Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Trust Issues With Housing Sector Momentum

Written by Than Merrill

Despite the progression of the housing sector, there are those who remain unenthused as to the direction it is headed. While many are encouraged by recent trends, others have to see more before they are convinced the market has turned around. It is important to note that Robert Shiller, one of the nation’s top housing economists, remains reluctant to accept the housing sector’s current position. The recent appreciation of home prices is simply not enough to convince him that the recovery has gained traction. According to Shiller, “We can’t trust momentum in the housing market anymore.”

Despite Shiller’s lack of confidence, it is easy to assume the market is currently experiencing sustainable momentum. Investors have made it a priority to acquire distressed properties and rehabilitate them into desirable houses, essentially facilitating more home sales. In all, investors have accounted for approximately 100,000 homes being flipped.

They bought homes in a limited number of markets, mostly in the West, and pushed prices dramatically higher in these regions, as competition for the properties increased. Now they are renting them and even selling bonds backed by the rental streams. By every account, the activity of investors has dramatically helped the U.S. housing market return from the depths of the recession.

While investors have played a pivotal role in the recovery, Shiller attributes his concern to their presence. According to Shiller, investors are unpredictable, as they will not hesitate to dump properties that do not contribute to their bottom line. This causes them to move on to other trades at a moment’s notice. “They’ve learned that there is short run momentum in housing,” said Shiller.

Numbers already suggest investors are moving on to new strategies. These individuals are considering alternative exit strategies, as homes have appreciated too much for investors to make an easy profit. Institutional investor purchases represented just 6.8 percent of all sales in October, according to a new report from RealtyTrac. That is a dramatic drop from 12.1 percent in September and is down from 9.7 percent a year ago.

While appreciation rates have crippled investor activity, regular homebuyers are finding it increasingly difficult to find a home that they can afford to live in. Houses are more expensive now than they were during the housing boom. The recent lack of affordability may be directly correlated to lending practices. With a distinct lack of easily obtainable credit, buyers now have to look to traditional, more expensive mortgages and higher down payments.

All-cash purchases facilitated the increase in prices, now up over 13 percent from a year ago, according to the latest S&P/Case-Shiller report. That surge is far higher than income and employment growth, and therefore priced regular buyers out.

Prospective homeowners are, therefore, decreasing their participation in the market. High prices, as expected have dramatically decreased homeownership rates. Of particular concern, however, is the decline of younger homeowners. Recent conditions have removed 15 percent of homeowners under the age of 35 from the market. Rentals, as a result, have become increasingly popular.

The recent surge in rental property popularity has forced investors to hold on to their properties. The profits from buy-and-hold properties are too generous in the current market. At the same time, however, they are purchasing fewer properties and returning less to the market.

So if investors really are moving out of the market and even getting ready to sell some of their homes, at far higher prices than they bought them, then housing could take yet another turn for the worse. There just is not enough regular consumer demand to make up the difference.

“I don’t see evidence that people think we are launching out on some great new era,” said Shiller of today’s homebuyer. “I don’t find that they’re as excited about the housing market as price increases would suggest.”