Real Estate Market
Financial Services Industry

Saints or sinners, investors contribute to crashes, recoveries

(12/28/2011) Investors get it coming and going.

They are speculating sinners after markets crash, but saintly saviors when demand for good times are here again.

To wit.

The Federal Reserve Bank of New York's recent study "Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis," says investor flipping - buying, fixing up, and quickly reselling for a profit - helped drive up prices before the housing market hit the brakes, but crashed anyway.

Right now, however, the housing market wouldn't even be in the slow lane if investors weren't pouring money in the tank.

Investor buys largely comprised the 38 percent of homes purchased with cash in 2011, according to HanleyWood's Housing Intelligence Pro.

That's double the 19 percent rate in 2006 and you can expect the trend to continue as investors with good credit and cash have a better shot at running the mortgage qualification gauntlet than home owners abandoning homeownership for the rental market.

Critics complain that the investor market can be ugly. Realists say it's the stuff of free markets. For better or for worse, right now, the investor market is critical to recovery.

The federal reserve report says speculative investing had a greater impact than previously thought on skyrocketing home prices and prices' subsequent fall to earth.

The study says easy-money policies of the 2004 to 2006 era allowed house flipping to drive up home prices, but by 2007 and 2008, many speculators were over leveraged with too many homes they couldn't sell fast enough.

Between 2007 and 2009, speculators were responsible for more than 25 percent of seriously delinquent mortgages in the U.S. and get much blame for a hangover that just won't go away, the report says.

"Long standing tradition in the mortgage lending business and the predictions of economic models hold that investors will quickly default if prices begin a persistent fall. This is what happened starting in 2006," the federal report says.

Today, about 23 percent of active mortgages are underwater -- the mortgage balance exceeds the resale value of the house. As of the fourth quarter 2010, nearly 2.8 million homes have undergone foreclosures with another 2 million waiting in the wings -- if not more.

The Center for Responsible Lending says the nation is still 3.6 million foreclosures and years away from recovery.

Maybe a few hard-nosed investors aren't such a bad idea right now.

After heading for the hills to lick their wounds, seasoned investors often return to the spoils - as they already have, this time joined by a new wave of first-time "speculators," both cashing in on the rental market boom.

• Earlier this year, reported, by three-to-one, investors will be more active in local markets compared to typical homebuyers in the next two years.

• Vacation rentals investments paid off so well this summer, more than one in three vacation rental owners planned to raise the rent for the holiday travel season, reported.

• Student housing more and more often isn't a dormitory, but an investment property off campus.

• A second home market in reverse is heating up due to underwater homeowners renting out their old home at high rents to help cover the cost of moving up. Developers and others who see the light are building to accommodate the new investor.

It is a buyer's market, especially if you are an investor.

But that's a good thing.

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