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Shifting market turns investors shy on housing

As interest rates and home prices continue to take off, real estate investors are growing weary and beginning to back away from the housing market.

This, of course, is happening at a time when investors continue to get credit for stimulating a significant portion of today's home sales.

In a new survey conducted by ORC International for MemphisInvest.com and Premier Property Management Group, 48% of investors said they intend to cut back on home purchases in the coming year, compared to 30% in the previous survey conducted in August, indicating a strong shift in investor purchasing intentions. 

At the same time, only 20% of investors expect to increase their purchases compared to 39% last August. 

"Higher prices are reducing returns on investment and investors are responding by cutting back on their purchasing plans until conditions sort out. Fewer foreclosures, rising property values and competition from hedge funds are making it tough to find good ideals on distress sales," said Chris Clothier, partner in MemphisInvest.com and Premier Property Management Group.

As investors begin to realize the benefits of rising rents and low vacancy rates, the trend is pushing investors to hold the properties they own for at least five years or more. According to the survey, 33% of investors plan to keep their property for 10 years or more. 

But surveyed investors may not be the only ones with this train of thought. Hedge fund manager Bruce Rose, chief executive officer of Carrington Holding Co., told Bloomberg last month that it no longer makes sense to be a buyer.

According to Rose, it’s getting increasingly difficult to buy properties cheaply. 

For the first time since December 2008, more existing single-family homes were bought in Phoenix using conventional loans than with cash in March, marking the end of a 51-month trend, according to Fletcher Wilcox, real estate analyst at Grand Canyon Title Agency.

So what does this mean for the housing recovery? There have been numerous reports that investors are the driving force behind the rebound…and that may not be far from the truth. 

Let’s hone in on Atlanta’s housing market. In Fulton County in Atlanta, which encompasses two ZIP codes (30310 and 30311), investor activity has helped revive a county with far-below-average median incomes. 

In the 30310 ZIP code, REO sales have plummeted nearly 60% in the past year, according to Pro Teck, while foreclosures have remained nearly unchanged.

Beginning in the second quarter of 2012, the REO discount per living space has continued to fall, down from 48.1% to 29.6% in the first quarter of 2013. This drop coincides with the emergence of hedge funds into the markets. 

In the adjoining 30311 ZIP code, REO sales fell from 23 to 7 per quarter over the past year. This drop in REO sales in pushing up the price of REO properties to a 17.3% increase over the past four quarters. 

The REO discount per living space actually went positive in the first quarter of this year, meaning buyers are paying more for REOs than normal priced homes. 

In the first quarter of 2013, for the first time since the end of the housing boom, the median price of REOs expressed in terms of living space actually was higher than the median sold price of regular homes in Atlanta’s ZIP code 30311, Pro Teck reported. This proves that hedge funds are not creating bubbles or overheating markets.

So why do we need real estate investors to keep the momentum building in the housing recovery?

Well, first off, hedge funds are keeping toxic foreclosures off the market. Institutional investors snatch up large batches of foreclosures before they even have the chance to become REOs, greatly reducing the number of REOs selling at a discount. 

Secondly, in a competitive market, investors are continuing to challenge traditional buyers by listing at or above list price. No longer are we in the days of negotiation when it comes to offers. Institutional investors can come in with all-cash offers above list price at any second.

Now that the market is healthy again, will traditional consumers take the place of buyers? With inventory as strapped as it is, will fewer investors pouncing on properties actually be a relief for potential buyers? Only time will tell what the lull in real estate investors will do to the housing market.

mhopkins@housingwire.com

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