Posted on: Friday, March 4, 2005

Speculators sharply increase influence on housing market

By Mary Umberger
Chicago Tribune

CHICAGO — Real estate speculators are buying at a pace that far exceeds previous estimates of their influence on the housing market, according to a first-of-its kind report released by the National Association of Realtors.

Collectively, investors and second-home buyers bought more than one of every three homes sold in last year's record market, according to the NAR report released Tuesday.

"I am astonished," said David Lereah, the NAR's chief economist, who said the data suggest a change in the role of real estate in the nation's economy.

"What we're seeing is that real estate is no longer just a place to live. It's a viable alternative to stocks and bonds," Lereah said. "Sept. 11 changed real estate forever, the way people look at it. They're nervous about stocks and bonds and they're placing money in real estate, which has proven to be a stable and wealth-building asset."

The report, which is based on two surveys, found that investors accounted for 23 percent of the nation's 2004 home sale transactions, with second-home buyers taking an additional 13 percent of all sales transactions. Previous estimates gleaned from other databases had suggested that 8.5 percent of all 2004 sales transactions were investments.

The NAR report said that such activity surged last year. Investor activity was 14 percent higher than in 2003, and second-home purchases topped the preceding year by nearly 20 percent.

Federal Reserve officials and other economists have expressed concern that scorching-hot investor activity in certain markets may be artificially inflating home-appreciation rates, which could lead to collapsing prices.

Fiserv CSW, a Cambridge, Mass., firm that tracks price appreciation, calculates that national home values, adjusted for inflation, have appreciated about 40 percent since 1995, with some metro areas, such as San Diego, up as much as 160 percent.

"If you go back to the '80s, during that cycle, adjusted for inflation, price appreciation was 18 percent," explained David Stiff, an analyst for the firm. "In the prior boom in the 1970s it was 15 percent."

Lereah said he isn't nervous about price declines. "I could worry about certain investments, such as interest-only loans or negative-amortization loans — people investing purposely on strong price appreciation rather than on the returns," he said.

A conservative approach to investment "would be to follow the historical 4 to 6 percent price appreciation" in determining its soundness, Lereah said.

"For people who aren't doing that and using interest-only loans to get into those places, I think there's a yellow flag there," Lereah said. "People have to understand the local markets and they have to do their homework."

But Stiff, among others, says investor activity is worrisome.

"It's kind of alarming," said Stiff, whose firm has for the last year warned of overheating. "I presume investor activity is concentrated in some metropolitan areas, such as Southern California, Florida, Las Vegas and Phoenix. But even I am surprised that it's that high.

"It's at the end of a housing cycle that you start to see people investing irrationally," Stiff said. He singled out increasingly widespread reports of homeowners cashing out equity in their principal residences to invest in properties in other markets around the country.

"If anything is a sign of a price bubble, that is it."

But Lereah, who is the chief forecaster for the nation's largest real estate trade association, says that, to the contrary, such investment can be a positive.

"As an economist, I think that's good. The markets are actually working. Real estate is being more liquid. You could never have done that 20 years ago. Real estate was a large, tangible, awkward asset, and only moguls could do that.

"It's wonderful to be able to take one equity gain and purchase real estate in another part of the country. That means the market is getting healthier, more liquid.

"People are trying to paint bad pictures here, that there's too much speculation and that it's bad," Lereah said. "What's bad about taking equity wealth gains in California and using them in Florida? That's a more efficient market outcome."

The NAR report characterized the typical vacation-home buyer as someone who is 55 and earned $71,000 in 2003. The typical investment-property buyer is 47 and earned $85,700, it said.