Investors Lose Interest in the Housing Market

August 28, 2012 No Comments »
Investors Lose Interest in the Housing Market

Just when everything looked oh so good in housing, a new report has revealed that investors have already lost interest.

The latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey found that so-called “investor participation” in the housing market slipped to 21.9% of all transactions in July, down from 23.5% in June.

It hit a two-year high as recently as May, when investors scooped up more than a quarter (25.3%) of all transactions.

So why the sudden reversal? Well, survey respondents have pointed to higher home prices, which cut into investors’ profits.

After all, they work on tight margins, so if the pricing isn’t just right, it doesn’t make for a good investment.

Some respondents even noted that the “smart money” has left the housing market, and it’s now “dumb” investors stepping in.

That last comment came from a real estate agent in Arizona, where home prices have been on a tear in the past year.

In fact, recent home price appreciation has pushed negative equity levels there from 55.5% to 51.6% in just one quarter, according to a recent report from Zillow.

It’s great news for existing owners and those who recently purchased, but bad news for investors looking for a bargain.

Another agent in Florida said “rookie investors” were moving in and paying too much for properties, which sounds like another bubble all over again.

Existing Homeowners Still Pumped About Housing

While investor sentiment has shifted, existing homeowners still seem to be pretty amped about housing.

They accounted for 43.5% of home purchases in July, up from 42% in June and 40.3% in May.

Participation by first-time home buyers was flat month-to-month.

It’s likely that demand is being driven in part by the record low mortgage rates, which have made it very attractive to own versus rent in many parts of the country.

But Campbell Surveys research director Thomas Popik warned that a reversal in rates could lead to another flood of distressed properties, and a subsequent drop in home prices.

Of course, the distressed supply has been dropping as of late, with only a 42.2% share in July, down from 45.1% in June and 46.1% in May.

And in many hot markets across the country, inventory is so low that prospective homebuyers have no choice but to wait for properties to come to market.

Even if there are suitable properties, many are clouded by intense bidding wars, so it’s clear that swelling inventory isn’t a huge concern, at least for the moment.

Homeownership Rate Lowest in Nearly 50 Years

Meanwhile, the “real homeownership rate,” which is the percentage of households who own a home and are not 90 days or more behind on their mortgage, fell to the lowest point in nearly half a century, per a report from John Burns Real Estate Consulting.

The company said the Census Bureau’s 65.5% homeownership rate is grossly overstated, and the actual rate is closer to 62.1%.

Historically, this spread is just below 1%, as there are still distressed homeowners, even when things are golden.

Obviously it has widened considerably thanks to the ongoing mortgage crisis, but they believe housing will make a serious comeback.

Their survey of 20,000 “confirms that the American dream of homeownership is as strong as ever.”

Additionally, they have started to see foreclosed homeowners return as home buyers after the three-year waiting period required by most banks and mortgage lenders.

This is especially prevalent in parts of the country where the foreclosure process runs more smoothly, such as in Arizona and Texas.

So if you believe the homeownership rate will climb back over time, there will certainly be plenty of demand in coming years, and with that, ideally some decent home price appreciation for those who get in early.

Sure, it won’t happen overnight, but a good time to believe in housing is at a time when no one else does.

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