Investor participation in the housing market dropped sharply In July for the second straight month, reversing long-term growth in investor purchases of residential properties, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Investor participation in the housing market fell to 21.9 percent of all transactions in July, from 23.5 percent in June, based on a three-month moving average. Investor participation back in May of this year hit a two-year peak of 25.3 percent of all transactions, according to the survey of real estate agents.
The Campbell survey is not the only source reporting a drop in investor activity. NAR’s monthly Realtor Confidence Survey , also a survey of real estate agents and brokers, reported last week that investors accounted for 16 percent of total residential sales in July, down from 19 percent in June. Investor market share was as high as 23 percent in February.
Real estate agents responding to the HousingPulse survey indicated that recent price increases caused the sharp reversal in investor interest. “Investors are dropping out due to the increase in prices,” reported an agent in California. “Prices are too high here for investors,” added an agent in Massachusetts.
“Smart money” is beginning to leave from the market, said another. “Investors are having a hard time finding what they want. Starting to see ‘dumb’ investors enter the market, the ‘smart’ ones are exiting the buying,” reported an agent from Arizona. “Investors need a deal. There are not as many opportunities as there was this time last year. It seems all the rookie investors are buying now and paying too much,” observed an agent in Florida.
Prices are having an impact, but that’s not whole story (See Rising REO Prices Are Squeezing Investor Margins). Appreciating values make investing more attractive, not less. Two other related factors are the real culprits: shrinking distress sales inventories and shrinking discounts.
Completed foreclosures were down again in July, this time by 16 percent versus a year ago, as servicers increasingly rely on alternatives to the foreclosure process, such as short sales and modifications,” said Mark Fleming, chief economist for CoreLogic, yesterday. “Completed foreclosures remain concentrated in five states, California, Florida, Michigan, Texas and Georgia, accounting for 48 percent of all completed foreclosures nationwide in July.”
Pre-foreclosure short sales increased 25 percent to a three-year high in the first quarter of 2012 while listings of foreclosed properties have fallen in 17 of the last 19 months through July, according to research firm Zelman & Associates. REO listings are down 47 percent from their October 2009 peak and by 23 percent from one year ago. Banks are selling more homes to at courthouse trustee sales, rather than taking them back themselves. (See Short Sales Cast a Long Shadow).
Though short sales are up and foreclosures are down, distress sales as a category are at multi-year lows. The proportion of distressed properties in the housing market fell sharply to 42.2 percent in July, from 45.1 percent in June and 46.1 percent in May, according to HousingPulse.
The decline in investor purchases was also apparent in the non-distressed market. Investors bought 14.4 percent of non-distressed properties in May, but only 11.5 percent in July–a precipitous two-month decline. In other words, rising prices and fewer distress sales are not the only factors making life difficult for investors. The real culprit is the dramatic decline in discounts between short sales, foreclosures and “normal” sales.
As markets across the nation stabilize and demand for fewer numbers of distress sales increases, discounts for both foreclosures and short sales have continued to shrink during the spring and summer months, after the end of the traditional buying season when demand normally slackens. Call it the “summer squeeze.”
Foreclosures have been selling a median discount of 17 percent as of July and short sales have been selling at approximately 15 percent below market, according to the NAR survey of Realtors. Compare that to an average discount of 22 percent for short sales and 25 percent for foreclosures in April, according to Lender Processing Services. Compare that to the fourth quarter of 2010 when foreclosures sold at an average discount of nearly 37 percent and 10 states posted foreclosure discounts of more than 35 percent, according to RealtyTrac. The good old days?
The summer discount squeeze caused by declining supply and healthy demand from both investors and first-time buyers may in fact be a sign of times to come. In the bigger picture, the distressed portion of the market will continue diminish because the number of seriously delinquent mortgages has been falling for the past two years. A shrinking supply will guarantee lower discounts for all but the most damaged properties.
However, life is never quite so simple. Foreclosure and short sale inventories vary more and more by region, state and market. State laws, especially judicial states and states with laws extending processing times, problematic local economies and other factors create widely differing supplies of foreclosures. It’s virtually certain, for example, that supplies of foreclosures will linger for years in states with the slowest processing times. Though the rules are changing, smart investors will adapt by digging out deals in local markets that others miss.
Photo: Juli CrockettHow The Summer Squeeze is Changing Investing by Steve Cook