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Real Estate Research provided analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog included the Atlanta Fed's Jessica Dill, Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.

In December 2020, content from Real Estate Research became part of Policy Hub. Future articles will be released in Policy Hub: Macroblog.

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April 14, 2017

Is the Share of Real Estate Sales to Investors Increasing?

In early February, our monthly Construction and Real Estate Survey came back with a few comments that called attention to increasing investor home buying activity in certain Southeast markets.

Central Alabama: "We are as busy in early February as we usually are in May! I heard today that a busload of investors came to town recently because they'd been told [we have] a great cash flow market. Haven't heard that kind of talk since 2005."
Metro Atlanta: "I checked on the percent of homes we sell to investors. The answer is 19% so far this year. That is the highest level since the recession. Actually, that is a little scary because with rate increases and a fall in investor confidence, this section of the market will go away overnight. Before the last recession when we were in the bubble, investors were making up about 50% of the market in some lower-price neighborhoods. Keep an eye on sales to investors; anything over 10% is a little scary to me."

Given that we did not solicit comments on this specific topic, we wondered what these comments may signal. Was investor activity increasing in isolated markets, or was this increase more widespread? We decided to dig a bit deeper in our March poll, using special questions to gather more information on the trend in investor activity. We also turned to other data sources for additional clues. In short, what we found is that, while there may have been an increase in investment activity in some Southeast markets, investor activity does not appear to have increased in a material way at a national level.

In our March 2017 poll, we asked residential brokers and homebuilders to indicate whether home sales to investors had increased, remained unchanged, or decreased over the course of the previous year. While some respondents did see an increase in investor buying in their markets, the majority of builders indicated no change. Broker responses came in mixed. Interestingly, more brokers than builders indicated that investor activity was down.


To get a more complete picture, we also asked our business contacts to describe the distribution of home buyers in their market in the previous month (that is, the shares of sales to first-time buyers, repeat/move-up buyers, and investor buyers). On average, respondents indicated that 13.9 percent of home sales in February 2017 across the Southeast were to investors. Because we asked this question in the past, we were able to compare the response to previous periods. Interestingly, the investor share has trended downward since we started asking this question in 2012, and registered its lowest reading to date.


Out of curiosity, we wondered how our results compared with those from the National Association of Realtors (NAR), which asks a similar question about the share of sales to investors in its monthly survey, the Realtors® Confidence Index. The main difference between our survey and the NAR's survey is that our respondents are limited to the Atlanta Fed's Sixth District while the NAR's respondents are spread across the nation. After plotting our Southeast results on the same axis as the national NAR time series (see below), we found that both series appeared to trend downward over time.


Observing a similar trend in both series provided some assurance that investor activity has not ramped up to the extent that it had prior to the housing downturn. However, it is difficult to say what influence (if any) the results of the ongoing NAR survey had on our panel's responses. To get a third perspective, we turned to the Campbell/Inside Housing Mortgage Finance HousingPulse Tracking survey, a proprietary national-level monthly survey that ran from July 2009 through November 2016. The Campbell survey asked a similar question. This survey also shows a downward shift in the trend in the investor share of all home sales.

While these three separate surveys point to a broadly similar trend of declining investor share of sales, we felt it was important to consider other measures for tracking investor activity. Another potential proxy measure could be the share of flipped properties to home sales. CoreLogic's Insights Blog recently featured a couple of posts (here and here) that highlighted the current state of flipping. The author of the posts, Bin He, defined a flipped property as a property that was bought and sold within a 12-month period. He found "the ratio of flips to sales stands at 4.9 percent in 2016, which is well below the peak value of 7.5 percent reached in 2005." While a property flipper is just one type of investor, this analysis serves as one more piece of evidence that pushes back against the idea that investor activity has picked up in a material way.

To conclude, certain areas around the Southeast may have seen an increase, but investment activity does not appear to have increased in a material way across the nation. Although the measures we refer to above do not necessarily provide an apples-to-apples comparison, they independently but collectively provide some reassurance that investor activity has not returned to where it was at the height of the bubble (which of course is hard to pinpoint exactly because few of these more robust measures date back that far). The hope, of course, is that one or more of these measures would provide some type of signal if investment activity were heading in that direction again.

Photo of Jessica Dill By Jessica Dill, economic policy analyst specialist in the Research Department

February 13, 2017

Investigating the Trend in Office Renovations

Have you noticed more talk of office property renovations lately? Over the course of the past year, we've been hearing a lot of talk about office renovations from business contacts engaged with the Atlanta Fed's Regional Economic Information Network, as well as reading about more office renovations in our markets (see here, here, and here for just a few of many examples). This motivated our search for data that could help us understand the trend in office renovation activity, particularly as it relates to new office construction.

To our dismay, there was not much readily available data on office renovations. We turned to Dodge Data & Analytics, formerly known as McGraw Hill Construction, which collects project-level data on construction activity across 382 metropolitan markets in the United States. The data set not only tracks nonresidential construction activity by property type and stage of construction on a monthly basis, but also identifies the type of construction (which includes new construction, addition, alteration, and conversion).

Using the construction type variable, we selected all office projects that were marked as additions, alterations, or conversions and created a time series that provides a proxy measure for office renovation starts across the nation. Our time series runs from January 2003 to September 2016. Chart 1 shows the composition of office starts (that is, the share of new office construction starts versus office renovation starts) in any given month to provide insight into the mix of projects over time.

From 2003 through 2008, new office-construction projects comprised a larger share of office-related starts. But since 2008, the majority of office starts have been office renovations. We drilled down a bit further to understand the composition of the office renovations activity and found that alterations accounted for the majority of all renovations captured in this database over the course of the time series.

In addition to examining the makeup of the office-related construction activity, we also sought to understand the level of office construction activity. Ideally, we would have liked to examine the trend in renovations activity in terms of square feet under way because it would have given insight into the volume of activity (that is, size of projects) while controlling for changes in things like cost of land, materials, and labor (which have the potential to distort the project value), thus providing the best apples-to-apples comparison of activity over time. Unfortunately, this was not possible due to data limitations. Specifically, square footage under way is captured only for projects that add to the existing stock of office space (that is, where the construction type is listed as new construction or additions). Since additions make up such a small share of overall renovations activity, square footage data are missing for the majority of the observations.

As a result of this data limitation, we examined the trend in the number of office projects started over time. In chart 2, the blue line represents the number of new office construction starts, and the orange line represents the number of office renovation starts.

New office construction starts increased sharply from 2003 until 2005, when the number of projects leveled off. Office renovation starts increased during the same period, though at a much more modest pace, then also leveled off in 2005. New office construction starts began to drop in the first few months of the recession and fell rather sharply until the middle of 2010, while office renovation starts appeared to continue at a steady pace until halfway through the recession before softening a bit. Both new office construction and office renovation starts flattened out and continued at an unchanged pace throughout the early years of the recovery. New office construction starts experienced very little in the way of an uptick until 2016. Office renovation starts, on the other hand, began to rise at a fairly quick pace starting in 2015.

By creating a proxy measure for office renovations, we were able to take anecdotes from business contacts to the data and confirm that office renovation projects have, indeed, been on the rise over the past year. Stay tuned for our follow-up report, when we will drill down and explore renovations activity across the Southeast in more detail.

October 15, 2014

Bringing Foreign Investment into Economically Distressed Markets: The EB-5 Immigrant Investor Program (Part I)

The saying goes that all real estate is local. But investment from overseas—real dollars for both residential and commercial projects—is becoming a more common opportunity for developers, especially those working in economically challenged markets. Some euro zone countries—Greece and Spain, for example—offer visas to wealthy Chinese home buyers.

One source for commercial projects that is gaining the attention of community and economic development practitioners is the Immigrant Investor Program, called EB-5, a federal program designed to attract foreign investment to real estate projects in challenged markets. The EB-5 program provides residency status (green cards) to foreign investors in exchange for personal capital investments that create jobs in the United States.

EB-5 has been around since 1990, but growing wealth overseas (largely in China) and the financial crisis of 2008 created more demand for the program. More recently, the program has attracted the attention of a variety of economists, academics, and the media. In July 2014, for example, the unlikely political tripartite of mega-investors Sheldon Adelson, Warren Buffet, and Bill Gates endorsed the program in a New York Times op-ed. A few short months later, a Fortune Magazine piece referred to the EB-5 program as "a magnet for amateurs, pipe dreamers, and charlatans, who see it as an easy way to score funding for ventures that banks would never touch."

In this first of two posts, I present the rough mechanics of EB-5 and some of the trends and challenges facing the program. In the next post, I will address the program's impacts in the southeastern region and further assess its strengths and weaknesses.

The mechanics of EB-5
A recent report from the Initiative for a Competitive Inner City (ICIC) profiled the EB-5 program. The ICIC report has a detailed infographic on the anatomy of an EB-5 investment. According to authors Kim Zeuli and Brian Hull, the major components of the EB-5 program are as follows (we've summarized their information in this flow chart):


EB-5 investments can be made either directly into projects or through third-party entities called "regional centers." The city of Miami, for example, was recently authorized to act as a regional center. These regional centers can source deals, pool investment capital, and provide a number of other advantages, including the ability to count indirect and induced employment toward the program's job requirement. (Direct EB-5 investments can count only direct job creation.) Note that EB-5 investments can be used anywhere in a project's capital stack. Regional centers usually have the finance expertise to leverage EB-5 for additional equity or debt, or to reduce risk for more traditional finance.

The United States has more than 575 regional centers, up from 13 in 2007. The ICIC, citing data from the U.S. Department of State, reports that from 2003 to 2013, 85 percent of all EB-5 visas were issued to investors from China, South Korea, Taiwan and the United Kingdom; 65 percent of them were issued to Chinese investors.


Impacts and challenges
Since Congress first authorized the EB-5 program, it has captured about $5 billion in direct investments and created more than 85,000 full-time jobs, according to a recent report by Brookings. But the Brookings report also points out that the scarcity of reliable historical data makes it very difficult to evaluate the entirety of the program's impact. The ICIC report includes a summary and analysis of several hundred EB-5 projects. According to ICIC, the largest challenges facing EB-5 are uncertainty around the immigration approval process and the up-front capital and technical knowledge required to execute a project with EB-5 investment.

The next installment of this series will address the program's impacts in the southeastern region and further assess its strengths and weaknesses.

As part of the Atlanta Fed Community and Economic Development program's efforts to bring attention to economically distressed communities in the Southeast, we will be examining specific tools and policies—like EB-5—and sharing what we learn, sometimes in this blog.

Will Lambe is a senior adviser with the Atlanta Fed's Community and Economic Development program, focusing on community development finance.

February 10, 2014

Good News/Bad News/Good News: Affordability and Rising House Prices

First the good news: overall U.S. house sales in 2013 were the highest since 2006, according to the online Financial Times and, at least for current homeowners, house prices had double-digit increases during the year. The bad news, at least for potential buyers, is that house prices had double-digit increases. Combined with higher mortgage interest rates and relatively stagnant income growth, there have been a lot of concerns lately about housing affordability as the economy continues to recover.

In 2013, home prices increased by 14 percent, according to the S&P/Case-Shiller 20-City Composite Home Price Index. In June, talk that the Fed may begin scaling back its bond purchases led to mortgage rates rising quickly from 3.5 percent to 4.4 percent. As a result, buyers faced higher monthly mortgage payments. How concerned should we be that lower levels of housing affordability will make housing less attainable as the economy improves? Is there a possibility that rising prices and interest rates will limit the pace of the housing recovery? One way to put attainability in perspective is to examine an affordability index such as the one that the National Association of Realtors (NAR) produces.

Though not without its flaws, the NAR Affordability Index (AI) is widely cited and can give a sense of the magnitude of the change in housing affordability. The NAR index is designed to estimate the extent to which the ability of the median household to purchase the median home has changed over time. In addition, it also lets us determine the extent to which changes in mortgage rates, home prices, and income contribute to changes in affordability.

The NAR AI incorporates median incomes, mortgage rates, and median home prices. It is computed as the ratio of median family income to the income required to qualify for a mortgage on the median-priced single-family home, assuming a 20 percent down payment and a monthly payment-to-income ratio of 25 percent.

The index equals 100 when the median-income family just qualifies for a mortgage on the median-priced home. A value above 100 implies that the median-income household has more than enough income to qualify for a mortgage on the median-priced home, and a value below 100 means that the median-income household does not have sufficient income to qualify. During most of 2012, the NAR AI was at or near 200. At this level, the median-income family can afford two mortgage payments with 25 percent of its income. Or, to put it another way, that family had to spend only 12.5 percent of its income on a mortgage payment on the median-priced house. (Note that there’s a powerful regional component to housing affordability as well. Even taking regional incomes into account, homes are considerably more expensive in the West and Northeast than in the South and Midwest.)

Armed with the formula for the AI, we can decompose it into its three parts—home prices, mortgage rates, and incomes—to see which factor is creating the strongest declines in affordability. Looking at the decomposition through time, house prices are typically a drag to the AI, and nominal income growth supports the AI (see chart 1). Historically, interest rates play the role of affordability swing factor.

Decomposition of the NAR Affordibility Index 1969-2012

The record levels of affordability since the onset of the Great Recession were due to the combination of falling house prices and declining interest rates. The recent decline in the NAR AI is primarily due to the rebound in housing prices, which in 2012 returned to the role of a drag to affordability. After six years of contributing to affordability, mortgage interest rates became a drag in 2013 (see chart 2). Sluggish income growth has had little effect on the index.

Decomposition of the NAR Affordibility Index 2013

Looking ahead, many forecasters are predicting that house price growth will be in the positive single digits, slower than the past couple of years. Should we be concerned that continued home price and mortgage rate increases may decrease affordability and thus lower construction and house sales? For several reasons, the answer is: probably not. First, sales and affordability, as measured by the AI, have had little correlation historically (see chart 3). A lack of correlation is not surprising since the decision to buy is a function of access to credit in addition to what is measured by the affordability index, which has no measure of access to credit. That is, attainability is a function of both affordability and access to credit.

Affordability Index versus New House Sales 1971–2013

Second, the increases in house prices and mortgage rates may signal a growing economy and, subsequently, recovering credit markets. Given this context, as the NAR affordability declines, what we may see is an expansion of credit and increasing access to credit. Finally, as banks continue their search for profitable opportunities, we may see their eagerness to lend increase (that is, the availability of credit could increase).

We will cover access to and availability of credit in future posts, but for now I think we can safely say that affordability as measured by indices such as NAR's should not be a primary concern.

Photo of Carl HudsonBy Carl Hudson, Director, Center for Real Estate Analytics in the Atlanta Fed's research department, and

Elora Raymond, graduate research assistant, Center for Real Estate Analytics in the Atlanta Fed's research department/PhD student, School of City and Regional Planning, Georgia Institute of Technology