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Investor participation in the housing market dropped sharply in July, establishing a two-month trend and showing a clear reversal of long-term growth in investor purchases of residential properties, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.

Rising Prices Are Driving Out Investors

Investor participation in the housing market dropped sharply in July, establishing a two-month trend and showing a clear reversal of 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.

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, according to HousingPulse survey respondents. “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.

The proportion of distressed properties in the housing market fell sharply to 42.2 pe rcent in July, from 45.1 percent in June and 46.1 percent in May, according to the HousingPulse Distressed Property Index (DPI). While investors often concentrate their purchases on distressed properties, 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 contrast to investors, current homeowners showed strong interest in buying homes, accounting for 43.5 percent of home purchases in July, up from 40.3 percent in May and 42.0 percent in June. Participation by first-time homebuyers was mostly flat. Use of cheap mortgage financing by current homeowners increased strongly during the months of June and July.

“Overall homebuyer demand and home price appreciation is being driven by historically low interest rates,” commented Thomas Popik, research director for Campbell Surveys. “But savvy investors are the canaries in the coal mine-they are warning that if rates rise, the high proportion of distressed properties could once again push home prices down.”

6 comments

  1. So the housing market is improving, but investors are leaving the market? Huh? If the current market is improving because of artificially low rates and artificial holding back of distressed inventory then that is nothing more than another bubble.

  2. Hi Jim:

    Thanks for your comment.

    Low foreclosure inventories are due to two factors: slow processing in some states and declining defaults. Certainly declining defaults are the leading cause recent inventory declines.

    Completed foreclosures were down in July by 16 percent versus a year ago, acording to CoreLogic data released yesterday. There were 58,000 completed foreclosures in the U.S. in July 2012 down from 69,000 in July 2011 and 62,000 in June 2012.

    Foreclosure processing cannot be the primary cause of this declnie since processing in most places is actually faster today than a year ago. Also, short sales, which today are nearly equal to foreclosures, are not affected by slow processing.

    Rather, the primary change affecting distress sale inventory is not “artificial” at all but the gradual decline in defaults. First mortgage default rates were at a five year low of 1.41 percent in July. Default rates on second mortgages increased slightly but still remained near their eight year low. Mortgage default rates have been steadily declining since 2009 when second mortgage default rates peaked at 4.66 percent in July of that year, followed several months later by first mortgage defaults which peaked at 5.67 percent in August of the same year.

    As I suggested in this article, and have written many times, the foreclosure market is undergoing fundamental changes that will result in a reduction of distress properties.

    Low mortgage rates certainly are not a primary cause of recent demand increases. Rates have been at record low levels for one to two years, and demand has not improved until lately.

    Finally, if there is any “artificial” factor impacting housing demand it is the difficulties qualified borrowers are having getting loans. Fewer than half of all applications are approved today, according to Ellie Mae.

    No, there is no bubble, not even a froth.

    Steve

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