Investors are a Wild Card in the Real Estate Market

As the 2006 housing market kicks into high gear, one group holds the key to what sort of numbers we can expect to see: investors. Will they remain important players in residential real estate, or will they return to the stock market, where analysts believe moderate gains are on the horizon?

“We can’t find a period when the investor share of home sales has been higher than in the last year,” said David Berson, chief economist with Fannie Mae. “However, in the fourth quarter, it looked like investors were starting to step back. We just don’t know for certain how far that’s going to go.”

Nor do they have a handle on the number of cash transactions and tax-deferred exchanges investors have made. Although some middle-class rental markets could feel the investor influence, high-priced home markets and condos likely will be the hardest hit by an anticipated slowdown in investment activity.

That could be troublesome for markets such as San Diego, Miami, Las Vegas, Phoenix and Orlando, where investor activity represents nearly 30% of all homes sold. Nationwide, investor and second-home purchases total at least 20% of the market.

Berson and chief economists David Seiders of the National Assn. of Home Builders and Frank Nothaft of Freddie Mac are predicting a dip in home sales this year. They say homes may become less affordable because of slightly higher interest rates and soaring home prices, plus the investor factor.

“We expect housing activity to drop about 8% this year. It’s primarily because of the investors’ slowing purchases,” Berson said.

The intriguing factor of the investor component is sales. When will they place properties on the market and why? Is it time to flip and run? Or, are more investors in a situation in which the market has softened, renters are difficult to find and the investor-owner has little equity in the property? Banking regulators have scrutinized low-down-payment mortgages for the last two years yet lenders have not significantly curtailed nontraditional financing plans for investors.

Although delinquencies and foreclosures have increased in low-employment regions such as Michigan, Indiana, Kentucky, Virginia and Ohio, Nothaft predicts that improved employment numbers nationally will diminish the prospect for delinquencies in prime markets — specifically along both the East and West coasts.

Nothaft predicts home appreciation to be 7% this year. He is expecting consumer loan delinquencies to be near the lows experienced from 1999 to 2001. The exception would be in some FHA Florida home loan situations and sub-prime loans where the default rate has been as high as eight times that of prime loans.

Berson, Seiders and Nothaft did not see anything on the horizon that would boost long-term mortgage interest rates. All three expected 30-year, fixed-rate loans to remain near the 6.5% to 6.75% range for the remainder of the year. (NAHB’s early forecast for 2007 has fixed-rate loans at 6.7%.) The exceptions would be any surprise spikes resulting from high oil and energy costs.

“This has been an incredibly resilient U.S. economy,” Seiders said, “and housing has been a significant piece of that.”

As has been the case, the Florida home loan industry is leading this charge. It remains strong in the face of investor indifference and other obstacles.