Real estate's September report card

John Burns

Investor buyers are back and help explain some of the resurgence in sales we have seen in many markets. Investor sales now constitute nearly 26 percent of total sales in the 53 markets where we track this statistic, which is higher than the peak of 24 percent in 2005-2006 and a considerable rise from just 21 percent in Q3 2008. Our data source misses a certain category of investor activity, so the actual percentage is higher than shown throughout the entire period, but we believe the recent trends are valid.

Our conversations with investors reveal that many are looking to rent the properties they buy, as opposed to flipping them as was common in the up-cycle, although there are flippers this time around as well. With the cost of homeownership falling to or even below rental parity in many markets, investors are increasingly able to make these investments cash flow positive by making a large downpayment.

With limited mortgage availability, investors are generally required to make large downpayments, so we are not concerned that this will cause future distress, as most investors will not be forced to sell under duress and the odds of the house being worth less than the mortgage are very low. If investors flood the market to take profits, then housing will have rebounded -- so increasing investor activity is a positive scenario.

Investor activity varies greatly by market. To estimate the levels of investor activity, our data source calculates the percentage of home sales with different ZIP codes for the property and the owner's mailing address for property tax statements. As such, second-home sales would be counted as investor sales, and not surprisingly, large second-home markets such as Naples, Fla., are ranked high in terms of investor sales percentage. We also found that markets with the greatest distress, such as California's Central Valley, have seen the greatest rise in investor activity compared to one year ago.

Actual investor activity is probably even higher than our conservative modeling shows because some owners don't change the property tax address, especially if property taxes are impounded by the lender. There was probably more impounding in 2005 than today because low downpayments were available, so the amount of unaccounted investor activity was probably higher in 2005 than today. Still, we are confident that the recent trend of growing investor buying is accurate.

Our grading system of the economy and the housing market is a "bell curve" model, with statistics at an all-time high receiving an "A," statistics near the long-term average receiving a "C," and the worst times ever receiving an "F." In this grading system, it is OK to be a "C" student.

Here is our current report card:

Economic Growth: D
While still extremely weak, there were some positive signs in terms of economic growth this month. The preliminary second-quarter GDP growth rate came in at -1 percent, which is a significant improvement from the -6.4 percent decline in the first quarter. The most recent headline unemployment rate increased to 9.7 percent. Employment losses worsened, with 6 million jobs lost (-4.4 percent) in the last 12 months. Mass layoff events -- job cuts of more than 50 jobs -- decreased from the previous month, but remain 41 percent higher than one year ago. The time it takes for people to find a new job is double the norm. Productivity was a positive this month, improving significantly to 6.4 percent growth year-over-year. The Core CPI (all items less food and energy) declined slightly to 1.5 percent, while the Full CPI fell to 2.1 percent in July. ...CONTINUED

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