Rarely articulated publicly but high on the agenda for many traditional real estate folks is the question: How soon will it be before those foreclosures they converted into rentals flood back onto the market and reduce home prices?
It’s the elephant in the room that won’t go away in light of inventory shortages, double digit price increases and record new home construction.
While one camp dreads the prospect of millions of mom-and-pop investors simultaneously booting their tenants and listing their SFR with their favorite Realtors, another group applauds the idea. Here’s a passage from the State of the Nation’s Housing 2013, an annual report by the Joint Center for Housing Studies at Harvard that was published Wednesday.
A key issue for markets where investors have been most active relates to the longer-run impact on housing prices. For now, investors are earning returns from rents, but eventually they are likely to liquidate their real estate holdings when prices have recovered sufficiently. Over the past 12 months, prices of bottom-tier homes have already climbed sharply in several key metros including Atlanta (up 37 percent), Las Vegas (up 34 percent), and Phoenix (up 39 percent). If many investors were to decide to lock in their gains by selling, house prices in these areas could again weaken…
Since much of the increased demand for rental housing has been satisfied by the expanded supply of single-family rentals, future market adjustments may come from a return of these units to owner-occupancy.
The JCHS has a coined a term for the conversion of these properties from rental to ownership: tenure switching. Tenure switching is not as simple as it may appear. Most investors today, and probably yesterday as well, aren’t investing for appreciation and don’t want to just “lock in their gains” as the JCHS report suggests (See Repeat After Me: “Appreciation is a Loser”). They are in it for the cash flow in the form of rents, which over time will generate a much more attractive return on investment than selling after only a few years of renting.
A couple of months ago, when we were designing the MemphisInvest.com National Survey of Investors we decided it might be a good idea to ask investors themselves just what it is that they plan to do. Without introducing the thought that prices might continue to rise (In May, when we conducted the survey prices were accelerating at a record pace but have slowed down since).
We simply asked investors how long they intended to hold their properties before selling. Of the investors who own rentals, only 37.5 percent plan to sell in fewer than five years, only 10.4 percent would sell in less than one year after buying their investment property. Most of the investors in the survey were not professionals who make a living buying and managing rentals but “amateurs” who own just one or two properties. Some 65.8 percent own an investment property but have no plans to purchase more. Only 8.8 percent in of the investors in the survey sample make more than five purchases a year.
Yet it is these more active investors, coupled with the hedge funds, who are in a position to impact local housing markets the most should they choose to sell off large numbers of properties suddenly because they own the most. Yet if their goal is to realize profits based on appreciated value, they might shoot themselves in the foot by flooding local markets.
Reminds me of the fears following the Attorneys General agreement on Robogate last year. I was one of those raising alarms about floods of foreclosures being unleashed upon vulnerable local housing markets (Weather Report on the Foreclosure Storm). Last March I questioned Marc Fleming, chief economist at CoreLogic, about it. Don’t worry he said. Lenders would not do that, it would be against their interests to lower prices for their foreclosures. He was right. I was wrong.
Likewise it makes no sense for investors, large or small, to sell off profitable rentals into a market where everyone else is doing the same thing.
Time to tell the elephant in the room to return to the zoo.
Photo: Murilo Morais