A red flag for another housing bust?

by Ryan Smith14 Jul 2016
It’s been nearly nine years since the housing market collapse helped drive the country into recession – and RealtyTrac’s Daren Blomquist worries that history might be repeating itself.

RealtyTrac data shows a record share of foreclosures – 31%– were bought by third-party investors in June, according to a Bloomberg report. It’s an echo of the kind of speculation that helped inflate the housing bubble in the early 2000s – an echo that Blomquist sees as a red flag.

Many of the third-party buyers who are snapping up foreclosures are “mom and pop” investors with little experience, Blomquist told Bloomberg. Meanwhile, institutional investors are leaving the market.

“It’s somewhat counterintuitive – as the market gets better and there are fewer foreclosures available, demand for those good deals, those bargains in the market goes up,” Blomquist said. “When you see this high percentage of the properties going to third-party investors, that is a sign that these speculators may be over-inflating the market.”

Foreclosure auctions are making up a smaller and smaller share of all home sales, according to Bloomberg. In June, they accounted for just 8% of home sales, the lowest since August of 2006. And third-party investors are taking a larger and larger share of that shrinking market.

Institutional investors, meanwhile, accounted for about 38% of investor purchases at foreclosure auctions last month, according to Bloomberg. That’s down from a steady rate of around 50% in the first five years of the economic expansion. That decline in institutional investors was an early warning of the last downturn, as more experienced buyers fled the market, according to Bloomberg.

“Their analytics are telling them it’s not a good time to buy – that’s definitely another red flag that they’re pulling back at the same time as the less savvy investors are ramping up,” Blomquist told Bloomberg. “…The pressure is building in the pressure cooker, and at some point that’s going to need to be released.”

He told Bloomberg that investors shouldn’t expect an overnight change. However, “probably not in the next month or two but in the next couple of years,” a downturn should set in.

Blomquist stressed that the housing market looked great right now, and a rise in speculation by non-professional investors was really just an early warning sign.

“Real estate is cyclical – it’s not this steady upward trend,” he said.
 

COMMENTS

  • by Been Through This Before | 7/14/2016 12:34:30 PM

    Disagree. After Dodd Frank, TRID and tons of additional regulation in the mortgage world, this time through "Mom and Pop" investors are required to fully document their income and assets, and prove that they have employment to support their investments. Not the same.

  • by Griff | 7/14/2016 12:49:24 PM

    In my neck of the woods a housing bust is not beyond happening. I'm starting to see some asking prices lowered. I've seen homes in the last 9 months or so sell for 40% more, and even double what they would have a year ago. I would not want to be someone buying those homes.

  • by SBHarkness | 7/18/2016 3:42:15 PM

    Griff, what "neck of the woods" are you from as you say. I live in a town called Bremerton that is 17 miles west of Seattle. At the start of Spring last year in Kitsap County where I live we had 1000 more listings than we do this year. This causes me to raise an interested eye. You see in Kitsap County you have to look at what the median wage then compare that to home prices. Just 17 miles East in Seattle a home that would sell here for the mid to upper 200's would sell in Seattle for the middle to upper $500's. The key factor is a body of water called the Puget Sound that separates Seattle from Bremerton. It takes one hour to commute by ferry and by car...........forget about it. We have some traffic here that is as bad as anywhere in the Country. Also, in Seattle the type of jobs that are available allow young couples to pay the prices asked for the homes. However, I am watching vigilantly. That's why I am asking about home prices and where you live.

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