Investors and owner-occupants purchase fewer homes
Home sales volumes are down across all market segments. Investors and owner-occupants alike find prices far too high for their liking.
Home sales are down despite hopeful predictions from economists and financial reporters that the housing market had finally achieved “escape velocity.” The theory was that investors would cause the housing market to bottom, and owner-occupants, seeing less risk in purchasing a home, would step in and purchase homes once prices started rising. In the past, owner-occupant buyers often would purchase even when prices were rising briskly because they believed house prices couldn’t go down, so they needed to buy before prices became too high; plus, many wanted to make a fortune on appreciation. The housing bust changed all that.
Posted on February 18, 2014 by Madeline Schnapp
California single-family home and condominium sales fell 18.7 percent in January 2014 from December 2013, and were down 11.8 percent from a year ago. Taking a longer-term view, in the past 12 months (February 2013 through January 2014), sales are down 6.5 percent compared with the same 12-month period (February 2012 through January 2013) a year earlier.
To get a clearer picture of current real estate sales trends and to eliminate seasonal factors, we compare January 2014 property sales with January sales in prior years and divide sales into their distressed and non-distressed components. Non-distressed sales fell 18.9 percent in January 2014 from December 2013 but gained 18.2 percent year-over-year. Meanwhile, distressed property sales declined 17.8 percent for the month and were down 49.9 percent for the year.
Despite January’s sizeable falloff in distressed property sales, they still accounted for 25.0 percent of sales, which remains historically high. More importantly, distressed property sales as a percent of total sales remain much higher in counties away from the coastal areas. …
Sales are down because investors drove prices up so high that they no longer want more property. Unfortunately, owner-occupants aren’t excited about the higher prices either, and since the economy is not growing that robustly, there is no pressure on owner-occupants to buy before someone else does. Only the restriction of inventory is keeping prices afloat.
In January 2014, cash sales fell 11.1 percent from December 2013 and are down 21.2 percent in the past 12 months. The decline is cash sales mirrors the decline in total sales due to seasonal factors that typically depress sales this time of year. Despite the decline in sales volume, cash sales represented 26.1 percent of total sales, up 2.3 percentage points from 23.8 percent in December 2013.
Taking a longer-term view, cash sales as a percent of total sales oscillated between 28 percent and 31 percent from January 2012 through January 2013. They peaked at 33.0 percent in February 2013 and stayed below 25 percent from August through December. Despite recent declines, cash sales remain high from a historic perspective and are an important part of the real estate marketplace.
Cash sales as a percentage of all sales slips back down to historic norms; however, since all sales are down, all-cash sales are down as even more.
January 2014 flipping (reselling a property within six months) fell 19.8 percent in part due to seasonal factors that typically depress flipping this time of year. Flipping was down 15.3 percent from a year ago. Flips represented 5.2 percent of total sales in January 2014, up from 5.0 percent in December 2013.
Taking a longer-term view, in 2011, as housing prices trended sideways, flipping was basically flat, ranging from 2.5 percent of sales in January to 2.7 percent in December 2011. In 2012, flipping as a percent of sales began to increase, rising from 2.9 percent in January 2012 and peaking in February 2013 at 5.5 percent. Flipping retreated from February 2013 to June 2013, reaching an interim bottom of 4.1 percent of sales.
In January 2014, within the 26 largest California counties, flipping as a percent of sales was greatest in Contra Costa, Los Angeles, Orange, Sacramento, San Bernardino, San Diego, Santa Cruz and Stanislaus counties; Orange and Stanislaus counties were the highest at 8.2 and 7.6 percent of sales, respectively.
It shouldn’t be surprising that flipping took off as prices bottomed, and as prices began to rise quickly, flippers were buying everything they could. However, with plummeting sales volumes and stagnant prices, flipping becomes less profitable and thereby less popular.
Institutional Investor (LLC and LP) Activity
We approximate institutional investor activity by looking at purchases and sales made by limited liability corporations (LLC) and limited partnerships (LP). From our research all activity by hedge funds, real estate investment trusts and other entities that are pooling large sums of money to invest in residential real estate are doing so in one of these two business structures. While institutional investors represent the bulk of activity, there are some other entities, like relocation companies, that also use these business structures to buy and sell residential real estate. Their activity is included here as well.
Market Purchase Activity
Market purchases by LLCs and LPs posted steady gains from 2008 through 2011, accelerating rapidly in 2012 and reaching a peak in December 2012. Since then, LLC and LP market purchases have been trending lower and are now 52.1 percent below their December 2012 peak. Despite the longer-term decline, January 2014 purchases represented 4.4 percent of total sales up from 4.0 percent in December 2013.
The steady decline in LLC and LP market purchases is being driven primarily by the increase in purchase prices. As prices rise, the potential return on investment (ROI) for holding properties as rentals decreases, making homes less attractive to buy and hold investors.
The smart money stopped buying in early 2013; dumb money kept buying, and although cash sales are declining, many individuals are still buying investment properties.
Trustee Sale Purchase Activity
Purchases by institutional investors (LLCs or LPs) at the trustee sales (foreclosure sales) gained 0.8 percent for the month but are down 73.6 percent from a year ago.
The steady decline in LLC and LP trustee sale purchases is being driven by two factors; 1) the reduced number of trustee sales and 2) the reduction in return on investment (ROI) due to higher prices.
The trustee sale (foreclosure auction) market ceased to be a source of supply for hedge funds in mid-1012. These funds went from acquiring over half the total sales activity to just over 10%. Most hedge funds turned to the MLS, then in early 2013, they stopped buying entirely.
Market Sales Activity
Market sales by LLCs and LPs represented 6.0 percent of total sales in January 2014, up from 5.6 percent in December 2013 and up from 4.8 percent of total sales in July 2013. Despite this increase, total sales by institutional investors has been declining and we see no evidence that the major buyers over the last four years have begun to significantly reduce their accumulated inventory.
The decline in hedge fund purchases on the MLS is notable. Many mom-and-pop investors took their place, but sales volumes to investors declined overall. Unless owner-occupants get high-paying jobs and decide they want to pay near-peak prices, sales volumes will be lower in 2014, and the housing recovery will be in question.
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