Investors Are Back in Full Force | John Burns Real Estate Consulting

Investors Are Back in Full Force

Investor buyers are back and help explain some of the resurgence in sales we have seen in many markets. Investor sales now constitute nearly 26% of total sales in the 53 markets where we track this statistic, which is higher than the peak of 24% in 2005-2006 and a considerable rise from just 21% in 3Q-2008. Our data source misses a certain category of investor activity, so the actual percentage is higher than shown throughout the entire period, but we believe the recent trends are valid.

Our conversations with investors reveal that many are looking to rent the properties they buy, as opposed to flipping them as was common in the up-cycle, although there are flippers this time around as well. With the cost of homeownership falling to or even below rental parity in many markets, investors are increasingly able to make these investments cash flow positive by making a large down payment.

With limited mortgage availability, investors are generally required to make large down payments, so we are not concerned that this will cause future distress, as most investors will not be forced to sell under duress and the odds of the house being worth less than the mortgage are very low. If investors flood the market to take profits, then housing will have rebounded – so increasing investor activity is a positive scenario.

Investor activity varies greatly by market. To estimate the levels of investor activity, our data source calculates the percentage of home sales with different zip codes for the property and the owner’s mailing address for property tax statements. As such, second home sales would be counted as investor sales, and not surprisingly, large second home markets such as Naples are ranked high in terms of investor sales percentage. We also found that markets with the greatest distress, like the central valley of California, have seen the greatest rise in investor activity compared to one year ago.

Actual investor activity is probably even higher than our conservative modeling shows because some owners don’t change the property tax address, especially if property taxes are impounded by the lender. There was probably more impounding in 2005 than today because low down payments were available, so the amount of unaccounted investor activity was probably higher in 2005 than today. Still, we are confident that the recent trend of growing investor buying is accurate.

Economic Growth………………………………………………………………….D
While still extremely weak, there were some positive signs in terms of economic growth this month. The preliminary second-quarter GDP growth rate came in at -1.0%, which is a significant improvement from the -6.4% decline in the first quarter. The most recent headline unemployment rate increased to 9.7%. Employment losses worsened, with 6.0 million jobs lost (-4.4%) in the last 12 months. Mass layoff events – job cuts of more than 50 jobs – decreased from the previous month, but remain 41% higher than one year ago. The time it takes for people to find a new job is double the norm. Productivity was a positive this month, improving significantly to 6.4% growth year-over-year. The Core CPI (all items less food and energy) declined slightly to 1.5%, while the Full CPI fell to 2.1% in July.

Leading Indicators…………………………………………………………………D+
The leading indicators were mixed this month, although many have improved since the beginning of the year. The Leading Economic Index increased again, reaching 6.2% in July, and up from 4.3% in May. The index has been positive for the last 3 months, after holding a negative status for much of the last 2 years. Stocks continued to show improvement in August. Homebuilder stocks performed very well in August, and are down just 5% from one year ago. The price of crude oil increased in August to $71.06 per barrel and has trended upward since February.

This month, affordability improved slightly due to a drop in the median resale price and slightly lower mortgage rates, but affordability conditions are still not as good as at the beginning of the year. The housing-cost-to-income ratio decreased to 27%, and remains very attractive at a level that is well below the peak of 44% during this housing cycle. The median-home-price-to-income ratio also remains very attractive, currently equal to 3.3 and still below the historical average of 3.7. The 30-year fixed mortgage rate declined slightly in August and has fallen since a recent peak of 5.4% in June. Fixed rate mortgages ended August at 5.14%. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 5.4% in the last week of July, according to the Mortgage Bankers Association. However, the share of ARM applications remains extremely low when compared to peak levels above 35% of total loans in early 2005.

Consumer Behavior………………………………………………………………..D
Consumer behavior was a mixed bag this month. The Consumer Confidence Index jumped in August to 54.1, following several months of decline. Since 97 is the long-term average, consumers confidence remains quite low. The Consumer Sentiment Index fell, while the Consumer Comfort Index remained flat from the previous month. The personal savings rate has fallen in the last two months after spiking at 6.9% in May. Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year (total U.S. net worth is $50.4 trillion in the first quarter of 2009).

Existing Home Market……………………………………………………………..D
Prices and sales volumes have collapsed from the peak and appear to be nearing stabilization. The seasonally adjusted annual resale activity increased in July to 5.24 million homes, which is up 5% from one year ago, according to the National Association of Realtors (NAR). Our rolling 12-month count of resale sales activity has turned upward, which means that monthly sales activity is better than the same month one year earlier. The median resale home sale price declined in July to $178,300 from June’s uptick, according to NAR, and has fallen 15% from one year ago. In comparison, the Case-Shiller index, which tracks paired sales, fell 15% in the second quarter of 2009 compared to the second quarter of 2008. The supply of unsold homes was flat in July at 9.4 months of supply, which is still high in comparison to historical levels. The pending home sales volume increased from the previous month, and is up nearly 7% from one year ago.

New Home Market………………………………………………………………….D
There was some positive news in the new home market this month, as builder confidence improved and inventory continued to decline. The Housing Market Index rose to 18 this month, as builders put more confidence in sales activity for the next 6 months. Inventory levels continued to fall, with just 7.5 months of supply on the market. The seasonally adjusted new home sales volume rose to 433,000 in July, although this statistic remains down from one year ago. The median new home price remained essentially flat from the previous month at $210,100, but is down nearly 12% year-over-year, according to the Census Bureau. The median new home price can fluctuate greatly month-to-month, as it is dependent on the mix of housing types sold during that period.

Housing Supply…………………………………………………………………..F
Total construction activity decreased this month, with the declines in the seasonally adjusted multifamily permits and starts outweighing the gains in the single-family volumes. Seasonally adjusted total permits fell to 560,000 and are down 39% year-over-year. Single-family permits increased to 458,000. Seasonally adjusted new home construction starts fell to 581,000 and are down 38% year-over-year. Single-family starts increased to 490,000. Seasonally adjusted new home completions fell to 802,000 and are down 26% year-over-year.

Data Current Through September 9, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -1.0% D+
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -5,999,000 D-
Employment Growth Rate
– Non-ag Payroll, NSA -4.4% D-
Unemployment Rate 9.7% F
Average Length of Unemployment (Weeks) 24.9
Median Length of Unemployment (Weeks) 15.4
% of Labor Force Unemployed 27 weeks and over 3.2%
U.S. Initial Jobless Claims 570,000
Mass Layoff Events, SA (YOY % Change) 40.5% D+
Productivity 6.4% B-
Retail Sales -9.5% F
Core CPI 1.5% A-
Full CPI -2.1% B-
Personal Income Growth, nominal -2.4% F
Federal Deficit (last 12 mos., $mil curr.) -$1,515,889 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 112,119,000
– Growth Rate 0.8% D-
Owned Households 75,607,000
– Growth Rate -0.1% D
Rented Households 36,512,000
– Growth Rate 2.8% B
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 6.2% C+
ECRI Leading Index 10.5% B
Manpower Net Employment Outlook -2% F
U.S. Vistage CEO Confidence Index 69%
CEO Economic Outlook Survey 19%
U.S. Average Hours Worked per Week 33.1
Temporary Employed Workers -30.2% F
Corporate Profit Growth (pre-tax) -10.9% D
Residential Investment as % of GDP (nominal) 2.4% F
Interest Rate Spread
10-year Treasury 3.60%
2-year Treasury 1.12%
Interest Rate Spread 2.48% B+
3-month LIBOR 0.43%
3-month Treasury 0.19%
TED Spread 0.24% B
Stock Market (Return over last 12 months)
Dow Jones -18% D+
S&P 500 -20% D
NASDAQ -15% D+
Wilshire 5000 -20% D
S&P Super Homebuilding -5% C-
Tougher Standards on Business Loans – Large Firms 32% D+
Tougher Standards on Business Loans – Small Firms 34% D+
Crude Oil Price (Current $) $71.06 D+
ISM Manufacturing Index 48.9 C-
ISM Non-Manufacturing Business Activity Index 46.1 D
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Housing Cycle Barometer 0.7 A
US Median Home Payment / Income Ratio 27.2%
US Median Home Price / Income Ratio 3.3 B+
Mortgage Rates, Fixed 5.14% A+
Mortgage Rates, Adjustable 4.69% B
Fixed/Adjustable Spread 0.45% F
Fixed/10-year Spread 1.55% C
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 5.4% A-
Equity/Owned Home (Current $) $98,815 C
Debt % in Home (LTV) 58.6% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 54.1 D
Consumer Sentiment Index 63.2 D-
Consumer Comfort Index -50.0 F
Revolving Cons. Credit per Household $7,704
– Growth Rate -6.0% A+
Personal Savings Rate 4.2% D+
U.S. Net Worth Growth Rate -16.2% F
Financial Obligation Ratio 18.5% D
Misery Index (Unemployment + Inflation) 7.30 B-
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -14.9% F
NAR Single-Family Median Home Price $178,300
NAR Single-Family Annual Price Appreciation -14.6% F
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 5,240,000 B
Existing Home Inventory for Sale, SA 4,091,000 F
Months Supply of Unsold Homes, SA 9.4 D+
Purchase Mort. App. Index, SA 264.4 C
Pending Home Sales Index, SA 94.6 D
Homeownership Rate 67.4% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 18 F
Multifamily Condo Market Index 15 F
Median Price, NSA $210,100
Annual Appreciation Rate -11.5% F
Constant Quality Price Index (YOY % Change) -6.2% F
Sales Volume, SA 433,000 F
New Home Inventory for Sale, NSA 272,000 B-
Months Supply of Unsold Homes, SA 7.5 C+
Months of Homes Completed, SA 3.3 B-
Months of Homes Under Const., SA 3.1 D+
Months of Homes Not Started, SA 1.1 C
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 802,000 F
Single-Family Starts, SA 490,000 F
Multifamily Starts, SA 91,000 F
Total Starts, SA 581,000 F
Single-Family Permits, SA 458,000 F
Multifamily Permits, SA 102,000 F
Total Permits, SA 560,000 F
Manuf. Housing Placements, SA 48,000 F
Total Supply, SA 608,000 F
Total Housing Stock 130,828,000
Homeowner Vacancy Rate 2.5% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are “A” scores, the average is a “C”, and the worst 15% ever are “F” scores, with distributions throughout.


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