Written by Gavin Kakol, GEI Associate
With the recent uptick in home prices this year, the foreign share of investors searching for an American single-family home has declined. Meanwhile investment firms and hedge fund operations are purchasing thousands of foreclosed homes to rent now and sell later. The surge in demand for foreclosed homes has led to a shortage of sellers and for the first time in 14 months of year over year gains, pending home sales are down (1.4 percent).
According to the National Association of Realtors (NAR), the current national medium home price is $189,400, up 7.9 percent from a year ago. From May to June, first time home purchases fell slightly from 34 to 32 percent, while investor purchases increased from 17 to 19 percent. The Realtor Confidence index of buyers to sellers shows a disparity of 60 to 41, where 50 would indicate an equilibrium between supply and demand.
According to UC Berkeley professor Kenneth Rosen, there are dozens of investment funds buying up single family homes around the country. Blackstone Group is one such case; the firm has acquired 2,000 single-family homes valued at $300 million dollars over the last year. By acquiring these homes to rent and eventually resell, investors have significantly reduced the amount of existing homes on the market, thereby increasing home prices. In a weekly update by NAR chief economist Lawrence Yun:
We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors....Any bank-owned properties that have been held back in markets with inventory shortages should be released expeditiously to help meet market demand
Yun points that record low refinancing options have slowed the closing process; Additionally, banks have slowed their foreclosure sales to ensure proper paperwork is handled. These factors have kept supply significantly lower than in past months.
The majority of investment homes have been purchased with direct cash rather than financing, so paying interest has not been a factor to decrease profits. Many hedge fund home investments are returning as much as 10 percent annually. Goldman Sachs claims that housing investors may be able to earn 8 percent on investment.
A concern that arises with investor owned rental property is the potential neglect that could arise from inadequate maintenance. According to the 50 to 2 rule,half of a property's rent should go into general maintenance, while only 2 percent should be taken as profit. Fortunately, investors have been making large enough returns on investment to adequately provide the proper services necessary.
Harvard professor Matthew Desmond believes that another cause for concern may be a possible collusion between the investment firms that may lead to increased rents. Stephan Gandal from Fortune magazine is optimistic in his writing:
It's probably a little too early to condemn Wall Streeters as slumlords. And no matter how many houses they buy up, fixing rental rates in the huge housing market will be much harder than manipulating Libor
The second quarter International House Hunter Report conducted by Trulia showed a 10 percent drop in the share of searches made by foreign investors from a year earlier. International investors accounts for 5 percent of the U.S. housing sales. The reason behind the drop according to Jed Kolko, Trulia's Chief Economist:
Investors want to buy when prices are at their bottom, but they'll start to lose interest when prices rise 15 percent, as they have in Miami and Phoenix.
The Eurozone crisis and the depreciation of the Euro to the American dollar are additional factors that have affected foreign investment.
Contrary to the foreign buyer declining interest mentioned above for markets such as Phoenix, that metro has the tenth shortest mean time on the market in the U.S., according to a report from 24/7 Wall St. Wire. Of the ten quickest selling housing markets, nine are in the west and five are in California where the housing crisis was especially devastating.
However, other areas in the U.S. are not seeing as strong a housing market as others. GEI News reported a week ago that a New York Fed study found that almost half of the counties in the country were still seeing year-over-year price declines. In the same article observations by real estate expert Keith Jurow were mentioned. Jurow has found that in some markets where median sales prices appear to be stable or even improving the price per square foot for new sales is down significantly, sometimes by double digits over a year's time. Jurow has also done a detailed study in the metro New York area which reveals that 90% or more of seriously deliquent mortgages have not yet started foreclosure processes.
And in my own GEI News article last week (20 July 2012), in some areas of the country municipalities are finding the condition of neglect for some foreclosed and abandoned properties is such that the only option is demolition.
Leaving on an optimistic note, according to Stephan Gandal:
the best thing that could happen for the economy right now is probably for the overhang of foreclosed homes to disappear, even if it doesn't immediately lead to rising prices. So this might prove to be an instance where Wall Street ends up doing what it's supposed to do, allocate needed capital to an undervalued sector of the economy, helping everyone in the process.
That assumes, of course, that the resources are available to demolish and clear the properties that nobody wants.
- Pending Home Sales Slip in June, Remain above a year ago (Walter Molony, National Association of Realtors, 26 July 2012)
- Wall Street's Hottest Investment Idea: Your House (Stephan Gandal, CNN Money, 24 July 2012)
- International Sales Continue to Climb in US Market, Realtors Report (Leanne Jernigan, National Association of Realators, 11 June, 2012)
- Trulia Reports Cooling Foreign Interest in US Real Estate (Trulia, 24 July 2012)
- Real Estate Hedge Funds Buy Single Family Homes (Z, Investing Blog, 9 August 2011)
- 50 to 2 Rule for Real Estate Investing (Z, Investing Blog, 6 September 2010)
- American Cities Where Homes Sell Fastest (24/7 Wall St. Wire, 25 July 2012)
- NY Fed: Has Housing Market Bottomed? A Definite Maybe (GEI News, 18 July 2012)
- Rent, Demolish or Burn? What to do with Foreclosed Houses (Gavin Kakol, GEI News, 20 July 2012)