Investor-driven housing recovery poses danger
(MoneyWatch) Home prices are up, the number of properties on the market is down and buyers are moving fast to take advantage of deflated prices. So is the housing market finally returning to normal?
Not exactly. Many of those real estate buyers aren't your everyday bargain-hunters. They're Wall Street and international investors. While the fast money is boosting the housing market, it also poses risks in a key sector of the economy that is just getting back on its feet.
Data show that investment trusts, private equity firms and other institutional investors are purchasing thousands of single-family homes. The idea is to fix them up, rent them out and, when prices rise, sell them.
Although it's not the first time that financial firms have scooped up blocks of homes in anticipation of a rebound, it's hard to predict how this will affect the neighborhoods where firms are doing most of the buying. In the past, most single-family homes were built to order, purchased by the family that would live in them for years.
So what happens to the housing market when investors are doing the buying rather than owner occupants? And what happens to the neighborhoods in which this is occurring?
It's tough to pinpoint exactly how many homes are being purchased by investors rather than individual buyers. One of the best ways to do that is to look at absentee purchases, where the property tax bill is sent to a different address. These typically indicate an investor-purchased property, but there could be second-home buyers in the mix, particularly in popular vacation-home markets.
CBS MoneyWatch asked real estate research firm DataQuick to compile a list of 28 metropolitan areas around the U.S. and to count their absentee purchases over the past 10 years. The results highlight the surge in investor buying: In all but five markets, investor activity is up over the 10-year average.
Even at the peak of the bubble in 2005, only 11.5 percent of homes in Los Angeles were purchased by absentee buyers -- now 25 percent are. Over the past decade in Miami, only 33 percent of homes were purchased by absentee buyers, while in 2012 42 percent were absentee. In Las Vegas, a whopping 51 percent of purchases consisted of absentee transactions; while this is more typical in a vacation destination like Las Vegas, that total is still a full 10 percentage point higher than average.
Even in areas where you would ordinarily see almost no second-home purchasers, like Cincinnati, there's a significant increase in absentee buyers. The average number of absentee buyers in that Ohio market over the past 10 years accounted for 22 percent of all home purchases. In 2012, by contrast, 35 percent of all homes purchased were by an absentee buyer, likely investors looking to pick up a cheap piece of property. That's a huge jump.
No matter how you slice it, investors are taking up a bigger piece of the pie than they used to, helping to drive inventory down and push prices up. So what happens if they suddenly step out, as home prices get more expensive?
According to the National Association of Realtors, existing home sales rose 9.1 percent year-over-year in January. If investors exit the market altogether in areas where they account for 10 or 15 percent of sales, that would just about eliminate any of the substantial growth in home sales in those neighborhoods.
Without investors buying these properties, in other words, there would be more homes on the market and some possible price stabilization (since price increases are closely tied to limited inventory). The hope is that regular home buyers will have already stepped into the housing market by then.
According to Realtor.com president Errol Samuelson, these home buyers are coming to market, but they're having trouble finding properties because of the limited number of houses for sale.
"We're hearing anecdotally, when you talk to real estate agents on the ground, that they have buyers but they simply cannot find inventory for them," he said. "When something does come on, the time on market is short, [as few as] 27 days in some areas."
There is also increased interest in renting single-family homes, where Samuelson suspects that interest is sparked by people who want the lifestyle associated with a home, but cannot afford to buy one. They frequently don't have the kind of down payment or credit profile necessary, another casualty of tightened lending standards and the heavy debt that many consumers are still working off.
Some housing activists are crying foul over the investor-driven recovery in housing. Under this view, investors are taking away homes from people who otherwise would be able to buy an affordable property. Investment firms also act as a ready buyer for banks that opt for foreclosure and short sales over loan modifications that would keep homeowners in their homes.
Instead, these investors are setting up a new rental market, which could mean transience where there was once stability in neighborhoods across the country. Instead of people building equity in a home they secured at an inexpensive price, with some of the cheapest mortgage interest rates in history, these renters are pouring money back into the hands of investors while they struggle to purchase a home they can call their own.
If this is the case, the housing recovery as it appears today could be nothing more than a mirage.
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