For some investors, real estate may have lost its rosy glow
Will investors continue to purchase residential real estate at a record pace, or will they return to the stock market, where analysts believe moderate gains are on the horizon?
If there is a wild card in the nation’s housing this year, it’s the investor market, according to housing analysts.
“We can’t find a period when the investor share of home sales has been higher than in the last year,” said David Berson, chief economist with mortgage company Fannie Mae, the largest player in the lending industry’s secondary market. “However, in the fourth quarter, it looked like investors were starting to step back. We just don’t know for certain how far that’s going to go.”
Nor do they have a handle on the number of cash transactions and tax-deferred exchanges investors have made. “We obviously track the mortgage activity and understand that overall share, but we don’t focus on how many homes are being purchased by investors without a mortgage,” Berson said. “That could be a more interesting part of the housing picture.”
Although some middle-class rental markets could feel the investor influence, high-priced home markets and condos likely will be the hardest hit by an anticipated slowdown in investment activity. That could be troublesome for markets such as San Diego, Miami, Las Vegas, Phoenix and Orlando, Fla., where investors buy nearly 30% of all homes sold. Nationwide, investor and second-home purchases total at least 20% of the market.
Berson and chief economists David Seiders of the National Assn. of Home Builders and Freddie Mac’s Frank Nothaft are predicting a dip in home sales this year. They say homes may become less affordable because of slightly higher interest rates and soaring home prices, plus the investor factor.
“We expect housing activity to drop about 8% this year. It’s primarily because of the investors’ slowing purchases,” Berson said. “And ... the condo market is slowing considerably. It’s no surprise because that’s the type of housing investors most favor; there is no lawn to mow and you don’t have to shovel the snow.”
The intriguing factor of the investor component is sales. When will they place properties on the market and why? Is it time to flip and run? Or, are more investors in a situation in which the market has softened, renters are difficult to find and the investor-owner has little equity in the property? Banking regulators have scrutinized low-down-payment mortgages for the last two years yet lenders have not significantly curtailed nontraditional financing plans for investors. The subject often fuels the argument over whether lenders have gone too far in extending credit.
“In some cases, they probably have,” Berson said. Although delinquencies and foreclosures have increased in low-employment regions such as Michigan, Indiana, Kentucky, Virginia and Ohio, Nothaft predicts that improved employment numbers nationally will diminish the prospect for delinquencies in prime markets -- specifically along both the East and West coasts.
Nothaft, who predicted homes would appreciate 7% this year, said: “We are expecting consumer loan delinquencies to be near the lows we experienced from 1999 to 2001. The exception has been in some FHA and sub-prime loans where the default rate has been as high as eight times that of prime loans.”
Berson, Seiders and Nothaft did not see anything on the horizon that would boost long-term mortgage interest rates. All three expected 30-year, fixed-rate loans to remain near the 6.5% to 6.75% range for the remainder of the year. (NAHB’s early forecast for 2007 has fixed-rate loans at 6.7%.) The exceptions would be any surprise spikes resulting from high oil and energy costs.
“This has been an incredibly resilient U.S. economy,” Seiders said, “and housing has been a significant piece of that.”
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