A couple of days ago I did a post about existing home sales. At the end of it I posed a couple questions about the market and particularly about the near frenzy in some of the hard hit areas for foreclosed homes. I was mostly thinking out loud. As it happens, the WSJ had a story yesterday along the same lines.
From the Journal:
The pace of housing sales has been rising in many markets this year, but it is only partly because families seeking affordable housing are returning to the market.
It also is because of investors like former Deutsche Bank managing director Matthew Cooleen, whose firm has spent $30 million buying pools of foreclosed houses from banks.
His newly formed Greenwich, Conn.-based firm, HudsonCross Financial, is betting it can make a profit reselling in beaten-down markets in states like Nevada, Arizona and Florida and in Southern California because it is paying so little for the homes.
Outside San Francisco, a former Morgan Stanley executive director’s new firm is buying four houses for 75% less than they cost four years ago, and is raising $6 million to purchase others.
In Phoenix, Mark Allen, a former division president at D.R. Horton, the nation’s largest home builder, is reselling homes he is buying at courthouse auctions with funding from Gorilla Capital, an Oregon-based firm that targets foreclosures. “It’s the only way to make money in Phoenix residential real estate right now,” Mr. Allen says.
After mostly retreating from the housing market after the bubble burst, investors are returning in droves, hoping to take advantage of the distress. In many cases, Realtors say, investors also are outbidding first-time home buyers and other would-be occupants because they often come to the table with all-cash offerings.
Some of the new investors profited while home prices boomed and are now trying to cash in on their decline. Far from their trading rooms and executive suites, some are spending their days looking for deals in far-flung suburbs and staking out courthouse auctions.
While many real-estate trade groups don’t track investor purchasing on a monthly basis, real-estate agents in many markets say investor buying is high. One telltale sign is how many home buyers are paying all cash.
Though not every cash sale involves an investor, the investors often use cash because they can close quicker and get a better return. In the Phoenix area, for example, about 38% of April sales of single-family homes were all-cash deals. In Punta Gorda, Fla., the figure was 67%, and in the Las Vegas area, total cash sales were 39%.
I guess that clears up one of the questions I had, the investor participation level is high. In fact, it’s probably about where it was during the bubble. Good or bad? I have no idea. If a lot of these buyers are flippers then it doesn’t do much th alleviate the over-supply. It just distributes housing available for sale from the financial system to the investor class. At the same time, it at least gets vacant houses into responsible hands and presumably they become occupied either by renters or buyers they’re flipped to.
At the same time, it does call into question the overall health of the housing market. Pull out the investor purchases or even norm them down to historical rates and you don’t see quite the rebound in demand that the raw figures would indicate. That might change with an improvement in the economy but at the same time we might just be burning through a small pocket of pent up demand with nothing to take its place when it’s exhausted.
Unlike the last go round with investors, I wouldn’t expect that many are going to find themselves in jeopardy if they can’t flip the homes quickly. So long as they don’t get carried away with leverage, the purchase prices are low enough to ensure some positive cash flow. If they do get forced into a longer-term hold than anticipated they can probably hang in for some time.