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Sunday, April 21, 2013

Housing: Some thoughts on Investor Buying, Inventory and recent Price Increases

by Calculated Risk on 4/21/2013 01:26:00 PM

One of the key themes I've mentioned over the last year is the increase in conventional sales and the corresponding decline in distressed sales (Foreclosures and short sales). I've argued this increase in conventional sales is a sign of a healing market.

Tom Lawler has sent me some rough data that suggests much of the increase in conventional sales in California has been due to investor buying (mostly large institutional investors buying single family homes to rent).   As an example, reports are Blackstone has purchased 20,000 homes nationally and Colony Capital has purchased 7,000 homes. And there a number of other large players. There groups have continued to buy even as the number of foreclosures has declined.

Note: some of the smaller investor groups I've mentioned on this blog have stopped buying (they started buying at the low end in late 2008).  They say the numbers no longer make sense.

Historically single family rentals were a mom-and-pop venture, and these large institutional buyers are a significant change in the market. These buyers are one of the reason the current active inventory is so low (other reasons include "underwater" homeowners who can't sell, potential sellers unable to find a new home to buy, and a change in seller psychology "not wanting to sell at the bottom").

This investor buying is making it very difficult for first time buyers to find a home, and this is probably keeping some potential buyers as renters - and maybe pushing up some buyers to higher price points just to buy.  

In the short run (the next few years), I don't think these institutional buyers will have a negative impact on the market.  It seems unlikely they will be large sellers, and they will probably maintain the homes that they purchase.  However this could impact the housing market in the future, especially the move-up market, since the move-up market usually needs previous first-time buyers to sell their first homes. Obviously institutional sellers will not be move-up buyers.

The impacts of this investor buying are something to consider.  Below is some comments and data from Tom Lawler.  He makes a couple of key points: 1) owner occupied buying is actually down a little in California, and 2) it appears the investors are moving up to higher price points.

The following is from economist Tom Lawler:

Dataquick [released estimates for all-cash and absentee buyer shares] for the Southern California area and the Bay Area, which are shown on the [below], along with the foreclosure and short sales shares for each area, as well as the median sales price for all-cash transactions and absentee buyer transactions.

There are a few interesting things to note: first, while the foreclosure share of resales was down sharply from last March to this March, and last month’s short-sales share was down from a year ago, both areas saw an increase in both the all-cash share of sales and in the “absentee” buyer share of sales. This confirms anecdotal reports that “investors,” rather than curtailing purchases because of declines in “distressed” properties for sale, have increasingly been purchasing non-foreclosure properties, and possibly even non-distressed properties. Second, the median sales price for homes sold to “all-cash” buyers and to “absentee” buyers – and, of course, there is a lot of overlap in these two – increased by a lot more than the overall median sales price in both areas, also shown on the next page.

Dataquick Estimates, California Home Sales
 All-Cash ShareAbsentee Buyer Share
Bay Area31.1%29.4%27.3%24.2%
 Median Sales Price, All-Cash ShareMedian Sales Price, Absentee Buyer Share
SoCal$280,750 $215,000 $274,000 $212,000
Bay Area$325,000 $250,000 $324,000 $250,000
 Foreclosure ShareShort Sales Share
Bay Area10.7%25.5%19.0%23.8%

Median Prices1SoCalBay Area
 13-Mar12-Mar% Chg13-Mar12-Mar% Chg
All Transactions$345,500 $280,000 23.4%$436,000 $358,000 21.8%
All-Cash$280,750 $215,000 30.6%$325,000 $250,000 30.0%
Absentee Buyer$274,000 $212,000 29.2%$324,000 $250,000 29.6%
1 CR Note: Median prices are distorted by the mix. For the overall market, it is better to use repeat sales indexes to estimate price changes, however Lawler is using this data to show investors are moving up to higher priced properties.

This confirms anecdotal reports that “investors” in California have been “moving up” the price points at which they purchase homes.

Finally, while the sharp drop in the “distressed” share of sales over the last year indicates that there was strong YOY growth in “non-distressed” sales, the increase in the absentee buyer share of sales indicates that sales last months to folks planning to occupy the home they were purchasing were down from a year ago in both areas.

New and Resale Home Sals, Socal and Bay Area
 13-Mar12-Mar% Chg.
Southern California
Owner Occupant14,28314,326-0.3%
Bay Area
Owner Occupant5,2805,854-9.8%

These data strongly suggest the investor buying – a lot of which was all-cash and a lot of which has or will become rental units (witness the sharp drop in home listings in California, suggesting that few of the investor purchases were for quick flipping) – has been a major driver of the housing and home price recovery in California.