Incentives Remain for Private Investors in Housing

As housing is inches closer to fair value due to rising home prices and distressed properties for sale continue to decline, private investors are finding it harder to find bargains in the market.

A U.S. housing market update from Capital Economics by Property Economist, Matthew Pointon, showed that although there are a few roadblocks on their path, private investor demand is not likely to dry up anytime soon.

"With returns on other types of assets looking low and/or risky, expectations for further gains in house prices suggest Americans will continue to see housing as a good place to store wealth," Pointon wrote.

In the midst of tight supply, heightened competition for buyers, and unpredictable financial markets, U.S. home prices continued to rise in the fourth quarter.

The Federal Housing Finance Agency's (FHFA) House Price Index (HPI) shows that home prices rose 5.8 percent year-over-year in the fourth quarter of 2015. Prices increased 1.4 percent from the third quarter of 2015, marking the 18 consecutive quarterly price increase in the purchase-only, seasonally adjusted index. Home prices were up 0.4 percent month-over-month for December.

“Instability in financial markets did not seem to put much of a drag on home prices in the fourth quarter,” said Andrew Leventis, FHFA Supervisory Economist. The 1.4 percent rise in home prices "was in line with the extremely steady—but historically elevated— appreciation rates we have been observing for several years now."

Capital Economics posed the question if the continued rise in prices will cause investors to withdraw from the market, potentially leading to a drop in housing demand if others—like first-time buyers—do not take up the slack. However, Pointon stated, "Private investors have proved a stable source of housing demand over in recent years."

"Private investors are typically on the look-out for bargains they can buy with cash. But with housing now at fair value, good deals are becoming harder to find. In particular, the rise in house prices, low mortgage rates and improving labor market have all helped to bring mortgage delinquencies down to pre-crisis levels," Pointon said. "As such, the share of homes bought for investment and vacation purposes that were distressed dropped in 2015 compared to 2014."

Capital Economics said that it not likely that the lack of distressed properties will fend off investors. "While bargains may be harder to find, the fact remains that house prices are expected to keep on rising. Even if the home is not rented out, buyers will be expecting a decent capital gain," the report said.

"We don’t see a collapse in private investor demand as a significant risk for the housing market. Rather, a slow recovery in first-time buyer numbers will complement second home buyers, and ensure that housing demand weathers the coming gradual rise in mortgage rates," Pointon concluded.