Investing in real estate cools off
The Wall Street Journal
Published: Sunday, December 11, 2005
Individuals are pulling back from buying homes and condos as an investment, in a move that could further cool the housing market.
In markets such as Las Vegas, Miami, Phoenix, San Diego and Washington, D.C., where investor activity had been heated, fewer people are competing to buy properties as an investment, real-estate brokers and housing analysts say. Some investor-owned properties are returning to the market for sale. With the pace of price appreciation slowing, some investors who were betting on quick profits are instead being squeezed.
The apparent pullback by investors is recent and is just beginning to show up in national data. Evidence of the development can also be seen in a number of markets that had until recently been a hotbed of investor activity. As speculators withdraw from the market in San Diego, for instance, the number of investors buying property has fallen by nearly half, estimates Russ Valone, president of MarketPointe Realty Advisors, which tracks the San Diego housing market.
In the Phoenix area, as many as 30 percent of properties for sale are owned by investors, says Jay Butler, director of the Arizona Real Estate Center at Arizona State University. Six months ago, most investors were buying rather than selling, he says. The shift has helped to drive up inventories of homes for sale in the Phoenix area, which climbed to 22,340 in October from 8,600 in April, according to data from the Arizona Regional Multiple Listing Service.
In the latest sign that the housing market is cooling, the National Association of Realtors said Tuesday that its index of pending home sales dropped 3.2 percent in October. The reading is the lowest since March.
It's too early to tell just how a pullback by investors will affect the broader housing market, but their impact on the housing boom has been considerable. Investors accounted for 9.6 percent of mortgages used to purchase homes in the first nine months of this year, the most recent data available, up from 6.7 percent in 2002, according to LoanPerformance, a unit of First American Corp. But the investor share began to drop in the third quarter, the firm says. The figures don't include second homes that may also provide rental income and serve as an investment.
A softening in investor demand is likely to accentuate any slowdown in home sales, says David Berson, chief economist at mortgage giant Fannie Mae. He estimates that home sales will fall 10.4 percent over the next two years, largely because of a decline in investor and second-home purchases. Mr. Berson also figures that without the recent surge in these purchases, home sales would have been 7.3 percent lower in each of the past two years. That estimate assumes that investment properties and second homes account for 10 percent of total sales.
Another concern is that investors will be quicker to sell if prices soften, accentuating any downturn, particularly in areas where speculation has been most prevalent. Some of the most vulnerable markets include Daytona, Fla., Las Vegas, Phoenix and Fresno and Bakersfield, Calif., according to Credit Suisse First Boston analyst Dennis McGill.
Even if investors don't all rush for the exits at once, more investor-owned properties are likely to return to the market over the next few years. In part, that's because many investors have bought preconstruction properties that won't be ready for occupancy for another year or two.
heraldnet.com |
