The Housing Market Is Waving a Red Flag

Third-party investors are making up an alarmingly high share of auction purchases, according to housing-data firm RealtyTrac

1468441458_m490992

An auctioneer speaks to potential bidders outside a home in Atlanta.

Photographer: Chris Rank/Bloomberg

Almost nine years after the housing-market bust helped trigger the most recent recession, RealtyTrac senior vice president Daren Blomquist sees the industry waving a red flag.

The same fervent speculation that abetted the housing bubble is showing up in the bloated share of foreclosures snapped up by third-party investors at auction — a record 31 percent in June, according to RealtyTrac data that starts in 2000.

Many of those third-party buyers are "mom and pop" investors with less experience, said Blomquist. At the same time, institutional investors, a subset of the third-party investors who purchase at least 10 properties a year, are ducking out of the market.

"It's somewhat counterintuitive — as the market gets better and there are fewer foreclosures available, demand for those good deals, those bargains in the market goes up," said Blomquist. "When you see this high percentage of the properties going to third-party investors, that is a sign that these speculators may be over-inflating the market."

The third-party investors are gaining a bigger share of a shrinking pie, as foreclosure auctions made up 8 percent of all home sales in June, the lowest since August 2006.

Meanwhile, institutional buyers made up about 38 percent of those investor purchases at foreclosure auctions in June, down from a steady trend of around 50 percent in the first five years of the expansion, the data show. They accounted for 2.5 percent of all home purchases in June, down from a peak of 9.8 percent in February 2013.

The same kind of decline in institutional buyers was a dramatic harbinger of the last downturn as more seasoned stakeholders headed for the sidelines.

"Their analytics are telling them it's not a good time to buy — that's definitely another red flag that they're pulling back at the same time as the less savvy investors are ramping up," he said.

And while investors at foreclosure auctions could rely on about a 40 percent discount from the previous sales price in the early years of the expansion, this year they're only garnering about a 30 percent markdown, Blomquist said.

"The pressure is building in the pressure cooker, and at some point that's going to need to be released," Blomquist said. There's a little time — "probably not in the next month or two but in the next couple of years," a downturn should set in, he said.

Overall, the housing market looks great so the latest data showing a rise in speculation by non-professional investors was an early warning signal, Blomquist said. "Real estate is cyclical — it's not this steady trend upward."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE