Speculators infulence market
Speculators who have been partly responsible for housing's wild ride over the last few years could be responsible for the sector's demise if they all at once decide to cash in their chips.
So far, housing is cooling off "in an orderly fashion," and David Seiders, chief economist of the National Association of Home Builders, thinks it will continue to slow at a gradual pace. But that hasn't stopped him from warning things could turn ugly if speculators dump their holdings, or if rates spike on the so-called exotic mortgages that also have had a hand in the record number of new and resale houses.
"If you are looking for a trigger, that would be it," Seiders said at the NAHB's annual convention in Orlando earlier last week. "If there is a sudden unloading by speculators, or if interest rates go up by more than a few points, it could spark a quick reversal."
The wild card is that no one knows for certain exactly how many houses were snapped up over the last four or five years by investors looking for quick capital gains. Estimates suggest that as many as four out of every 10 purchases in some places were by investors, some of whom Seiders believes are depending solely on appreciation to float their boats and are not even renting their units.
Seiders painted a rather scary picture of what could happen if speculators pull out of the market as quickly as they swooped in. Such a scenario could "provoke sizeable house price declines, cut into housing equity and provoke a snapback in the personal savings rate that would seriously cut consumer spending," he told the convention.
Actually, builders have been concerned about the rise in speculative buying for the better part of the last 12 months, and some have gone to great lengths to stop it. For the most part, those who don't want investors in their communities will sell only to owner-occupants, refuse to allow sales contracts to be "flipped" to other buyers prior to closing and/or prohibit resales within the first year of ownership.
But a smaller percentage has taken even stronger steps. Some require that they be given the right of first refusal on all resales within the first 12 months of ownership. Others prohibit rentals for a year under a penalty of up to $50,000. Some limit the number of investor sales, and some go so far as to sell only one house to someone with the same last name.
Despite these precautions, however, the issue has made its way onto the list of single-family production builders' Top Ten concerns because they fear their markets could be "rocked" if prices stop rising and what they call "hidden" inventory comes back on the market all at once or too quickly.
And No. 10 on their list of worries is that rates on the unconventional forms of adjustable-rate mortgages will rise enough to force investors' hands. While they seemed to have had no qualms about Interest-only loans and pay-option ARMs when they were the seller, they are now concerned that such financing vehicles "promote investor buying instead of real home ownership."
The markets that are said to be the most vulnerable to an investor-induced downturn are those with the highest share of such buyers. According to Loan Performance, a San Francisco company which studies the mortgage market, the share of second home and investor purchases has been between 31 percent and 39 percent in eight metro areas -- Las Vegas, San Francisco, West Palm Beach, Phoenix, Tucson, Orlando, Honolulu and Monterey. In the Capital Region it has been estimated that nearly 20 percent of all home sales have been made to investors and speculators. Let’s hope they all don’t decide to sell at once.
So far, housing is cooling off "in an orderly fashion," and David Seiders, chief economist of the National Association of Home Builders, thinks it will continue to slow at a gradual pace. But that hasn't stopped him from warning things could turn ugly if speculators dump their holdings, or if rates spike on the so-called exotic mortgages that also have had a hand in the record number of new and resale houses.
"If you are looking for a trigger, that would be it," Seiders said at the NAHB's annual convention in Orlando earlier last week. "If there is a sudden unloading by speculators, or if interest rates go up by more than a few points, it could spark a quick reversal."
The wild card is that no one knows for certain exactly how many houses were snapped up over the last four or five years by investors looking for quick capital gains. Estimates suggest that as many as four out of every 10 purchases in some places were by investors, some of whom Seiders believes are depending solely on appreciation to float their boats and are not even renting their units.
Seiders painted a rather scary picture of what could happen if speculators pull out of the market as quickly as they swooped in. Such a scenario could "provoke sizeable house price declines, cut into housing equity and provoke a snapback in the personal savings rate that would seriously cut consumer spending," he told the convention.
Actually, builders have been concerned about the rise in speculative buying for the better part of the last 12 months, and some have gone to great lengths to stop it. For the most part, those who don't want investors in their communities will sell only to owner-occupants, refuse to allow sales contracts to be "flipped" to other buyers prior to closing and/or prohibit resales within the first year of ownership.
But a smaller percentage has taken even stronger steps. Some require that they be given the right of first refusal on all resales within the first 12 months of ownership. Others prohibit rentals for a year under a penalty of up to $50,000. Some limit the number of investor sales, and some go so far as to sell only one house to someone with the same last name.
Despite these precautions, however, the issue has made its way onto the list of single-family production builders' Top Ten concerns because they fear their markets could be "rocked" if prices stop rising and what they call "hidden" inventory comes back on the market all at once or too quickly.
And No. 10 on their list of worries is that rates on the unconventional forms of adjustable-rate mortgages will rise enough to force investors' hands. While they seemed to have had no qualms about Interest-only loans and pay-option ARMs when they were the seller, they are now concerned that such financing vehicles "promote investor buying instead of real home ownership."
The markets that are said to be the most vulnerable to an investor-induced downturn are those with the highest share of such buyers. According to Loan Performance, a San Francisco company which studies the mortgage market, the share of second home and investor purchases has been between 31 percent and 39 percent in eight metro areas -- Las Vegas, San Francisco, West Palm Beach, Phoenix, Tucson, Orlando, Honolulu and Monterey. In the Capital Region it has been estimated that nearly 20 percent of all home sales have been made to investors and speculators. Let’s hope they all don’t decide to sell at once.
posted by Ken Calhoon at 7:50 AM
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