Home prices are on the rise, and the number of properties for sale continues to drop across the country – so buyers are moving as fast as they can to scoop up the limited inventory of homes, even if it means getting into a bidding war with other buyers.
That’s a good sign for the housing market, right?
Not necessarily, say some experts. While existing home sales are up, some experts are concerned over who is actually buying the properties! In many cities, you won’t find bargain-hunters or first-time homebuyers signing on the dotted line and getting the keys to new homes. Instead, the buyers are investment trusts, private equity firms, and other investors. In fact, armed with cash in hand, these investors are scooping up thousands of single-family homes around the country, renovating them, and renting them out. Then, when prices rise in the future, they'll sell them.
Because these investors can afford to make cash-only purchases, they don’t need a lender – meaning that they can skip the entire mortgage process. That speeds up the home buying process, and in the end, these investors are able to purchase the home before a “traditional” buyer even has the chance to apply for a mortgage! According to the National Association of Realtors, existing home sales across the nation rose 9.1% in January, compared to January 2012. However, anywhere from 10-50% of those homes (depending on which major metropolitan area you are looking at) were purchased by investors.
How do we know that?
Real estate research firm DataQuick compiled a list of 28 metropolitan areas around the country, and then counted the number of absentee purchases over the past 10 years in each city. An absentee purchase is where the property tax bill for the home is sent to a different address – exactly what would happen if an investor owned the home.
The result? In 23 of the 28 markets they analyzed, current investor activity is higher than the 10-year average.
In Los Angeles, 25% of the homes sold in 2012 were purchased by absentee buyers. In Miami, 42% of home purchases were absentee transactions. In Las Vegas, 51% of all purchases were made by out-of-town buyers. Absentee purchases don't necessarily prove that investors are buying the homes, especially in cities that are popular vacation-home markets. But even in cities you ordinarily see almost no second-home purchasers, there's a significant increase in absentee transactions. Cincinnati is a perfect example. Over the past 10 years, absentee buyers accounted for an average of 22% of home purchases. But in 2012, 35% of all homes were purchased by an absentee buyer. That's a significant increase!
So how does this affect the health of the housing market?
With investors buying thousands of homes, (in many cases, just days after they were listed on the market), the trend is driving inventory down even further. The limited supply of homes for sale is pushing prices up. Economists say that's creating false consumer confidence in the market's recovery. If investors stopped buying homes – or started selling their recent purchases (like the “flipping” trend of the mid-2000’s) – there would be far more homes on the market, and prices would stabilize. Plus, the same people who are trying to buy a home now – but are losing out to out-of-town investors – are being forced to rent. So, instead of building equity in their own home, they are struggling to pay sky-high rents, which makes it hard to save for future home ownership.
What does all of this mean?
If the investor trend doesn’t slow down, we could see a gloomy picture in a couple of years – with a glut of homes for sale because there aren’t enough financially-stable or qualified buyers to purchase them.
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