Market Sees More Individual Homebuyers

The U.S. residential real estate market has been dominated by institutional investors and cash purchases that experts say has driven the housing recovery to its current strength, but …

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The U.S. residential real estate market has been dominated by institutional investors and cash purchases that experts say has driven the housing recovery to its current strength, but RealtyTrac reports that individual homebuyers are gaining a little ground. Many analysts feared institutional investment alone could not sustain a full-blown recovery, but now that cash sales are slipping some are speculating that it may be a sign that the market is normalizing. It’s thought that higher prices and diminishing profit margins will help further remove institutions from the market to make way for first-time buyers and others who intend to live in the homes they purchase. For more on this continue reading the following article from TheStreet.

The share of cash sales and institutional investor purchases of residential homes declined slightly from a year ago in June, signaling an ever-so-tiny reversal in a trend that has dominated the real estate recovery.

According to the U.S. Residential Sales report from RealtyTrac, all-cash purchases accounted for 30% of sales in June, down from 31% of all sales in the previous month and a year ago.

Purchases by institutional investors — non-lending entities that purchased at least 10 properties in the last 12 months — accounted for 9% of all sales in June, up from 8% in May, but down from 10% a year earlier.

Cash sales have dominated home sales activity in recent years, amid heightened interest from real estate investors.

Traditional first-time homebuyers and existing homebuyers have been largely absent. Many first-time homebuyers have been unable to access mortgage credit despite lower interest rates, while many existing homebuyers have lacked the equity in their homes that would allow them to "trade up."

As a result, most sales in the early part of the recovery were made to those who paid all cash, usually investors. The entry of institutional investors more recently has also kept the level of cash sales unusually high.

Cash sales helped the market recover from the bottom. But more recently, though, it is showing signs of peaking.

The number of distressed properties available for sale has dropped, prices are notably higher and interest rates are rising — all factors that have made real estate a little less attractive for investors and cash buyers.

The decline in the share of cash sales may be an early sign that the market is stabilizing, according to Daren Blomquist, vice president at RealtyTrac.

"The U.S. housing market is slowly but surely moving toward a more normalized and sustainable pattern after a flurry of institutional and cash buyers flocked to residential real estate last year, pushing up prices and picking clean the best inventory available in many areas," said Blomquist in a press release. "Rising home values should continue to unlock more non-distressed inventory while also pricing institutional investors out of more markets, which, combined with rising interest rates, will cool off the pace of price appreciation."

Cash sales will likely continue to be high in places that are still working off high levels of distressed inventory. Metro areas with higher percentages of cash sales included Cape Coral-Fort Myers, Fla. (70%), Miami (64%), Las Vegas (62%), Sarasota, Fla. (59%), Tampa, Fla. (58%), and Detroit (56%), according to the report.

Crucially, as investor interest wanes and prices moderate, first-time homebuyers and trade-up buyers will have to step up to fill the void. The share of first-time homebuyers has been unusually low and their participation is viewed as critical for a healthy housing market.

Separately, the report also noted that short sales in June were sharply higher from a year ago. Short sales (where the sale price is below the combined total of outstanding mortgages secured by the property) accounted for 14% of all residential sales in June, down from 15% in May but up from 8% a year ago.

This article was republished with permission from TheStreet.

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