Investor buyers are back and help explain some of the resurgence in sales we have seen in many markets. Investor sales now constitute nearly 26 percent of total sales in the 53 markets where we track this statistic, which is higher than the peak of 24 percent in 2005-2006 and a considerable rise from just 21 percent in Q3 2008. Our data source misses a certain category of investor activity, so the actual percentage is higher than shown throughout the entire period, but we believe the recent trends are valid.
Our conversations with investors reveal that many are looking to rent the properties they buy, as opposed to flipping them as was common in the up-cycle, although there are flippers this time around as well. With the cost of homeownership falling to or even below rental parity in many markets, investors are increasingly able to make these investments cash flow positive by making a large downpayment.
With limited mortgage availability, investors are generally required to make large downpayments, so we are not concerned that this will cause future distress, as most investors will not be forced to sell under duress and the odds of the house being worth less than the mortgage are very low. If investors flood the market to take profits, then housing will have rebounded — so increasing investor activity is a positive scenario.
Investor activity varies greatly by market. To estimate the levels of investor activity, our data source calculates the percentage of home sales with different ZIP codes for the property and the owner’s mailing address for property tax statements. As such, second-home sales would be counted as investor sales, and not surprisingly, large second-home markets such as Naples, Fla., are ranked high in terms of investor sales percentage. We also found that markets with the greatest distress, such as California’s Central Valley, have seen the greatest rise in investor activity compared to one year ago.
Actual investor activity is probably even higher than our conservative modeling shows because some owners don’t change the property tax address, especially if property taxes are impounded by the lender. There was probably more impounding in 2005 than today because low downpayments were available, so the amount of unaccounted investor activity was probably higher in 2005 than today. Still, we are confident that the recent trend of growing investor buying is accurate.
Our grading system of the economy and the housing market is a "bell curve" model, with statistics at an all-time high receiving an "A," statistics near the long-term average receiving a "C," and the worst times ever receiving an "F." In this grading system, it is OK to be a "C" student.
Here is our current report card:
Economic Growth: D
While still extremely weak, there were some positive signs in terms of economic growth this month. The preliminary second-quarter GDP growth rate came in at -1 percent, which is a significant improvement from the -6.4 percent decline in the first quarter. The most recent headline unemployment rate increased to 9.7 percent. Employment losses worsened, with 6 million jobs lost (-4.4 percent) in the last 12 months. Mass layoff events — job cuts of more than 50 jobs — decreased from the previous month, but remain 41 percent higher than one year ago. The time it takes for people to find a new job is double the norm. Productivity was a positive this month, improving significantly to 6.4 percent growth year-over-year. The Core CPI (all items less food and energy) declined slightly to 1.5 percent, while the Full CPI fell to 2.1 percent in July. …CONTINUED
Leading Indicators: D+
The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index increased again, reaching 6.2 percent in July, and up from 4.3 percent in May. The index has been positive for the last three months, after holding a negative status for much of the last two years. Stocks continued to show improvement in August. Homebuilder stocks performed very well in August, and are down just 5 percent from one year ago. The price of crude oil increased in August to $71.06 per barrel and has trended upward since February.
This month, affordability improved slightly due to a drop in the median resale price and slightly lower mortgage rates, but affordability conditions are still not as good as at the beginning of the year. The housing-cost-to-income ratio decreased to 27 percent, and remains very attractive at a level that is well below the peak of 44 percent during this housing cycle. The median-home-price-to-income ratio also remains very attractive, currently equal to 3.3 and still below the historical average of 3.7. The 30-year fixed mortgage rate declined slightly in August and has fallen since a recent peak of 5.4 percent in June. Fixed-rate mortgages ended August at 5.14 percent. The Fed’s overnight lending target rate remains at a range of 0 percent to 0.25 percent, which is the lowest level on record. The share of adjustable-rate mortgage (ARM) applications increased to 5.4 percent in the last week of July, according to the Mortgage Bankers Association. However, the share of ARM applications remains extremely low when compared to peak levels above 35 percent of total loans in early 2005.
Consumer Behavior: D-
Consumer behavior was a mixed bag this month. The Consumer Confidence Index jumped in August to 54.1, following several months of decline. Since 97 is the long-term average, consumers’ confidence remains quite low. The Consumer Sentiment Index fell, while the Consumer Comfort Index remained flat from the previous month. The personal savings rate has fallen in the last two months after spiking at 6.9 percent in May. Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year (total U.S. net worth is $50.4 trillion in the first quarter of 2009).
Existing-Home Market: D
Prices and sales volumes have collapsed from the peak and appear to be nearing stabilization. The seasonally adjusted annual resale activity increased in July to 5.24 million homes, which is up 5 percent from one year ago, according to the National Association of Realtors (NAR). Our rolling 12-month count of resale sales activity has turned upward, which means that monthly sales activity is better than the same month one year earlier. The median resale home price declined in July to $178,300 from June’s uptick, according to NAR, and has fallen 15 percent from one year ago. In comparison, the Case-Shiller index, which tracks paired sales, fell 15 percent in the second quarter of 2009 compared to the second quarter of 2008. The supply of unsold homes was flat in July at 9.4 months of supply, which is still high in comparison to historical levels. The pending home sales volume increased from the previous month, and is up nearly 7 percent from one year ago.
New-Home Market: D
There was some positive news in the new-home market this month, as builder confidence improved and inventory continued to decline. The Housing Market Index rose to 18 this month, as builders put more confidence in sales activity for the next six months. Inventory levels continued to fall, with just 7.5 months of supply on the market. The seasonally adjusted new-home sales volume rose to 433,000 in July, although this statistic remains down from one year ago. The median new-home price remained essentially flat from the previous month at $210,100, but is down nearly 12 percent year-over-year, according to the Census Bureau. The median new-home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period.
Housing Supply: F
Total construction activity decreased this month, with the declines in the seasonally adjusted multifamily permits and starts outweighing the gains in the single-family volumes. Seasonally adjusted total permits fell to 560,000 and are down 39 percent year-over-year. Single-family permits increased to 458,000. Seasonally adjusted new-home construction starts fell to 581,000 and are down 38 percent year-over-year. Single-family starts increased to 490,000. Seasonally adjusted new-home completions fell to 802,000 and are down 26 percent year-over-year.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at firstname.lastname@example.org.
Copyright 2009 John Burns
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