Apr242017

Will investor sales limit future home price appreciation?

At some point, the investors who bought distressed properties from 2009 through 2014 will want to liquidate their holdings. Will those sales provide additional overhead supply that will slow home price appreciation?

In a normal and healthy real estate market, owner occupants dominate sales. These owners accumulate equity through paying down a mortgage and home price appreciation, and they execute move-up trades seven to ten years after they buy their starter homes. Unfortunately, that isn’t the market we had from 2006 through 2014.

For several years owner occupant sales were stuck in a holding pattern at 1990s levels. Orange County home resale volumes were very weak by historic norms, and the only increase in sales volumes from 2012 through 2014 came entirely from investors. Unlike owner occupants, investors don’t accumulate equity for a move-up purchase. Most hold the property for a while, collect some rent, and sell when they feel they need the money for something else.

Ordinarily, investor purchases represent a small fraction of the total market, and they disperse over time. During the bust and early recovery, investor sales were a high fraction of total sales, and they were concentrated in time.

Most of the investors who purchased after the bust were very different from the over-leveraged speculators who bought during the housing bubble. Many paid cash for their investments, and the remainder put at least 20% down. Most were cashflow positive, so they feel little or no pressure to sell. However, many of them planned an exit strategy, and particularly with the hedge funds, many will sell these investments over the next several years.

A concentration of sales overhanging the market may limit future appreciation. As with cloud inventory of distressed sellers, most investors are withholding their properties from the market until prices reach some higher value, and they will hold out until prices get there before they sell. For the market to push prices higher, many new buyers will need to step up to absorb the cloud inventory of distressed sellers and the investor inventory waiting in the wings.

Right now many potential move-up buyers lack the equity to buy the home they want, so current MLS inventory is quite low. With investors also keeping their homes off the market, there is no respite from the depleted inventory problems we face today. With supply so low, it seems unlikely that the next generation of move-up sellers and property investors will find themselves competing with each other to sell later on. It could happen, but it wouldn’t happen suddenly, and many people would change their plans if this became a problem.

Some people have speculated that investors will panic and sell in a stampede that causes prices to crash. While that was true for over-leveraged speculators, that’s not what all-cash buyers will do. Most will wait patiently for prices to rise before they sell. They may form a ceiling but not an anchor.

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