 2023: the West and the Southeast. In both of these regions, 90% of buyers said they expect their investment property purchases to increase or remain the same in 2023, tied for the highest rate among the four regions.
The typical exit strategy for these distressed property acquisitions is also changing as a price correction becomes the expected reality for an increasing number of local community developers. Half of all buyers surveyed in 2023 said their primary exit strategy is to renovate and resell homes to owner-occupants, down from 61% in 2022. Meanwhile, 39% of auction buyers said that renovating and holding properties as rentals was their primary business strategy, up from 32% last year.
The percentage of buyers who report buy-and-hold as their primary strategy was highest in the Southeast (44%) and West (39%). These are also the two regions with the highest shares of buyers who anticipate home price declines in 2023. ●