By Mike Colpitts
Investors shopping for a deal are purchasing more than one-in-five residential properties in the U.S. and make up the second largest share of home purchasers right behind first time buyers.
The rise in investor purchases has been developing over the last year as home values and the prices on all sorts of other real estate in most areas of the country decline. Investor purchases are a good sign for the housing market, indicating that a growing number of buyers believe real estate prices are at or near the bottom of the market.
Low mortgage rates accompanied with a large supply of discounted homes that are either in the foreclosure process or have already been foreclosed by banks provide a large inventory for wannabe landlords. Investors accounted for 19% of purchase activity through Realtors in May, a 1% drop from April, according to the National Association of Realtors. Investor purchases made up 14% of Realtor assisted transactions a year ago.
However, investors also make up a large percentage of auction buyers, and purchases made directly from homeowners, banks and mortgage companies that aren’t included in NAR statistics. A bumpy stock market and fear in financial markets over automated trading mechanisms with equities being traded by sophisticated computer algorithms and a trend towards more short term trading are leading many investors to leave financial markets and to invest their money in real estate.
“Rents will continue to trend up, especially in comparison with a fixed-rate loan, which provides financial stability and gradual accumulation of equity over time,” said NAR president Ron Phipps, a Realtor in Warwick, Rhode Island. “The typical buyer today plans to stay in a home for 10 years, while rents are projected to rise at faster rates over the next few years.”
Higher demand for rental housing as a result of the foreclosure crisis is driving many wannabe landlords to buy residential properties, and large real estate investment groups are building more apartment developments for a growing volume of renters.
However, difficulty getting mortgage financing is weighing on the marketplace as lenders shy away from making too many mortgages to applicants searching for a mortgage. Cash transactions made up 30% of all NAR handled home sales in May as investors accounted for the bulk of cash purchases with many taking the money out of other investment like stocks and bonds.
At the same time, the U.S. is a major destination for foreign property buyers with international purchases surging to an estimated $16 billion in sales this year alone, more than half of which are paid for in cash.