Is the new kind of real estate investor to blame for the falling home ownership rate?

Is the new kind of real estate investor to blame for the falling home ownership rate? The current data on investor purchases, home ownership, and all cash purchases.

One piece of housing information that warrants a deeper analysis is the continually falling home ownership rate.  Since the recession hit over 5,000,000 Americans have gone through the process of foreclosure.  Yet for over a year now, the housing market has been recovering with lower interest rates, higher home prices, and a record low amount of inventory.  Yet even on the national inventory front, it does look like some pressure is being released on this end.  US housing starts are bouncing from the bottom and this will add much needed relief on the inventory side.  However, this doesn’t answer why the home ownership rate has fallen so hard.  Trying to explain the dichotomies in the housing market is like trying to wrap your head around dark matter.  Sure, those that went through a foreclosure are likely now in rental housing.  But as foreclosures become a smaller part of the market, why does the rate continue to fall like dominoes falling over one another with momentum?  And the term “investor” has definitely shifted in the last few years.  Let us take a look at the overall trends first.

The shift in investors

The peak year in home sales was in 2005 when over 8,000,000 new and existing home sales took place:

Home Sales By Type of Sale

Keep in mind the above focuses on transactions.  It was the case that some homes were being sold multiple times in one year given how hot the market was and how easy it was to get a loan (this applies to 2003 through 2007).  But look at the amount of investment purchases in 2005 (over 2,000,000).  Even in 2012 when investors essentially dominated the market, it was about 1,000,000.  So why does it feel like investors are more dominant today?  First the amount of supply is low:

month supply of homes

Months of housing supply is still near record lows (at 4 months of inventory).  Yet overall sales are definitely picking up reaching 5,000,000 in 2012 and we are on pace for 5.4 to 5.6 million this year combining existing and new home sales.  So why is the home ownership rate still falling?  There are a few reasons:

-Shift in investors:  Many prior investors were regular buyers purchasing second homes to either flip or try to rent.  So you had many that had one, two, or more properties but the owner was one person.

-Foreclosures still occurring:  People are still losing their homes.

-One and done transactions:  Many of the modern day investors are big hedge funds.  So you have one large entity owning 100, 500, 2000, or even more properties under one name.

I think the last item is probably the big difference here.  The shift to all cash purchases shows big money has moved strongly into the rental business.  Some of the big investors are looking at buy and hold strategies that will keep inventory off the market for a few years versus the buy and flip investors from the last housing boom.

When you buy 1000 properties, you don’t have it under individual names.  It is registered likely under one entity.  This is adding to the change.  But also, a larger portion of Americans are renting because of their financial situation or because of a change in preferences.  Many younger Americans are still trying to find their footing in this economy and many carry mountains of student debt.  It will be interesting to see if younger Americans carry similar desires of home ownership as the previous generation.

The all cash buyers

Another big point is the investors of the last boom did not have the capital to buy their investments.  In fact, most were leveraging all the way.  Although the last boom obviously saw more investor action, it was more of the mom and pop variety.  We can see this with the all cash purchase activity:

all cash buyers

Notice that in 2005, the peak of “investor” buying, all cash purchases were rather low in highly speculative markets.  Orlando was below 10 percent in 2005 but in 2010, 2011, and 2012 the rate was above 50 percent for all cash purchases.  You can see the boom of all cash investors.  In Southern California, the figure has been above 30 percent for a couple of years now.

This is why you have an increase in home sales yet the overall home ownership rate continues to look like this:

homeownership rate

There are a few reasons for the drop but it is clear that bulk buying of properties from Wall Street for renting purposes has caused supply to drop, prices to increase, and the home ownership rate for Americans to drop.  As someone mentioned in an e-mail, what use is a great mortgage rate when investors are outbidding and overbidding regular buyers?  We are now five months into the year and the trend continues to move on.  We are seeing a shift in inventory nationwide and also, some larger investors are losing their appetite as yields get squeezed.  However, housing starts have picked up significantly since the bottom:

ushousing starts

This is crucial given the very low level of inventory.  However housing starts are a leading indicator here because it will take some time before this inventory hits the market.  I think the above information does add some clarity as to why the home ownership rate continues to decline in spite of rising home sales, higher home prices, and what appears to be another boom in the housing market.

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