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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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October 19, 2012


Investor Participation in the Home-Buying Market

What is the investor share of the home-buying market, and in what direction is the trend moving? We have been asking ourselves this question for the past few months, because the answer can help to inform what type of housing recovery we are seeing. Is it being driven by owner occupants or investors?

If it is being driven by investors, does this signal an emerging aversion to homeownership? Or, instead, does this simply signal that owner occupants are unable access mortgage finance and that, for now, owner occupants will be unable to maintain the share of market they once held? If we see that the owner occupant share is increasing, this observation could offer some support that the housing recovery has legs. The conclusion that the investor share is increasing, then, may suggest that we will see home sales activity fall off once prices rise to the point that it no longer makes sense for investors to continue buying.

To help us pinpoint the share and trend in the investor participation in the home-buying market, we polled our real estate business contacts to get a better sense for our regional portrait of investor market share. When asked to describe the distribution of home buyers in their market, our business contacts from the Southeast (excluding Florida) noted that one-fifth of home sales, on average, were to investors. Once we added Florida into our tally of Southeast contacts, just over one-fourth of sales, on average, were to investors.

121019_tbl1


Since this was the first time we posed this question to our business contacts, we lacked information on the directional trend. To address this information gap, we asked our business contacts how sales to investors had changed between the second and third quarters of 2012. More than half reported no change or a slight decline in home sales to investors, unless you include the Florida observations. A closer look at Florida reveals that nearly two-thirds of our business contacts reported that sales to investors in Florida have increased over the past quarter. The investor dynamic in Florida all seems to add up, especially given the strong demand from international buyers and cash investors in South Florida. This dynamic was discussed in the latest issue of EconSouth.


We thought it would also be informative to ask our business contacts about their expectations for future investor home buying activity. For the Southeast less Florida, more than half of our business contacts indicated that they did not expect there to be much change in investor market share over the next year. For Florida, more than half of the business contacts continued to indicate that they expected share of sales to investors to increase.


While the intelligence gathered from our business contacts aligns nicely with external data sources, we still had a few concerns that made us question the directional trend of these data.

The first source of concern is two-fold. First, brokers serve as a key input to our business contact poll and others like it. In and of itself, this is not a big deal because brokers are valued business contacts that provide us with a frequent and timely pulse on changing conditions in local real estate markets. What is slightly problematic is that brokers often rely heavily on the Multiple Listing Service (MLS), which brings me to my second point. We have also been hearing through business contacts (and this is echoed in the media here) that the composition of the investor pool has shifted from primarily smaller mom/pop-type investors to larger institutional investors that, more often than not, purchase properties at auction or directly from banks. Often, these sales take place before the properties get listed on MLS.

So, how involved are brokers in transactions that take place before MLS? Is this particular slice of investment activity being picked up by our sources? If not, how much do we really know about the share and directional trend of investor participation in the home buyer market?

Media coverage (here, for example) of these institutional investors often describes scenes at local auction in which institutional investors outbid smaller investors and have gone so far as to expand their presence and show up at auctions where properties at the fringe (in less desirable locations) are being sold. This piece of information, alone, leads me to believe that these larger investors have displaced smaller investors. Therefore, it would not necessarily be correct to think of properties acquired by institutional investors as something in addition to the properties purchased by smaller mom/pop investors. Instead, many of the mom/pop investors have been priced out of the market and replaced by institutional investors.

Another related concern involves the timing and strategy of these institutional investors. Why would institutional investors flood local real estate markets at the same time that inventory is tightening and home prices are beginning to stabilize and modestly increase in many markets? Wouldn't this squeeze their yields and make it less desirable for them to continue to ramp up their efforts?

To help provide some insight into the institutional investor, I created a table of information to provide a profile on a few institutional investors often cited by the press. It is important to mention that this table was not intended to be all-encompassing and that the source of information is entirely secondary.

121019_tbl2


What this table implies is that institutional investors ramped up activity earlier this year and have indeed concentrated their investment activity within a handful of markets that were hit hard by the housing downturn. Acquisition strategies for these larger investors focus on mostly low-priced, distressed properties.

This makes sense. The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale. However, data from CoreLogic indicates that the share of distressed sales is steadily declining over time. As the distressed sales share continues to shrink and home prices continue to rise, it stands to reason that investment activity will shrink (or continue to shrink).

It was recently noted that Och-Ziff Capital Management Group LLC, a large institutional investor (not outlined in the table above), announced that it intends to exit this line of business. Perhaps it is just a matter of time before other large investors follow suit.

Dave AltigBy Jessica Dill, a senior analyst in the Atlanta Fed’s Center for Real Estate Analytics

 


October 19, 2012 in Housing, Real Estate | Permalink

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Comments

Another approach to this general topic is to track sales vs. mortgage purchase applications. Sales to investors generally do not require a single property mortgage. Sales were much stronger than applications in 2011 and the first half of 2012. More recently applications have picked up. This is consistent with investors being more active last year and early this year. Owner occupants now seem to have become more dominant.

Posted by: Douglas Lee | October 22, 2012 at 01:24 PM

Hi Jessica. You are correct. The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: regulatory arbitrage | October 24, 2012 at 11:42 AM

Hi Jessica. I totally agree with you. the markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: adr arbitrage | November 06, 2012 at 02:52 PM

Jessica, this seems to be the case everywhere. Living in Panama there are a number of Americans who initially moved down here in the boom and had properties back home. Some of them have had to let those properties go, as even if they returned home, they would not be able to keep up the payments and the cost of living.

Posted by: Jeanne Smith | December 01, 2012 at 01:14 PM

Another one in agreement, downturn causes a lot of stress on the market all over the World. We just had our Auturm Statement here in the UK and there it was good for business bad for the individual.

Posted by: Dean K | December 06, 2012 at 03:27 AM

The housing market is different all over the World, but each Country has some dstressed areas more than others. Good article will return and read more. Thank you Jessica.

Posted by: Peter | December 07, 2012 at 08:57 AM

The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale.

Posted by: our website | January 25, 2013 at 09:02 AM

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