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Commentary: Investors Still Flooding the National Housing Market

Investors remain a crucial factor in the U.S. housing market. Both large institutional and smaller ""mom and pop"" investors have been very active purchasing homes at a steep discount, primarily in housing-bust markets that have seen dramatic decreases in prices over the past several years.

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""RealtyTrac recently released"":http://www.realtytrac.com/content/foreclosure-market-report/september-2013-us-residential-and-foreclosure-sales-report-7915 its September Residential and Foreclosure Sales Report, reporting that nearly half of the home sales in September were all-cash transactions, signaling significant investor presence. This proportion is up significantly from 40 percent in August and 30 percent in September 2012.

While all-cash purchases and institutional investors usually go hand-in-hand, RealtyTrac reports that institutional investors (defined by the firm as purchasing 10 or more properties in the last 12 months) accounted for 14 percent of sales in September, the highest percentage since the company's data tracking began in January 2011.

While RealtyTrac's definition of institutional investors certainly captures the larger institutions purchasing houses in bulk, we consider the all-cash share of purchases a better gauge for non-occupier home purchase activity, since smaller investors that purchase one home at a time, repair and remodel it, offer it for re-sale, and then repeat the process will generally not fall into the 10-plus purchases per year category but often purchase all-cash.

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Investors have started to pull back in higher-priced markets such as New York, San Francisco, and Seattle and are also sensitive to price increases that alter their return prospects. As the pricing landscape shifts, investors shift toward markets where home prices are still below $200,000, in places like Jacksonville, Atlanta, and St. Louis.

RealtyTrac reports Atlanta saw the highest percentage of institutional investor purchases at 29 percent, with Las Vegas coming in second at 27 percent. Along the same lines, both Atlanta and Las Vegas were among the top large metro areas with the highest percentage of all-cash sales, with both markets coming in at 62 percent. Miami saw the highest proportion of all-cash sales at 69 percent as both domestic and international investors continue to pour into the tropical destination where median home prices have just crossed the $200,000 mark.

While RealtyTrac claims that nearly half of September's home sales were investor purchases, the ""National Association of Realtors reports"":http://www.realtor.org/news-releases/2013/10/existing-home-sales-down-in-september-but-prices-rise that proportion to be somewhat smaller at 33 percent. Either way, these figures are extremely elevated and so far do not seem to be slowing.

This has important implications for the housing recovery. As mortgage rates rise along with home prices, it decreases affordability and edges owner-occupier buyers who are at the cusp out of the market. However, the rise in home prices engendered by investor demand pushes up household wealth of homeowners and creates a positive backdrop for people considering purchasing a home who previously feared seeing their investment lose value in a declining market environment.

For now, whether one-third or nearly one-half of the purchase market, investors are the key force driving home prices, which could signal volatility ahead in coming quarters as the interest rate and pricing landscapes shift.

_Peter Muoio, Ph.D., is the chief economist for ""Auction.com Research"":http://www.auction.com/market-research/ and a regular lecturer at the New York University Real Estate Institute._

About Author: Peter Muoio, Ph.D.

Peter Muoio, Ph.D., is chief economist for Auction.com Research. He is a veteran of the real estate industry and founder of the research and consulting firm Maximus Advisors, which Auction.com acquired in December 2012. Prior to forming Maximus Advisors, he was a managing director and global head of Deutsche Bank Real Estate Research with teams in New York, London, Frankfurt, and Sydney. He is also a regular lecturer at the New York University Real Estate Institute.
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