Today we’ll try and unravel the twisted logic of Realty Times’ Blanche Evans and Lawrence Yun of the National Association of Realtors. According to Evans:
This latest report should put the notion to bed that the housing boom was largely driven by speculators. The National Association of Realtors annual Investment and Vacation Home Buyers Survey finds that investors and second home buyers snapped up one third of the homes sold in 2007.
While the volume of sales is down along with home sales in general, the market share of investors and second-home or vacation home buyers is 33 percent, close to the historic norms at the height of the housing boom.
Investors bought 21 percent of homes in 2007, down only one percent from 2006. And vacation home buyers dropped from 14 percent in 2006 to 12 percent in 2007.
Wait a minute. I thought there was a credit crunch. That vacation homes were piling up like college student laundry. That investors got out of housing and moved into gold, corn and oil.
So what’s happening? Primary residence sales declined 10.0 percent to 4.34 million in 2007 from 4.82 million in 2006, but vacation sales (-30.6 percent) and investment homes (-18.1 percent) fell much more, possibly due to tighter credit and economic uncertainty.
You were right Blanche about two things- there is a credit crunch and the vacation homes are piling up. That theory about the boom being driven by speculators has not been put to bed- it’s walking around and wide awake, however.
First of all, according to the 2006 report, market share for second homes is down from it’s peak of 40% in 2005. Yun is reporting current market share as 33% in 2007. It’s unclear to me how one has a "historic norm" at the height of a boom, but Evans is in error – market share has clearly dropped. Yun indicates in the report Evans references that there has been a serious decline in investment purchases:
Lawrence Yun, NAR chief economist, said the findings suggest different cycles for each of the sectors over the past two years. “Investment-home sales declined sharply in 2006 as speculators disappeared, leaving the market to serious buyers, with the pattern continuing in 2007,” he said.
Actually market share has probably dropped significantly more than the percentages indicate- clearly sales numbers for vacation and investment homes have dropped. Because mortgage rates and loan terms are more advantageous for owner-occupiers, many speculators lied to obtain more favorable financing. Also remember that these numbers are resale only, and do not include new home sales. Financing available through homebuilders made purchasing new homes for investment purposes attractive in the boom years, and many of those new homes are now back on the market as resales.
Twenty-eight percent of vacation-home buyers paid cash for their property, as did 35 percent of investment buyers.
Plus, investors and second home buyers aren’t interested in short-term gains and plan to hold on to their properties from four to ten years (median) respectively.
Investment homes are $150,000, unchanged from 2006, while the price of vacation homes have dropped $5000 to $195,000.
Eight out of ten second home buyers believe it’s a good time to buy real estate, and a majority plan to buy another property in the next two years.
So what does that tell you? People with more money are spending it on real estate.
Looking at the numbers, it’s clear that a lot fewer "people with more money" are spending it on real estate. That said, agents I know are telling me they do have a significant percentage of buyers that are speculators. Inqueries I receive certainly indicate that there is a lot of interest in buying investment property, particularly short sales and foreclosures. To a large extent, I believe that is because "wannabe" flippers are thinking that now is the "bottom", and they are going to make a killing snapping up bargains. Many of those who might ordinarily be shopping for a primary residence however, are unnerved by current market conditions and are sitting tight or are choosing to rent. Owner-occupiers are more risk averse than investors- It does not necessarily follow that the "smart money" is on real estate.
Investors continue to make up a large percentage of the real estate market. Some of them are "smart money"- but a lot of them are fools. Anyone buying in today’s market should be doing so because solid homework shows a particular investment makes sense- not because they followed the example of the eight out of ten people don’t know what they are talking about.