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Cash Buyers and Investors Take Fright: Capital Economics

Home price depreciation over the past few years has made housing more undervalued relative to incomes than ever before, yet home sales have continued to decline.


Even more striking is that the dampened activity can be largely attributed to a weakening in demand from cash buyers and investors, triggered by the more uncertain investment climate, according to the researchers at ""Capital Economics"":http://www.capitaleconomics.com.

The firm has found that since January, the number of homes purchased by cash buyers and investors has fallen by 26 percent. Over the same period, purchases by first-time and repeat buyers have risen by just 2 percent.

Widespread negative equity and high unemployment are preventing first-time and repeat buyers from filling the hole left by cash buyers and investors, Capital Economics notes. That imbalance translates to weak home sales numbers.


Based on the Case-Shiller house price index and compared to the 1975-2010 average, the research firm says housing is now around 23 percent undervalued against disposable income per employee and disposable income per capita. These are both record lows.

As Capital Economics said, the weak labor market and outstanding loan balances that exceed property values are keeping first-time and repeat homebuyers on the sidelines, even with mortgage rates at all-time lows.

Moreover, the firm’s analysts note that mortgage rates have yet to respond in full to the decline in 10-year Treasury yields to 2 percent. It is possible that 30-year mortgage rates will soon fall below 4 percent, according to Capital Economics.

If so, the firm says the monthly mortgage principal and interest payment on a median priced home bought with an 80 percent loan would fall to a record low of 13 percent of median income. That would compare with the 20-year average of 20 percent.

For cash buyers and investors, the weaker economic and investing climate is clearly taking its toll on housing demand, according to Capital Economics.

The resulting fall in home sales has offset recent declines in the number of homes for sale, leaving housing inventory still high relative to demand, the research firm explained. And there’s nothing in the cards to suggest a resurgence to bring activity closer to normal levels.

All this at the same time that home prices appear to be close to stabilizing, Capital Economics notes. Although, the firm says home prices have yet to respond fully to the recent weakening in consumer and investor demand.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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