In Hot Housing Markets, Are Investors Fanning Flames?

Photograph by John Moore/Getty Images

Home prices are on fire, according to new data today from the S&P/Case-Shiller index. Home prices made the largest 12-month gain since April 2006, with prices up 10.9 percent from March 2012. The sharp gains have fanned fears that we might be seeing another bubble, so we thought we’d look at one facet of the market: the role investors are playing.

First, some broad context

In the big picture, first-time and existing homeowners drive the market and make up just under 80 percent of all sales. That leaves the remaining fifth of sales to investors, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. Tom Popik, research director for Campbell Surveys, says tight lending standards have contained first-time buyers to about 35 percent of the market, with the rest coming from existing homeowners.

Who are the investors?

Investors have long been mom-and-pop operations that buy and rent out a few homes at a time. That profile began started shifting over the past two years as Wall Street firms entered the game. Major institutional investors have been buying up foreclosures and other low-cost properties by the thousands, rehabbing them, and then renting them out to families that can’t buy homes.

What are they buying?

Investors have come to dominate the market for foreclosures that need repairs, making up about two-thirds of so-called damaged REO sales, Popik says. Regular buyers don’t compete much for those damaged REOs because they often don’t have the time, money, or interest to make major repairs. But everyone likes a deal, so regular buyers do compete with investors for foreclosures that don’t need major repairs. Investors make up only about a fifth of all purchases if the foreclosures are habitable and generally move-in ready. This means that when foreclosures in good shape, investors are more directly competing with homeowners. The same goes for short sales, for which investors now make up more than a third of all buyers.

Does that mean investors drive up prices for regular buyers?

Investors aren’t likely to participate in the bidding wars that are happening for the best properties in hot markets. “The investors tend to be frugal buyers,” says Popik. “They pay with cash and they bid low.” But just because investors often don’t compete directly with homeowners on individual properties, doesn’t mean investors don’t still broadly affect that market. “The investors take inventory out of the market, especially on the front end at foreclosure auctions,” he says. “That constricts the supply of property for owner-occupants, and then the owner-occupants bid against each other.”

Will investors keep being a force in the market?

According to the HousingPulse survey, foreclosures and short sales combined made up about 33 percent of the market in April, based on a three-month moving average, down sharply from 43.6 percent a year earlier. If those distressed sales become a declining share of the market, the impact of investors may wane over time.