Easy pickings from foreclosures may be gone, but investors continue to swarm over housing markets
Article originally posted on WSJ.com. Written by Joe Light.
During the housing bust, investors pounced on foreclosures and short sales—houses that sell for less than the amount owed on the mortgage—to use for cheap homes they could rent out or flip for a quick profit. Now, those easy pickings are gone, but the investors are still swarming over local housing markets, offering all-cash deals and creating headaches for the first-time home buyers who compete with them.Regan Austin, 25 years old, and her husband lost out on an Orlando, Fla., area home earlier this year to an all-cash buyer. “It was very disappointing. We had our heart set on that home,” said Ms. Austin. She and her husband, who are first-time home buyers, are still looking. “We never thought of the concept of having a cash buyer come in and take that out from under you.” During the housing bubble, investors, lured by easy mortgages, helped send home prices to record levels. In the crash that followed, investors appeared again, this time offering all-cash deals on thousands of bank-owned properties to sell or rent out.
Some economists and real-estate agents say the market is going through an uneasy transition. While the foreclosure starts rate is back down to where it was before the crisis, cash and investor buying in some cities remains far above historical levels. That creates difficulty for buyers of low-price homes because more buyers are competing for fewer properties. In October, 25% of home sales nationwide were to investors, down from a 32% peak in 2012, according to real-estate data firm CoreLogic, CLGX -1.66 % but still 8 percentage points greater than in 2000, before the housing boom and bust.
Meanwhile, the supply of homes for sale dwindled to 1.79 million in December, according to the National Association of Realtors, enough to last 3.9 months at the current sales pace and well below the six months considered a normal market. The problem has become acute for buyers focused on low-price properties. According to the NAR, between December 2014 and 2015 the number of homes for sale priced below $100,000 fell 11.1%, in part because of a decline in foreclosure sales.
“Home supply is diminishing but investor demand is not going away,” said NAR chief economist Lawrence Yun.
Many economists expect housing prices to cool over the coming year, and rather than try to flip homes for a profit, some investors say they are making a long-term bet on demand for rentals, which has boomed in many parts of the country. The U.S. Census Bureau last month said 7% of rental units were vacant in the fourth quarter, near the low for the last decade and down from the peak of 11.1% in 2009. The median asking rent was $850, up 11% in the past year.
Some housing advocates say they have mixed feelings about the strong investor demand.
“Low inventory is a problem and making sure first-time home buyers have a shot should be a priority. But on the other hand, we have a rental affordability crisis,” said Sarah Edelman, director of housing policy for the left-leaning Center for American Progress.
Investor Ken Weiner, a former financial-services executive who lives in Wantagh, N.Y., didn’t buy his first single-family rental property until November, but since then has closed with an investment partner on six homes and on another three on his own, including ones in South Carolina, Illinois and Georgia. He said he plans to close on at least another seven properties by mid-year. Mr. Weiner, who is buying homes sight unseen through investor startup Home Union, said he thinks demand for rentals among millennials and others delaying homeownership will make investing in single-family homes a fixture of the market. “I’m not counting on appreciation,” he said. “If that comes, that’s great. I’m looking for income.”
Some real-estate agents in cities that have seen their foreclosure crisis ease said investors have moved up from bank-owned properties and now are competing for traditional, low-price homes that normally would be fodder for first-time buyers. Lisa C. Ford, secretary for the Orlando Regional Realtor Association, said buyers there can expect to compete against at least one cash offer for any home priced below $300,000. In Orlando, 39% of sales in October were all-cash, according to the latest data available from CoreLogic, down 5.6 percentage points from a year earlier but 23 percentage points greater than in 2006. Miami and West Palm Beach, Fla., also have seen declines but about half of homes there still sell for cash.Don Ganguly, CEO of investor startup Home Union, has recently expanded the company’s business to facilitate investor purchases in markets such as Columbia, S.C., and Huntsville, Ala., which some investors think could have strong rental demand despite little price appreciation recently. Some investors through the site are buying newly constructed homes directly from home builders, he said.
In some cities still suffering from foreclosures, such as Newark, N.J., and New Orleans, cash purchases climbed in the past year through October, according to CoreLogic. Of the 100 largest metro areas, nearly all in the year through October saw the all-cash share of purchases fall, but only 10 have fewer all-cash sales than in 2006.
Daniel Brown, an investor who lives outside Los Angeles, met with real-estate agents in Kansas City, Chicago, Cleveland, Detroit, Pittsburgh and other cities looking for investment opportunities. He bought his first U.S. home in January 2015, and said he now owns about 60 homes with 75 units. “An average normal city goes through its ups and downs, but most people there need somewhere to live, and next year, they’ll still need somewhere to live,” said Mr. Brown.
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