Families Blocked by Investors From Buying U.S. Homes

Home purchases by institutional buyers reached a record high in September and all-cash buyers accounted for almost half of sales as investors responded to rising demand from renters.  Institutional purchases accounted for 14 percent of sales, according to a report today from RealtyTrac. That was the highest share since the real estate data firm began in 2011 to track transactions by that group, which it defines as buyers of 10 or more homes a year. All-cash sales rose to 49 percent from 40 percent in August and 30 percent a year earlier, a sign that rising mortgage rates since May have kept some people out of the market and that smaller investors are stepping up purchases.  

“Both investors and traditional buyers are trying to snap up cheap homes before prices go higher, but the investors have the advantage of paying cash and not having to go through a convoluted mortgage process,” said Michael Hanson, a former Federal Reserve economist now working for Bank of America Corp. in New York. “People are being bid out of some markets because of investor demand.”

Wall Street’s influence on the residential real estate market is growing as the biggest investors, Blackstone Group LP and American Homes 4 Rent, have together bought about 60,000 homes across the country to benefit from low prices and rental demand from millions of former home owners who have lost properties through foreclosures.

The homeownership rate declined to 65 percent in the first half of this year from a peak of 69.2 percent in June 2004. The level is expected to stabilize at about 63 percent, adding more than 2 million households to the rental population, according to Morgan Stanley analyst Haendel St. Juste.

Pendulum Swings

Families are still able to live in single-family homes with a yard for their kids to play in, said Daren Blomquist, a RealtyTrac vice president. However, they’re sending their money to investor-landlords, rather than paying off a mortgage.

“The pendulum is swinging too far from the direction we saw during the run-up to the mortgage crisis,” Blomquist said in an interview. “Then, we tried to make everyone an owner. Now, we have people who have the income to pay a mortgage and have the desire to own a home who are stuck being renters.”

Blackstone has led hedge funds, private-equity firms and real estate investment trusts raising about $20 billion to purchase as many as 200,000 homes to rent after home prices plunged 35 percent from the 2006 peak.

Mortgage Rates

The ability of investors and cash buyers to outbid traditional home purchasers has grown after a spike in mortgages rates that began in May. The average fixed rate for a 30-year home loan jumped almost a percentage point to a two-year high of 4.58 percent in mid-October, according to data from Freddie Mac.

The average rate for a 30-year fixed mortgage dropped to 4.13 percent this week. It’s risen from 3.35 percent in May.

“There’s a tremendous pressure on inventory in the areas that are being dominated by investors,” said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage website. “People end up wanting to buy a home, but they can’t. All the homes have been converted into rentals.”

Daryl Dennis spends his days helping investors do that. A general contractor for Waypoint Homes, an Oakland, California-based real estate fund that buys more than 50 homes a month in the metro Atlanta market, Dennis oversees plumbers, painters and landscapers on about 20 single-family projects a month.

“The investors are ruling the market,” said Dennis, interviewed by phone while on the job at a project in Canton, Georgia, outside Atlanta. “The little guy can’t win if he’s up against a deep-pocket investor.”

Biggest Chance

The biggest chance for profit comes from buying bank-owned properties that often are sold in bulk, Dennis said. About 10 percent of September sales nationwide were properties that had been repossessed in foreclosures, according to the RealtyTrac report.

Las Vegas had the highest share of those sales, at 21 percent. In the California cities of Riverside and San Bernardino the share was 20 percent of the market, in Cleveland it was 19 percent and in Phoenix it was 18 percent, according to the report.

Atlanta was the top market for institutional investors, who accounted for 29 percent of all home purchases there in September, according to the RealtyTrac report. Las Vegas was second at 27 percent, followed by St. Louis at 25 percent, Jacksonville, Florida, at 23 percent, and Charlotte, North Carolina at 17 percent.

Flipping Houses

Adam Luesse is an investor in St. Louis who paid cash for five houses he turned into rentals. He also buys properties to renovate and resell at a profit, called flipping. He planned to list his latest flip, a two-bedroom home on the west side of the city, for sale today for $140,000.

“When financing became difficult, that pushed the entire lower tier of buyers into rentals,” Luesse said. “They either don’t have the down payment or they don’t have the credit score.”

Nationally, the median monthly rent was at an all-time high of $735 in the second quarter, according to U.S. government data. The rental vacancy rate, which measures the number of empty units, fell to 8.2 percent, the lowest since the first quarter of 2001.

The median price of a distressed residential property, meaning a property in foreclosure or a home already seized by a bank, was $112,000 in September, a discount of 41 percent from the $189,000 median price of a non-distressed property, according to the RealtyTrac report.

Foreclosed Properties

About 49 percent of homes were bought with cash, up from 40 percent in August and 30 percent a year earlier, the report said.

Investor demand for foreclosed homes has driven up prices at a pace not seen since the boom that ended in mid-2006. The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent in July from a year earlier, the biggest advance since February 2006.

While real estate values nationally are still 21 percent below their peak, investors’ mass purchases are helping push up values in cities hardest hit by the property crash, with a 27.5 percent surge in Las Vegas and gains of 18.5 percent in Atlanta in July from a year earlier.

“The housing market is tilting in favor of deep-pocket institutional investors, especially in cities that were hard-hit with foreclosures,” said RealtyTrac’s Blomquist “These guys will pay as much as they need to get a property and that’s squeezing out families looking for a home to live in.”

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Santa Barbara Real Estate Market-Still Robust!

The real estate market in the Santa Barbara area is still moving forward.  Comparing this October to last year’s, we had 52% more closed sales of single family residences and planned unit development units (all to be referred to as houses).   Looking at our year-to-date total, we have surpassed the number of sales every year in the past 11 years except 2004, which had just a few more sales than we have this year.

Our condos have also been flying off the shelf.  There were over 64% more sales this October than there were last October.  Overall, the number of condo sales is up about 45% over last year. 

Our year to date median price of $799,000 is basically the same as it was last year.  We are seeing the bulk of our sales occurring under this price, but we are still seeing high-end properties continue to sell.  Last year in October, only six properties closed escrow over $2,000,000 and none over $4,000,000.  This past month, we had eight properties close escrow between $2,000,000 and $4,000,000 and six properties over $4,000,000 which represents more than 13% of the monthly sales.    

The year to date median for condos is $400,000 but this is almost 4% less than last year’s median.   This can partially be attributed to the fact that almost 40% of the condos that sold this year were either short sales or bank owned (also known as “distressed”), and those types of properties tend to be sold a bit less than market value. 

At the beginning of the year, it was easy for first buyers to find affordable properties.  There were quite a few houses under $500,000 back in January; now there are four available, most with two bedrooms and one bath.   It is interesting to see that 15 houses did close escrow this month under $500,000, which shows that they the potential to buy in that range is still possible. 

It is important to note that over 1/3 of the houses sold above their list price.   There are still multiple offer situations in every price range.   Some properties have had more than 10 offers.  I just participated in a multiple offer situation on a well-priced house and there were 16 offers with the assumption that the price went well over the list price.  There is still pent up demand for buying.

The percentage of distressed houses that closed escrow this month was around 28%.  As of this writing, we have a total of 29 distressed houses in the Multiple Listing Service (MLS) with 13 of them in escrow.  For condos, the percentage was 39% of the closed escrows were distressed.  Currently, there are a total of 9 distressed condos in the MLS and all of them are in escrow.    It appears that the number of available distressed properties is shrinking in numbers. 

One of our biggest issues is the lack of inventory.  As of this writing, we have 42 houses that are priced under the current median of $799,000.  That represents just 11% of our available inventory of houses.   The median price of the houses in escrow is $815,000.   Once these properties close escrow, we will most probably see an upswing in our median price.  As Table 1 indicates, overall we only have 3.2 months of inventory, which means it would take that long to sell the current inventory.  Note that in the city of Santa Barbara and the area we refer to as Goleta (comprises most of “Noleta” and the city of Goleta) there is less than 2 months of inventory.  Higher end properties usually take longer to sell, but 5.9 months of inventory for Montecito actually represents a balanced market.  The number of sales for both Carp/Summerland and Hope Ranch are statistically too low to have an accurate basis for months of inventory. 

Based on the above information, here is a plea to our financial institutions, “If there really is a Shadow Inventory, please, please, please release them onto the market!”

Even with all of the good news, there are a few concerns that could cause turmoil in the real estate market in 2013.  One of those concerns is the extension to the Mortgage Forgiveness Debt Relief Act of 2007.  This Act is to expire on December 31, 2012 and at this point it does not look as if it will be extended this year.   The purpose of the Act is to prevent families who hold distressed properties from facing a hefty tax bill for trying to modify their mortgage or to seek a short sale through their lender. Even those facing foreclosure could find themselves forced to pay a “foreclosure tax” if Congress doesn’t act.

“If Congress does extend the law for federal income taxes, California is poised to follow suit for state taxes,” said Alex Creel, senior vice president of governmental affairs at the California Association of Realtors.    "Clearly nothing will happen on the extension this year," he said. Even if Congress waits until well into 2013 or even 2014 to extend the bill, it could easily make the bill retroactive to Jan. 1, 2013, so no one would be left out in the cold.  Admittedly that would put people in an awkward spot if they're trying to do transactions in 2013 and Congress hasn't acted," he said. "They would be out there wondering if the extender would go through."

The National Association of Realtors has a campaign to rally Realtors regarding this issue.  If you would like to have your voice heard regarding this issue, go to their website at www.realtor.org. 

The other concern is in regards to the Mortgage Interest Deduction (MID).  There is a possibility that this deduction may be totally removed as a write-off or else it may be modified.  Many pundits doubt that it will be totally removed.   In regards to modifying, some of the more popular proposals include eliminating the deduction entirely for second homes; converting the present MID to a 12 percent tax credit; reducing the $1 million ceiling to $500,000; and dropping the deduction in favor of lower tax rates.  There is still a possibility that it will not be modified at all.

Progress has been made in bringing stability to the housing market.  Any changes to the MID could place the housing market and the broader economy under stress and destroy wealth accumulation that is the foundation for a healthy middle class. 

Our market is doing well and buyers are out in full force.  With such a robust market, whether you are a buyer or a seller, you would be wise to enlist the aid of a knowledgeable Realtor to help you through the process.   Let’s think positively that the Mortgage Forgiveness Act gets extended and, if there are modifications to the MID, it does not adversely affect most homeowners.   

California pending home sales post monthly and annual gains in October;share of equity sales continues to expand

LOS ANGELES (Nov. 21) – California pending home sales rose both from the previous month and year in October for the first time in seven months, while the share of equity sales grew slightly, marking a four-year high, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today. 

Pending home sales data:

C.A.R.’s Pending Home Sales Index (PHSI)* rose 4.3 percent from a revised 115.2 in September to 120.2 in October, based on signed contracts.  Pending sales were up 3.6 percent from the 116.1 index recorded in October 2011.  Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.

“The strong pace of pending sales in October is a continuation of what we’ve experienced for most of 2012, with demand remaining robust across all parts of the state,” said 2013 C.A.R. President Don Faught.  “Non-distressed sales – which are up nearly 50 percent from a year ago – are especially strong, while REO sales are down more than 51 percent, primarily due to a short supply of REOs.  The significant increase in non-distressed sales has driven the share of equity sales to its highest level in more than four years.”

Distressed housing market data:

• The share of equity sales – or non-distressed property sales – compared with total sales expanded slightly in October.  The share of equity sales in October increased to 63.4 percent, up from 63 percent in September, the highest level since June 2008.  Equity sales made up about half (49 percent) of all sales in October 2011.
• The share of REO sales statewide contracted in October, while the share of short sales essentially was unchanged.  The combined share of all distressed property sales dipped to 36.6 percent in October, down from 37 percent in September and down from 51 percent in October 2011.
• Of the distressed properties, the share of short sales was 24.4 percent in October and 22.6 percent a year ago. 
• The share of REO sales fell further in October, dropping from 12.3 percent in September to 11.8 percent in October and was down from 28 percent in October 2011. 
• The available supply of REOs tightened in October, with the Unsold Inventory Index for REOs falling from 2.2 months in September to 1.9 months in October.  The Unsold Inventory Index for short sales was 3.1 months and was 3.2 months for equity sales.

Charts:

• Closed housing sales in October by sales type (equity, distressed).
• Pending sales compared with closed sales.
• Historical trend in the share of equity sales compared with distressed sales.
• Housing supply of REOs, short sales, and equity sales in October.
• A historical trend of REO, short sale, and equity sales housing supply.
• Year to year change in sales by property type.

Share of Distressed Sales to Total Sales(Single-family)

Type of Sale	Oct. 2011	Sept. 2012	Oct. 2012
Equity Sales	49.0%	63.0%	63.4%
Total Distressed Sales	51.0%	37.0%	36.6%
REOs	28.0%	12.3%	11.8%
Short Sales	22.6%	24.3%	24.4%
Other Distressed Sales (Not Specified)	0.4%	0.4%	0.4%
All Sales	100.0%	100.0%	100.0%

Single-family Distressed Home Sales by Select Counties
(Percent of total sales)

County	Oct. 2011	Sept. 2012	Oct. 2012
Alameda	NA	28%	21%
Amador	46%	38%	38%
Butte	43%	36%	35%
Contra Costa	NA	29%	26%
El Dorado	48%	38%	36%
Fresno	61%	51%	48%
Humboldt	28%	28%	20%
Kern	67%	45%	41%
Kings	NA	39%	42%
Lake	78%	47%	50%
Los Angeles	48%	37%	37%
Madera	89%	60%	55%
Marin	26%	24%	21%
Mendocino	49%	47%	43%
Merced	58%	46%	47%
Monterey	61%	40%	45%
Napa	46%	37%	30%
Orange	36%	25%	28%
Placer	58%	43%	40%
Riverside	63%	50%	50%
Sacramento	64%	50%	47%
San Benito	72%	55%	58%
San Bernardino	65%	45%	46%
San Diego	28%	15%	14%
San Joaquin	63%	52%	49%
San Luis Obispo	46%	28%	29%
San Mateo	23%	20%	17%
Santa Clara	34%	22%	22%
Santa Cruz	40%	31%	28%
Siskiyou	37%	40%	32%
Solano	72%	59%	62%
Sonoma	51%	37%	29%
South Lake Tahoe	31%	33%	25%
Stanislaus	67%	57%	55%
Tehama	49%	49%	43%
Tulare	NA	NA	46%
Yolo	61%	51%	45%
California	51%	37%	37%

**Note:  C.A.R.’s pending sales information is generated from a survey of more than 70 associations of REALTORS® and MLSs throughout the state.  Pending home sales are forward-looking indicators of future home sales activity, offering solid information on future changes in the direction of the market.  A sale is listed as pending after a seller has accepted a sales contract on a property.  The majority of pending home sales usually becomes closed sales transactions one to two months later.  The year 2008 was used as the benchmark for the Pending Homes Sales Index.  An index of 100 is equal to the average level of contract activity during 2008.

Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with 155,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.