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.
 

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