Nov022013

Investors now 50% of the buyer market

The current housing market is now testing 50% investor participation levels on closed sales. Maybe soon the market will test 55% or 60% investor participation levels.  According to this article below, all cash sales are being classified as institutional investors because rarely owner occupied sales are done with all cash which some exception of course.  However, investor purchases are negating the affect of lower rates by increasing home prices.   Lower rates are helping the banks, loan modification programs, and local governments to collect tax revenues, but lower rates are not helping the first time home buyers.  In fact, the trade up home buyers are not doing much better.  Enter the cash investor.

Nearly 50% Of All Home Sales Now Cash, As Institutional Investor Activity Hits New High

Nearly half of all home purchases in the month of September were paid for in cold hard cash, as tight lending conditions continue edge out traditional buyers and investors continue to scoop up inventory.

All-cash deals accounted for 49% of sales across the U.S., according to a new report from RealtyTrac. That’s up from 40% in August and 30% in September of 2012.

I’m embarrassed to say I had a link that documented than normally cash sales were 10% to 15% of the market, but I can’t find it. In addition, those cash sales weren’t usually investors, they were homeowners that had sold their existing homes and then purchased a new principal residence using all cash.  When retirees move it’s usually an all cash sale.

“The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash,” says Daren Blomquist, vice president at RealtyTrac.

The Irvine, Calif.-based real estate site’s latest U.S. Residential & Foreclosure Sales Report shows that, nationwide, residential properties sold at an annualized pace of 5.67 million homes per year, up 2% from August and up 14% from a year ago. The numbers from Realtytrac, which tracks activity for both distressed and non-distressed transactions using recorded sales deeds and loan data across 38 states, come in higher than the 5.29 million annualized pace posited by the National Association of Realtors in its Monday existing-home sales report.

It’s the lack of supply that is allowing investors to gain a edge in the market place.   The  lack of supply is mainly due to the HAMP/HARP refinance program Irvine Renter detail yesterday.  The program suppresses supply and it allow sellers to be very selective when choosing a buyers.

While higher mortgage interest rates have caused some traditional consumers to shy away from purchases in recent months, cash-flush investors, from mom-and-pop landlords to Wall Street firms, have remained exceedingly active. In September institutional investors accounted for 14% of all sales, a new high since RealtyTrac began tracking this emerging demographic, defined as buyers who have acquired 10 or more properties over the past 12 months, in January 2011.

Institutional buyers, whose financing come from all reaches of Wall Street, have exploded onto the market in the past two and a half years, typically acquiring distressed inventory to rehab into income-producing single-family rentals.  Private equity firms, hedge funds, and Real Estate Investment Trusts have funneled an estimated $20 billion into the housing market over the past several years, acquiring upwards of 200,000 houses to rent out to the ever-growing legions of Americans who, for a variety of reasons, can’t or don’t want to take out a mortgage and buy a home themselves.

If higher mortgage rates are allowed to occur within the next 18 to 36 months this new rental business model with be tested.  Can it survive 6% mortgage rates over an extended period of time?  Can it survive if home values take a 20% drop in value?  We might get chance to see that happen because were a in highly volatile phase of the housing market.

Blackstone Group’s Invitation Homes is by far the largest landlord in this arena, having spent $7.5 billion on an estimated 40,000 houses over the past two years. Other companies like American Homes 4 Rent, American Residential Properties, and Silver Bay Realty TrustSBY -0.96% have snapped up thousands of homes and bundled them into public offerings as single-family rental REITs.  Still others, like Five Ten Capital, have accessed nine-figure credit facilities from Deutsche BankDB -1.67% with the longer term plan to securitize the debt. And according to Bloomberg , Deutsche Bank could begin marketing $500 million worth of bonds backed by Blackstone’s massive portfolio’s rental income as soon as this week.

Distressed transactions, comprised of homes in foreclosure or bank-owned, accounted for 25% of all sales last month, up from 18% a year ago. Nationwide the median price of a distressed sale was $112,000 — 41% below the $189,000 median price of a non-distressed property.

“Distressed sales remain persistently high, particularly short sales,” explains Blomquist. “Markets with the biggest increases in short sales tend to be those where either foreclosure starts or scheduled foreclosure auctions have rebounded in the last 18 months — translating into more motivated short sellers — or those with a still-high percentage of underwater homeowners with negative equity.”

The number of short sales are actually dropping, however will it change in 2014?  I think real life comparison is “How long can a homeowner tread water if their home never increases beyond 5% equity?   It’s worked for the last 5 years, but will it work 10 year or even 15 years? I don’t think these zero equity loanowners will live in their homes forever.  That was the point of Irvine Renter’s article.

Unsurprisingly those markets also log the highest rates of investor activity. Whereas hard hit western Sun Belt markets like Phoenix, Ariz. and Southern Calif. were hot spots in 2011 and 2012, institutional buyer activity has moved east, into the Midwest and into the Southeast. Metro areas like Atlanta (29%), St. Louis (25%), Jacksonville, Fla., (23%), Charlotte, N.C., (17%), Memphis, Tenn. (16%), Richmond, Va., (15%), and perhaps surprisingly, given both the low-barrier cost of construction and relatively strong economy of Texas,  Dallas (15%), and San Antonio  (15%). Another market that’s welcomed a second wave of investor interest is Las Vegas (27%), thanks to what Blomquist calls a “recent rebound” in foreclosure activity.

Of the metro areas touting populations of one million or more, eight have housing markets in which more than 50% of all sales transpire in cash. Distressed deals comprise at least one-third of monthly sales in all of these markets as well. Several, like Las Vegas (62%), Jacksonville (62%), Atlanta (54%), and Memphis (51%), can chalk up some of that cash flow to institutional buyers.

Others, like Miami, Fla., where a hefty 69% of deals are all-cash, can in part also thank foreign buyers. Miami’s market, despite the fact that its luxury inventory has been trading at record prices, is still working through a large foreclosure glut: 43% of sales in September there were distressed.

Orange County in the last 2 years seems to have that perfect combination of foreign and institutional investors.  And unlike the the last bubble where everyone was invited to the party, this housing bubble has been primarily restricted to those two groups.  Of course, this market didn’t occur naturally, the Federal Reserve lowered rates and then HARP and HAMP will strict supply (along with the mark to market accounting rule change).  How the present market will change is anyone guess, but it will change.
Mike