28 November 2011
Low home prices and strong demand for rental properties are causing a surge in investor buying, driving up the market share of homes purchased by investors.
According to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investor purchases hit 22.3 percent of closed transactions for the month of October, up from just 19.6 percent as recently as July. For the past three months, investor participation has exceeded 20 percent, continuing a long-term trend of increased investor interest in the housing market.
All-cash sales accounted for 29 percent of purchases in October, little changed from 30 percent in September and 29 percent in October 2010; investors make up the bulk of cash transactions.
The National Association of REALTORS® reported recently that its survey of REALTORS® found that investors purchased 18 percent of homes in October, compared with 19 percent in September and 19 percent in October 2010. First-time buyers accounted for 34 percent of transactions in October, up from 32 percent in September; they were 32 percent in October 2010.
A combination of low home prices and growing demand for rental units make purchasing damaged Real Estate Owned (REO), fixing up the properties, and then collecting monthly rents, an attractive financial play, the Campbell survey reported. In October, average prices for damaged REO hit $101,100, the lowest price recorded in two years. In contrast, home prices for non-distressed residential properties averaged $266,700 in October. Distressed homes – foreclosures and short sales typically sold at deep discounts – slipped to 28 percent of sales in October from 30 percent in September (17 percent were foreclosures and 11 percent were short sales); they were 34 percent in October 2010.
One factor pushing down average home prices overall is the high proportion of distressed properties found in today’s housing market. The total proportion of distressed home sales, as represented by the HousingPulse Distressed Property Index (DPI), rose a full 4 percentage points to 48.4 percent in October, up from to 44.4 percent in September.
Meanwhile, the gap between the supply of distressed properties and their absorption by first-time homebuyers widened to 13.7 percentage points in October, from a reading of 8.8 percentage points in September. This shows that first-time homebuyers have become less active in the distressed property housing market.
“However, in some areas we’re hearing about shortages of foreclosure inventory in the lower price ranges with multiple bidding on the more desirable properties,” says NAR Chief Economist Lawrence Yun. “REALTORS® in such areas are calling for a faster process of getting foreclosure inventory into the market because they have ready buyers. In addition, extending credit to responsible investors would help to absorb inventory at an even faster pace, which would go a long way toward restoring market balance.”
Demand for rental units remains strong. Campbell Surveys estimates that 61.6 percent of investor properties purchased during the month of October will be rented out, with the remainder being flipped.
“Investors are prominent in the city of Las Vegas. They both flip and rent and buy properties in bulk. Renting single family homes is an extremely viable option and seems to be a growing trend in the valley with the decreasing of prices. Our inventory is dropping so we are seeing more investors becoming aggressive with their offers,” reported a real estate agent from Nevada in the latest HousingPulse.
“Given the current conditions in the market here locally, many of the investors are purchasing homes to rent until the market turns around then possibly looking to sell in a few years. Yes, at this point renting homes is a better option than flipping because the gap between what an investor can buy a house, fix it and flip it does not cover the cost of re-selling it,” added an agent from California.