Real estate investor market faces some unknowns in 2006

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Published: Sunday, February 5, 2006

Real estate investor market faces some unknowns in 2006

Tom Kelly
Herald columnist

Will investors continue to purchase residential real estate at a record pace this year, or will they return to the stock market, where analysts believe moderate gains are on the horizon?

If there is a wild card in the nation's housing for 2006, it's the investor market, according to the nation's foremost housing analysts.

"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 mortgage company Fannie Mae, the largest player in the lending industry's secondary market.

"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 all-cash deals that investors might swing via a tax-deferred exchange or a word-of-mouth transaction.

"We obviously track the mortgage activity and understand that overall share, but we don't focus on how many homes are being purchased by investors without a mortgage," Berson said. "That could be a more interesting part of the housing picture."

While some middle-class rental markets could feel the investor influence, high-priced home markets and condominiums 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 investors have been buying nearly 30 percent of all homes sold. Nationwide, investor and second-home purchases total about 20 percent of the market.

Berson, along with chief economists David Seiders of the National Association of Home Builders and Freddie Mac's Frank Nothaft, are predicting a dip in home sales this year. They point to affordability issues due to rising interest rates and soaring home prices, plus the investor factor.

"We expect housing activity to drop about 8 percent this year - primarily because of investors slowing purchases," Berson said.

"And it appears the condo market is slowing considerably. It's no surprise, because that's the type of housing investors most favor; there is no lawn to mow and you don't have to shovel the snow."

The intriguing factor of the investor component is sales. When will investors place their properties on the market, and why? Is it time to flip and run? Seiders says this "hidden inventory" is critical in the next 12 months.

Or are more investors in a desperation situation where 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 past two years, yet lenders have not significantly curtailed "exotic" programs to investors. The subject often fuels the controversial question of whether lenders have gone too far in extending credit to consumers.

"In some cases, they probably have," Berson said. "Yet, in another situation, the consumer will use the same loan to really benefit their situation. It's never an easy call as to what is going to work and what is not."

While 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 reduce delinquencies in prime markets, specifically along both the East and West coasts.

"Strong house price growth and low interest rates have helped with loss mitigation," said Nothaft, who predicted the average home would appreciate 7 percent this year.

"We are expecting consumer loan delinquencies to be near the lows we experienced in 1999-2001," he added. "The exception has been in some FHA and subprime 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 6.5-6.75 percent range for the remainder of the year. The National Association of Home Builders' early forecast for 2007 has fixed-rate loans at 6.7 percent.

The exceptions would be the unexpected, surprise spikes resulting from high oil and energy costs.

"This has been an incredibly resilient U.S. economy, and housing has been a significant piece of that," Seiders said. "The hurricanes provided a very significant risk, but we have seemed to have come through that.

Despite the risks that might be present in the near future, I'll throw my cards into this economy simply because of how it has performed."

Tom Kelly's new book "Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com