In a recent column, I focused on five key factors which indicate that housing markets may be topping out. Yet one other important factor may be the main reason why housing prices have not already deflated.

Investors have always played an important role in housing markets. I have written extensively about the crazy bubble years of 2004-06. Rampant speculation was one of the primary causes of the buying mania and subsequent collapse. A May 2005 Fortune magazine article described how speculators were descending on city after city in search of making a killing in real estate.

The chart below, from a 2011 study put out by the Federal Reserve Bank of New York, shows the percentage of homes purchased with a mortgage by investors in states where the bubble was most excessive. This chart breaks down investor mortgage borrowing by the number of first liens appearing on the credit report of these investors. Notice the substantial number of investors with three or more first liens:

The chart shows that in the bubble states, more than 40% of all new mortgage originations for purchases went to investors/speculators during the wildest years of 2006 and 2007. Another chart in this same study showed that nationwide, roughly 30% of all originations were for investors. If we include all-cash investor purchases, the percentage of homes purchased by speculators was even higher.

When home prices leveled off in the second half of 2006, nervous speculators in the hottest major metros began to sell in large numbers. This precipitated the price collapse which soon followed. By 2009, the foreclosure debacle was in full swing. For the next four years, investors focused on buying inexpensive repossessed properties. Most of these foreclosure sales were all-cash deals.

Contrary to a widely-held assumption, many of these investor-purchased homes were not bought by flippers. They were turned into rental units for a new type of renter — former homeowners whose house had been foreclosed.

Read: 5 signs that home prices could be rolling over again

The surge in single-family rentals

According to the U.S. Census Bureau, the number of single-family rental units has soared since the housing bust began. The Bureau estimated that about 3.6 million single-family homes for rent have been added, bringing the total number nationwide to more than 15 million. An April 2018 report released by the website rentcafe.com revealed that 22 of the 30 largest U.S. cities had larger percentage gains of single-family rentals than multi-family units over the past decade.

“ The investment surge over the past six years has been largely driven by a purchase-and-rent strategy. ”

Unlike the speculative housing bubble of 2004-07, the investment surge over the past six years has been largely driven by a purchase-and-rent strategy. This made a lot of sense. Rents have risen steadily as most home prices continued to climb. A report from CoreLogic stated that rents grew nationwide by an average of 3.2% in January 2019 from a year earlier. Another benefit was that the tenant retention rate of 70% was much higher than the 50%-53% retention rate for multi-family apartments, according to a recent Freddie Mac report.

The surge in single-family rental properties has been mirrored by the growth of the nation's largest real-estate investing community, the online resource BiggerPockets. Membership has doubled in the past two years to more than 1.4 million.

For the last two years, BiggerPockets has run a small survey of members. The first survey revealed that 73% had purchased at least one property in 2017. The results of the latest survey showed that last year, the figure had grown to 79%. While the survey response was too small to be considered representative of the entire community, it does indicate that its members are extremely active in single-family investing.

Who are the owners of these 15 million single-family rental units? For several years, media attention focused on large institutional investors who accumulated single-family portfolios. But they have slowed their purchases and now own slightly more than 200,000 homes; their influence in nearly all major U.S. markets is negligible.

Instead, the single-family rental market is dominated by small investors. About 45% of all single-family rentals belong to investors who own only one unit. Almost 90% are owned by investors whose total portfolio consists of fewer than 10 houses.

Evidence of increasing investor activity

Is there credible evidence that investor purchases of single-family homes have increased in recent years? Absolutely. Attom Data has provided previously unpublished data breaking down home purchases by owner-occupants and absentee owners, i.e., investors:

You can see in the table above that the percentage of homes purchased by absentee owners rises consistently from 2016 through the first half of 2019. According to these numbers, more than one-third of all home purchases in 2019 have been made by investors. Yet even with this increase in investor purchasing, the volume of home purchases in most major metros has been declining. That is a major red flag.

Indeed, had it not been for the aggressive buying by investors in the past two-and-a-half years, home prices would have already slumped in these metros. If you do not find this suggestion plausible, remember that it was the pullback by speculators/investors in 2006 and their dumping properties onto the market that started the housing collapse.

The important question going forward is whether purchasing by investors can remain active enough to support current home prices. The volume of home sales over the next three- to six months and the level of home prices in the major metros should tell us where the U.S. housing market is headed.

Keith Jurow is a real estate analyst who covers the bubble-era lending debacle and its aftermath. Contact him at www.keithjurow.com.

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