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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 19, 2012

Investor Participation in the Home-Buying Market

What is the investor share of the home-buying market, and in what direction is the trend moving? We have been asking ourselves this question for the past few months, because the answer can help to inform what type of housing recovery we are seeing. Is it being driven by owner occupants or investors?

If it is being driven by investors, does this signal an emerging aversion to homeownership? Or, instead, does this simply signal that owner occupants are unable access mortgage finance and that, for now, owner occupants will be unable to maintain the share of market they once held? If we see that the owner occupant share is increasing, this observation could offer some support that the housing recovery has legs. The conclusion that the investor share is increasing, then, may suggest that we will see home sales activity fall off once prices rise to the point that it no longer makes sense for investors to continue buying.

To help us pinpoint the share and trend in the investor participation in the home-buying market, we polled our real estate business contacts to get a better sense for our regional portrait of investor market share. When asked to describe the distribution of home buyers in their market, our business contacts from the Southeast (excluding Florida) noted that one-fifth of home sales, on average, were to investors. Once we added Florida into our tally of Southeast contacts, just over one-fourth of sales, on average, were to investors.


Since this was the first time we posed this question to our business contacts, we lacked information on the directional trend. To address this information gap, we asked our business contacts how sales to investors had changed between the second and third quarters of 2012. More than half reported no change or a slight decline in home sales to investors, unless you include the Florida observations. A closer look at Florida reveals that nearly two-thirds of our business contacts reported that sales to investors in Florida have increased over the past quarter. The investor dynamic in Florida all seems to add up, especially given the strong demand from international buyers and cash investors in South Florida. This dynamic was discussed in the latest issue of EconSouth.

We thought it would also be informative to ask our business contacts about their expectations for future investor home buying activity. For the Southeast less Florida, more than half of our business contacts indicated that they did not expect there to be much change in investor market share over the next year. For Florida, more than half of the business contacts continued to indicate that they expected share of sales to investors to increase.

While the intelligence gathered from our business contacts aligns nicely with external data sources, we still had a few concerns that made us question the directional trend of these data.

The first source of concern is two-fold. First, brokers serve as a key input to our business contact poll and others like it. In and of itself, this is not a big deal because brokers are valued business contacts that provide us with a frequent and timely pulse on changing conditions in local real estate markets. What is slightly problematic is that brokers often rely heavily on the Multiple Listing Service (MLS), which brings me to my second point. We have also been hearing through business contacts (and this is echoed in the media here) that the composition of the investor pool has shifted from primarily smaller mom/pop-type investors to larger institutional investors that, more often than not, purchase properties at auction or directly from banks. Often, these sales take place before the properties get listed on MLS.

So, how involved are brokers in transactions that take place before MLS? Is this particular slice of investment activity being picked up by our sources? If not, how much do we really know about the share and directional trend of investor participation in the home buyer market?

Media coverage (here, for example) of these institutional investors often describes scenes at local auction in which institutional investors outbid smaller investors and have gone so far as to expand their presence and show up at auctions where properties at the fringe (in less desirable locations) are being sold. This piece of information, alone, leads me to believe that these larger investors have displaced smaller investors. Therefore, it would not necessarily be correct to think of properties acquired by institutional investors as something in addition to the properties purchased by smaller mom/pop investors. Instead, many of the mom/pop investors have been priced out of the market and replaced by institutional investors.

Another related concern involves the timing and strategy of these institutional investors. Why would institutional investors flood local real estate markets at the same time that inventory is tightening and home prices are beginning to stabilize and modestly increase in many markets? Wouldn't this squeeze their yields and make it less desirable for them to continue to ramp up their efforts?

To help provide some insight into the institutional investor, I created a table of information to provide a profile on a few institutional investors often cited by the press. It is important to mention that this table was not intended to be all-encompassing and that the source of information is entirely secondary.


What this table implies is that institutional investors ramped up activity earlier this year and have indeed concentrated their investment activity within a handful of markets that were hit hard by the housing downturn. Acquisition strategies for these larger investors focus on mostly low-priced, distressed properties.

This makes sense. The markets hit hardest by the housing downturn are also the markets where distressed properties make up a significant portion of the available homes for sale. However, data from CoreLogic indicates that the share of distressed sales is steadily declining over time. As the distressed sales share continues to shrink and home prices continue to rise, it stands to reason that investment activity will shrink (or continue to shrink).

It was recently noted that Och-Ziff Capital Management Group LLC, a large institutional investor (not outlined in the table above), announced that it intends to exit this line of business. Perhaps it is just a matter of time before other large investors follow suit.

Dave AltigBy Jessica Dill, a senior analyst in the Atlanta Fed’s Center for Real Estate Analytics


September 17, 2012

Will the Housing Market Recovery Leave the Hardest-Hit Neighborhoods Behind?

The national news about residential real estate has been rosy. The latest figures from the U.S. Census Bureau and HUD find that sales of new single-family houses in July 2012 were up 3.6 percent over the June rate, and 25.3 percent above July 2011 numbers. The National Association of Realtors reported that existing-home sales grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June and are 10.4 percent above the July 2011 pace. The June S&P/Case-Shiller report on housing prices showed positive monthly gains across all markets in its 20-city composite for the second month in a row.

However, a large number of homes remain in the foreclosure pipeline and many of these properties are concentrated in certain neighborhoods, which is a particular challenge for recovery in these areas because research suggests that concentrated mortgage delinquency and foreclosure can depress housing prices (see discussions here, here, and here).

To examine this issue and the barriers to recovery in areas heavily affected by foreclosure, the Federal Reserve Bank of Atlanta's Community and Economic Development (CED) group conducted a poll to explore housing market conditions in the Southeast. We asked Neighborhood Stabilization Program administrators, HUD-approved housing counselors, and real estate brokers across the Sixth Federal Reserve District about price expectations and changes in supply and demand in the housing market. The poll was administered between August 7 and August 24. We received 224 responses to the poll and conducted an additional 23 interviews, all within the Sixth District, which includes all of Alabama, Florida, and Georgia, and parts of Louisiana, Mississippi, and Tennessee. The overall response rate to the poll was 30 percent (individual state response rates varied from 22 percent (Georgia) to 52 percent (Tennessee).

When we asked about their house price expectations over the next year (see the chart), we saw signs of bifurcation, with more than half (54 percent) expecting the overall jurisdiction to experience gains, but nearly half (48 percent) expecting the hardest-hit areas in those jurisdictions to continue to see price declines. (For our purposes, "hardest-hit areas" are defined as the top 10 neighborhoods in the area that had the most foreclosures. Also the differences across all parameters—price, inventory of homes for sale, and interest in home buying—between overall jurisdiction and the hard-hit areas are statistically significant.)

The differences between the overall jurisdiction and the hard-hit areas are less pronounced, though still present, when we asked respondents about changes in home buying interest and the number of homes for sale in the last six months (see the chart). Reflecting on the overall jurisdiction, 67 percent said that interest in home buying increased, and of those only 14 percent said it was a significant increase. Another 17 percent experienced decreased home-buying interest.

The "home-buying enthusiasm" found in overall jurisdictions is not as robust when respondents talked about hardest-hit neighborhoods. Although 46 percent mention that the interest in home buying in these areas has increased, it was offset by the 29 percent who noted a decrease in interest in home buying in these areas.

On the other hand, the inventory of homes for sale in the overall jurisdiction has increased in the last six months, according to 57 percent of the respondents (see the chart). (Of these respondents, 45 percent said the inventory increased modestly.) When referring to hardest-hit areas, almost half said that the number of homes for sale had increased in the last six months, 26 percent said it had remained the same, and 27 percent said the number had decreased. And while the trends in the overall jurisdiction and the hard-hit areas may not be wildly divergent in terms of the for-sale inventory, the causes may be different. In the overall jurisdiction, homeowners may be putting their homes on the market because they feel better about the potential returns, whereas it seems reasonable to suggest that in hard-hit areas the increase in inventory of homes for sale may reflect a continued foreclosure pipeline.

We then asked about the top barriers to house-price stabilization and recovery in the areas hardest hit by foreclosure. According to our respondents, the most significant barrier is the poor credit scores and financial history of people wanting to purchase homes in these areas (see the table). With tightened lending standards, fewer people are able to secure financing to buy homes. The next two barriers concern the continued flow of foreclosure starts in these areas. In these cases, the respondents suggest that foreclosures are initiated either because people owe more on their homes than they are worth or because of recent unemployment or underemployment of borrowers decreasing the ability to repay. Respondents also noted that low appraisals in hard-hit areas have undermined sales. Finally, the high concentration of vacant properties, likely perpetuated by the higher-ranked barriers identified in the poll, presents an image of disinvestment in the areas, making it difficult to attract new buyers.


It's important to recognize that even among hard-hit areas there are notable variations and expectations for the future. For example, responses to house price expectations in Florida's hard-hit areas were much more optimistic, with 36 percent expecting increases in the next year, compared to Georgia's hard-hit areas, where only 3 percent anticipated prices going up. Of course, there are metro areas where this "micro-recovery thesis," as Nick Timiraos of the Wall Street Journal puts it, is not at play. "Denver and Phoenix are experiencing price increases in almost every ZIP code," he notes. (A previous macroblog post provides another look at ZIP code–level house price analysis.)

Photo of Karen Leone de NieBy Karen Leone de Nie, research manager in the Atlanta Fed's Community and Economic Development (CED) department,



Photo of Myriam Quispe-AgnoliMyriam Quispe-Agnoli, an Atlanta Fed research economist and adviser to the CED research and policy team

August 29, 2012

Rising House Prices: The Good Fortune Spreads

On the heels of a rash of pretty good news related to residential real estate—including yesterday's pending home sales report—the June S&P/Case-Shiller report on housing prices checks in with positive monthly gains across all markets in its 20-city composite for the second month in a row. What's more, the index posted its first year-over-year gain since last summer.

The early reviews found little to dislike, from Calculated Risk...

This was better than the consensus forecast and the change to a year-over-year increase is significant.

...to Carpe Diem...

More evidence that the U.S. housing market has passed the bottom and is now in a period of sustainable recovery.

...to TimeBusiness...

[T]he housing market is steadily improving and is poised to contribute to economic growth this year. Modest economic growth and job gains are encouraging more Americans to buy homes.

The widespread nature of price firming evident in the Case-Shiller index is strikingly confirmed by looking at even more disaggregated data. The following chart shows June year-over-year price growth by zip code, before the crisis hit and since, based on data available from CoreLogic:

The sample represented by the chart covers about 21 percent of all of the zip codes in the nation, and is based (like Case-Shiller) on a repeat-sales methodology.

The striking aspect, of course, is that there haven't been price increases in the majority of the sample's zip codes since before 2007 (although there was improvement evident in 2010, followed by the re-emergence of broader weakness in 2011). Furthermore, the uniformity of the picture becomes even more apparent when you look market by market (across which the experience is not so uniform). Two of the big comeback stories—Miami and Phoenix—were uniform in the breadth of the suffering across their metro areas during the worst of the slump and are now just as uniform in recovery:

Folks in Atlanta, on the other hand—which remains the big negative outlier in the year-over-year Case-Shiller statistics—are just as uniform as Miami and Phoenix, but in the pain rather gain department:

Even so, the Atlanta market has had two consecutive months of Case-Shiller housing price appreciation and experienced the largest monthly percentage gains in the June report. It does appear that the rising residential real estate tide is raising most boats.

David AltigBy Dave Altig, executive vice president and research director;

Myriam Quispe-AgnoliMyriam Quispe-Agnoli, research economist and assistant policy adviser; and

Jessica DillJessica Dill, senior economic research analyst, and all with the Atlanta Fed

May 13, 2011

Just how out of line are house prices?

In Wednesday's post, I referenced commentary from several bloggers regarding the sizeable decline in housing prices reported by Zillow earlier this week. As I discussed yesterday, the rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much prices will ultimately adjust.

Recently, Barry Ritholtz's The Big Picture blog featured an update of a New York Times chart that suggests there will be a significant adjustment going forward:

Prior to the crisis, I was persistently advised that the better way to think about the "right" home price is to focus on price-rent ratios, because rents reflect the fundamental flow of implicit or explicit income generated by a housing asset. In retrospect that advice looks pretty good, so I am inclined to think in those terms today. A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart used in the aforementioned Ritholtz blog post:

According to this calculation, current prices have nearly returned to levels relative to rents that prevailed in the decade prior to the housing boom that began in the late 1990s.

Of course, the price-rent ratio is not the most sophisticated of calculations. David Leonhardt shows the results from other such calculations that suggest prices relative to rents are still elevated, at least relative to the average that prevailed in the 1990s. But the adjustment that would be required to bring current levels back into line with the precrisis average is still much lower than suggested by the Ritholtz graph.

How much farther prices fall is, I think, critical in the determination of how the economy will fare in the immediate future. Again, from President Lockhart:

"The housing sector also has indirect impacts on the economy. In particular, the direction of home prices is important for the economy because changes in home prices affect the health of both household and bank balance sheets. …

"The indirect influence of the housing sector on consumer activity and bank lending would almost certainly aggravate housing's impact on growth."

Here's hoping my chart is more predictive of housing prices than the alternative.

Update: The Calculated Risk blog does a thorough job and concludes that we don't have "to choose between real prices and price-to-rent graphs to ask 'how far out of line are house prices?' I think they are both showing that prices are not far above the historical lows."

Update: The Big Picture's Barry Ritholtz points me to his earlier argument against reliance on price-rent ratios.

Photo of Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed