Will Investor Pullback Destabilize Housing Recovery?

Home buyers, hedge your bets.

Fewer investors in the market could mean less competition for rank-and-file buyers, and could also slow home price appreciation in some markets.

The latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey says the investor share of home buyers shrank to a little more than 20 percent in May, down from 22 percent in April. That was the sharpest month to month drop in investor activity in more than three years, according to the survey.

Meanwhile, with less competition, both move-up buyers and first-time homebuyers increased their impact on home purchases from April to May. Move-up buyers accounted for 43.8 percent of home purchases in May while first-time homebuyers represented 36.0 percent in May, HousingPulse results showed.

Investors told the Campbell's HousingPulse survey their profit margins are getting squeezed by rising prices, up nationally by about 12 percent over the past year.

Investor Flight

MemphisInvest.com's National Real Estate Investor Survey says that's due largely to the shrinking supply of homes driving up purchase prices in all categories. Also, in many areas, the hefty discounts once found in distressed properties have all but disappeared and distressed properties' sales-to-list price ratios are also down.

That's forced investors to raise rents, making home purchases more affordable in the rent-vs-buy comparison.

Some small investors have had enough and are selling off rental properties. The sell-off could increase inventories sufficiently to lower prices, according to Campbell' HousingPulse survey.

Investor flight Isn't Temporary

MemphisInvest.com says more investors plan to purchase fewer investment properties this year than last year. In August 2012, 39 percent of investors planned to purchase more investment properties. By May 2013, that percentage was down to 20 percent.

Investors also say that due to the reduced profit margins, their business has gotten more difficult in the past five years, according to MephisInvest.com. More than 50 percent say business is tougher now than five years ago. Only 29 percent say it's easier.

But smaller investors aren't the only investors on the way out.

Institutional Investors Run with the Bulls

RadarLogic says institutional investors from Radar's 25 metro areas increased purchases by 41 percent from March 2012 to March 2012. Purchases by all other buyers was up only 2 percent during the same period!

Institutional investors are real estate corporations, partnerships and investment trusts have access to less expensive financing and expedite purchases by buying with cash instead of a mortgage. Because they buy homes in bulk before they show up on the traditional market, they've contributed to the inventory shortage and could balance out the potential inventory increase caused by small investor flight.

However, even institutional investors bow to the same profit margin god as smaller investors. These investors typically buy single-family properties to rent and rising prices will eventually render the strategy unprofitable. RadarLogic warns that could result in both a significant decline in demand accompanied by an increase in supply -- and reverse the current price-rising trend.

Keep an eye on Atlanta, Los Angeles, Las Vegas, Miami, New York, Phoenix and Tampa, where institutional investments have been concentrated. There's evidence they are already feeling the crunch.

While rents rose only 2.4 percent year over year in March, RadarLogic says the composite price per square foot paid by institutional investors in 25 of the largest metropolitan area housing markets increased 14.4 percent. That's putting a big dent in investors' yields on single-family rentals.

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