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Analytics Firm Expresses Skepticism Toward Home Price Recovery

As home prices continue to increase, spectators and analysts have concluded the housing market is now in recovery mode. But, one analytics firm has remained unconvinced and expects to see a trend where prices rise and fall periodically as investor demand waxes and wanes.

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""Some commentators suggest that investor-driven home price appreciation could spur demand among housing consumers, which will in turn bring about a broad-based and sustainable recovery in the nation's housing markets,"" wrote Quinn W. Eddins, director of research at ""Radar Logic"":http://www.radarlogic.com/. ""Maybe, but we are skeptical of this theory.""

The analytics firm explained investors have not been buying significant volumes of homes from builders and households. Instead, they seem to buying from two sources: financial institutions that sell REOs and investors who are trading distressed properties bought earlier in the crises.

And, traditional homebuyers still seem to be locked out of the market.

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""Thus, it is hard to see a direct connection between the current increase in institutional demand and future gains in household demand, especially at a time when traditional buyers are faced with high down payment requirements and tight standards for mortgages,"" Radar Logic stated.

Furthermore, as institutional investors purchase foreclosures with the purpose of renting them out, prices will eventually increase to a point where ""the economics of buy-to-rent strategies no longer work,"" the firm explained.

As demand from investors for foreclosures diminishes and there becomes a swelling of REOs in banks' inventory, foreclosures will see a price decrease again. When this happens, institutional investors will be back in business and purchase foreclosures, which will drive up prices for distressed inventory and reduce demand again. As demand for distressed inventory weakens, sales of non-distressed homes will increase as a share of total sales and drive up prices as well, Radar Logic explained.

This will continue ""until consumer demand recovers and drives a real recovery in housing values,"" Radar Logic stated.

Among the 25 metropolitan statistical areas the firm analyzes, Radar Logic also noted investor purchases in November 2012 increased to 11.4 percent of the total transaction count from 7.8 percent a year ago.

Radar Logic's report also included an analysis on home prices. The firm found prices in November across 25 metro areas rose 9.2 percent year-over-year. Radar Logic attributed the increase to ""a significant shift in the composition of home sales"" since discounted distressed sales (REO sales and foreclosure auction sales) account for a much smaller share of overall sales. The firm also noted ""home prices were unusually weak in November 2011,"" and thus a comparison could overstate appreciation.

About Author: Esther Cho

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