Investors Pulling Back — What Happens to Housing Now?

March 14, 2014

Bill McBride at (a must read in the economics blogosphere) has been doing some fantastic posts on the abrupt pull-back by investors in the U.S. housing market. They were very aggressively buying homes in depressed markets from 2010 to 2012, but the excitement is now cooling. This is closely related to a previous post where we showed that house price growth has been stronger in cities where investors were extremely active.

See this, this, and this.

We argued in our previous post that the 2010-2013 housing rebound was “strange” because it was driven mostly by investors buying up foreclosed properties that were sold at prices below fundamental value (a “fire sale”, in the language of Shleifer and Vishny).

What happens now that these investors no longer see bargains? Who steps in to buy? Is the 2010-2013 pace of house price growth sustainable? Difficult questions. We plan on looking deeper at this issue as more data become available.

Bookmark and Share

7 Responses to Investors Pulling Back — What Happens to Housing Now?

  1. Links 3/15/14: Ides of March | naked capitalism on March 15, 2014 at 5:56 ami

    […] Investors Pulling Back — What Happens to Housing Now? House of Debt (Scott) […]

  2. dilbert dogbert on March 15, 2014 at 8:12 ami

    The above comment is a lesson in why comments need moderation.
    Found your blog via Calculated Risk. Welcome to the blogosphere!

  3. Rich888 on March 15, 2014 at 11:53 ami

    So glad you guys started a blog and you are in the sweet spot – private debt – to provide insights into the most important issues in global economics.

    As far as housing goes, the investors bailed out the banks insofar as their purchases of REO’s kept a tsunami of fire sales from swamping markets and depressing prices further. The problem, of course, if they have tanked affordability in many msa’s. Looking forward, I’m not sure the question is who will buy. They’re just not many properties left. Listed inventories from the Realtors (existing sales) and Census (new home sales) are not high. REO levels have plummeted in the key sand states and sdq’s continue to grind lower, foreshadowing less distressed supply ahead.

    What we have is an inefficient equilibrium where the few buyers continue to outpace the even fewer sellers, and prices grind ever higher. It seems that potential sellers have set a reservation price somewhere near the peak they remember in the prior cycle, and this is simply out of reach for most potential homeowners. Particularly as lending standards remain far tighter than prior to the crisis, and factors such as student loan debt and uncertain labor markets deter younger cohorts from taking on significant additional debt.

    Can’t wait to see what you have to add to this.

  4. Bob K. on March 16, 2014 at 10:52 ami

    Nice vague comments that have nothing to do with the article. Did any of you even read it? I’m guessing you are all robo-posting and once you have enough comments built up, you will start posting spam.

    As for the actual article (vs all the BS comments), investors cleared up the cheap excess supply – nothing more, nothing less. If you don’t try to read any more into it than that, then you aren’t left with this feeling the housing market is suddenly doomed. Because investors got the properties so cheap, they are able to rent them very profitably, so they aren’t going anywhere anytime soon. The reality is that supply is razor thin and new construction is minimal. So in light of that, what has changed that is bad for real estate? Nothing. The only thing that has changed is the inventory is now slim and now sellers can raise prices since they don’t have to compete with so many “fire sale” foreclosures/short sales. If a person thinks having an excess of foreclosures on the market = strong housing market, then that person has a wrong minded view of the housing market.

  5. Dan Mulligan on March 16, 2014 at 12:37 pmi

    I am also interested in the effect that the seemingly inevitable tapering by the Fed will have on the mortgage market. Presumably, the interest rates will have to rise to attract private buyers but I have not seen much analysis of how much and the impact on sales.

  6. dog training school on March 16, 2014 at 7:28 pmi

    Thanks , I’ve recently been searching for info about this subject for a long time and yours is the best I have came upon till now. But, what about the conclusion? Are you positive in regards to the supply?

  7. Larry Signor on March 18, 2014 at 4:28 pmi

    This was always the story. Consumers are still paying off debt and residential collateral is still very sketchy. No news or market there. This housing price rebound has always seemed like a mini-bubble, or perhaps in Wall Street parlance, “a dead cat bounce”.