Investors Buy Homes
At a Record Pace
Investors are buying homes at a record pace this year, adding fuel to an already heated housing market.
During the first four months of 2005, investors accounted for nearly one in 10 mortgages used to buy homes in the U.S., according to a new analysis by LoanPerformance, a unit of First American Corp. that tracks 46 million mortgages monthly and provides information to lenders and other industry participants. The investor share for the period, 9.86%, compares with 8.67% in 2004 and less than 6% in 2001.
The total number of mortgages used to buy investment properties might actually be higher, as these figures don't include mortgages used to buy second homes that might also provide rental income. LoanPerformance says the share of mortgages used to buy second homes has also hit record levels this year, climbing to 7.19% through the end of April from 6.05% in 2004 and just 2.18% in 2001.
Rising demand from investors has raised concerns that speculation may be playing an increasing role in driving home sales and home prices higher. Earlier this month, Federal Reserve Chairman Alan Greenspan told Congress that there were "signs of froth in some local markets where home prices seem to have risen to unsustainable levels" and that "speculative activity" may be a growing contributor. Existing-home sales hit their second-highest level on record in May, according to the National Association of Realtors.
The latest numbers "are proof positive that speculation is infecting an increasing number of markets across the country," says Mark Zandi, chief economist of Economy.com, an economic-forecasting firm in West Chester, Pa. The investor share "is the most fragile source of demand" in the housing market, he adds. "It has juiced things up and can quickly evaporate once conditions or psychology shifts."
Investor demand was strongest in Redding, Calif., accounting for 23.71% of mortgages used to buy homes, according to LoanPerformance. The investor share was also greater than 20% in four other metropolitan areas: Medford, Ore.; Pocatello, Idaho; Visalia, Calif.; and Punta Gorda, Fla. Other markets with a high concentration of investors include Fresno and Bakersfield, Calif., and Tallahassee and Panama City, Fla.
Other research suggests that investors and second-home buyers could be playing an even greater role. A study released by the National Association of Realtors in March found that 23% of homes purchased last year were for investment, while an additional 13% were vacation properties. Unlike the NAR data, the LoanPerformance figures only include properties financed with new mortgages. They don't include homes purchased with cash or financed by borrowers tapping equity in their primary residence.
The LoanPerformance data are "consistent with our survey," says NAR chief economist David Lereah. He says that many purchases are being made by baby boomers "in their peak earning years....who have created a lot of wealth in their primary residence and are using a great deal of that wealth to purchase a second home." Mr. Lereah adds that some housing markets have become "more vulnerable to price softening" because of a high level of speculative activity.
The demand from aging baby boomers is likely to remain strong, says John Tuccillo, a real-estate consultant and former NAR chief economist. But markets being driven by speculation are vulnerable to a correction, he adds.
"What you will see down the line is that speculators will find that their expectations are not fulfilled and they will bail out with little or nothing to show for their efforts," says Mr. Tuccillo. "That will have a mini-firesale effect on the market."
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