Decreased Investor Activity Helps First-Time Homeowners

A steady decline within the housing sector saw property values plummet to near-record lows. Underwater homes became rampant, as houses across the United States were significantly void of equity. With nowhere to turn, distressed homeowners were forced to seek the assistance of savvy investors. Promises of quick and profitable cash transactions promoted the purchase of homes across the United States by investors of every level. However, with increased investor activity, first-time homebuyers were subjected to an incredibly competitive market. Investor purchases made it all but impossible for prospective buyers to participate.

With the progression of the market, and encouraging signs of recovery, investor activity appears to be fading. Cheap homes in distressed regions are less readily available than they were a few months ago. The disinterest exhibited by investors may help to cool surging home prices and bring first-time homebuyers to the forefront of house hunting.

“Investors helped stabilize a housing market that was in free-fall and they did so by taking advantage of fire-sale home prices,” said Michael Feroli, chief U.S. economist at JP Morgan Chase & Co. “Now you see few fewer bargain prices in the market and that’s a reason investor demand is coming off its peak.”

In the month of June, 20 percent of home purchases on a national level were attributed to investors. Investor activity is now lower, as they accounted for 23 percent of all homes in February. Of particular interest, however, is a recent survey released by ORC International. According to the global market research company, about 48 percent of investors surveyed planned to curtail home purchases over the next year. Values are simply being removed from the market at a pace they can’t keep up with. Those that were left required an alternative exit strategy, due largely in part to their bottom line.

Once the housing sector bottomed out, hedge funds and private equity firms began focusing on foreclosures. Funds were allocated to these distressed properties in an effort to rent them out for several years. Subsequently, once profits have been recouped, hedge funds will sell them from increased market value.

Their pursuit of distressed properties served to remove a substantial amount of inventory from the market, driving up home prices. Investor activity generated a myriad of bidding wars over the slim inventory, making it difficult for first-time buyers to make a purchase. Cash incentives often trumped prospective homeowners.

But with mortgage rates rising in anticipation of the Federal Reserves scaling back the generous stimulus to the economy it introduced during the financial crisis of 2007-2009, investors are pulling back. A distinct lack of investor activity has prompted new homeowners to participate in the market.