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Investors
Retreat
From Housing Market
Inventories Rise as Speculative Buying Slows
In Once-Hot Markets Like Phoenix and San Diego
By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
December 7, 2005; Page D1
Individuals are pulling back from buying
homes and condos as an investment, in a move that could accelerate the
cooling of the housing market.
In markets such as Las Vegas, Miami,
Phoenix, San Diego and Washington, D.C., where investor activity had
been heated, fewer people are competing to buy properties as an
investment, real-estate brokers and housing analysts say. Some
investor-owned properties are returning to the market for sale. With the
pace of price appreciation slowing, some investors who were betting on
quick profits are instead being squeezed.
The apparent pullback by investors is
recent and is just beginning to show up in national data. Evidence of
the development can also be seen in a number of markets that had until
recently been a hotbed of investor activity. As speculators withdraw
from the market in San Diego, for instance, the number of investors
buying property has fallen by nearly half, estimates Russ Valone,
president of MarketPointe Realty Advisors, which tracks the San Diego
housing market.
In the Phoenix area, as many as 30% of
properties for sale are currently owned by investors, says Jay Butler,
director of the Arizona Real Estate Center at Arizona State University.
Six months ago, most investors were buying rather than selling, he says.
The shift has helped to drive up inventories of homes for sale in the
Phoenix area, which climbed to 22,340 in October from 8,600 in April,
according to data from the Arizona Regional Multiple Listing Service.
In the latest sign that the housing
market is cooling, the National Association of Realtors said yesterday
that its index of pending home sales dropped 3.2% in October. The
reading is the lowest since March.
It's too early to tell just how a
pullback by investors will affect the broader housing market, but their
impact on the housing boom has been considerable. Investors accounted
for 9.6% of mortgages used to purchase homes in the first nine months of
this year, the most recent data available, up from 6.7% in 2002,
according to LoanPerformance, a unit of First American Corp. But the
investor share began to drop in the third quarter, the firm says. The
figures don't include second homes that may also provide rental income
and serve as an investment.
A softening in investor demand is likely
to accentuate any slowdown in home sales, says David Berson, chief
economist at mortgage giant Fannie Mae. He estimates that home sales
will fall 10.4% over the next two years, largely because of a decline in
investor and second-home purchases. Mr. Berson also figures that without
the recent surge in these purchases, home sales would have been 7.3%
lower in each of the past two years. That estimate assumes that
investment properties and second homes account for 10% of total sales.
Another concern is that investors will
be quicker to sell if prices soften, accentuating any downturn,
particularly in areas where speculation has been most prevalent. Some of
the most vulnerable markets include Daytona, Fla., Las Vegas, Phoenix
and Fresno and Bakersfield, Calif., according to Credit Suisse First
Boston analyst Dennis McGill.
Even if investors don't all rush for the
exits at once, more investor-owned properties are likely to return to
the market over the next few years. In part, that's because many
investors have bought preconstruction properties that won't be ready for
occupancy for another year or two.
To be sure, investor demand remains
strong in some parts of the country as investors take their profits in
markets that have seen double-digit gains and move into areas such as
Dallas, where price gains haven't been so steep. And while it's getting
tougher for speculators to make a quick buck, brokers say that
opportunities remain for investors who plan to hold their properties for
several years.
Earlier this year, Sandra Geary, a
broker in California's Sonoma County, was running seminars that drew as
many as 200 would-be investors. She's also taken California investors on
out-of-state home-buying expeditions to Arizona, Idaho, Nevada and
Oregon and bought more than 30 rental properties for her own portfolio.
But in recent months, her investor sales have fallen more than 75%. "Now
that the market is slowing down, it's scaring investors away," she says.
Some brokers are advising speculators to
put away their checkbooks. "I'm telling people who want to buy new
construction to flip it that the gig is up," says Frank Borges LLosa, a
real-estate agent in Arlington, Va.
Last year, Mike Morgan, a real-estate
broker in Stuart, Fla., set up a Web site designed to attract investors
scouring the Internet for preconstruction properties. But with the
market softening, Mr. Morgan has cut back on promoting his site. Now, he
works only with investors seeking "buy and hold" properties. "I haven't
sold an investor a property to flip since June," he says.
Some investors also are backing out of
preconstruction properties they bought. In San Diego, cancellation rates
for new condominium units climbed 47% in the third quarter over the
second, in part because a growing number of investors are getting cold
feet, according to the Building Industry Association of San Diego
County.
Cancellation rates for condo units are
also rising in many other markets, including Florida and metropolitan
Washington, according to the National Association of Home Builders.
"It's largely because of investors" pulling back, says NAHB staff vice
president for research Gopal Ahluwalia. "A whole lot of condo units are
sitting empty." Whether a buyer can easily get out of a deal can depend
on a number of factors, including the builder's policies and the terms
of the buyer's contract.
With price appreciation slowing, it's
getting tougher for investors looking to quickly flip a property to earn
a return that's high enough to cover brokerage commissions, mortgage
costs and other expenses. Prices for existing homes are expected to rise
12.4% this year, according to the National Association of Realtors, well
above the 5.3% average annual gain since 1990.
Some investors are already getting
pinched. Barry Fiske, an account manager, teamed up with a friend to buy
a bungalow in the oceanside town of Hingham, Mass. The pair tore down
the house and put up a three-story Victorian home that went on the
market in October, priced at $889,000. After three price cuts, the
asking price is now $799,000 and the opportunities to profit are
"marginal," Mr. Fiske says. "We probably spent more than we originally
intended to," he adds.
Robert Cayouette, a computer programmer,
has put down deposits on 10 homes under construction in Florida,
figuring he'd quickly flip them and make a profit of about $30,000
apiece. The first of those purchases, a three-bedroom home in Port St.
Lucie, is expected to close this month. But Mr. Cayouette has learned
he'll be lucky if the house fetches $285,000, or $10,000 less than his
original purchase price. "I wouldn't be able to flip it if I wanted to,"
says Mr. Cayouette.
With home prices growing faster than
rental rates, investors who decide to rent out their properties rather
than sell them often can't make enough to cover mortgage payments, taxes
and other costs. Arash Yazdi, an information technology consultant,
decided to rent out his $465,000 townhouse in Merrifield, Va., this fall
after a deal to sell the home fell through. He figures he's losing about
$1,000 a month.
Write to
Ruth Simon at
ruth.simon@wsj.com
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