The substantial run up in home prices caused by strong investor demand and a shortage of inventory may be nearing an end. With the double digit increases in home prices over the past year, fewer people are underwater with their existing homes and are starting to put them on the market. As this article in the LA Times points out, the recent price appreciation has also spurred homebuilders to increase their production. With this new inventory coming from both existing homeowners and new construction, combined with rising home mortgage rates off their historic lows, forecasters are predicting home prices will begin to stabilize and home price appreciation will moderate.
It is no longer a secret that much of the recent run up in housing prices is the result of institutional investors and private equity buying houses on a bulk basis. This has made it very difficult for traditional buyers to compete in the current market as the investors are buying with all cash forcing traditional buyers to scramble to compete when they are dependent on obtaining financing in a more conservative lending environment. In some cases this has led traditional buyers to feel so desperate at the prospect of being frozen out of the market that they offer significantly over list price just to win a bidding war.
It is important to remember that it was just this fear of being left behind that led to much of the irrational exuberance near the height of the last bubble. It is also worth remembering that investors want to foster this perception in the market because buyer sentiment is critical to home price appreciation, which is key to their investment strategy. As this recent New York Times article points out, while investor capital continues to say that it is in housing for the long-term, investors’ actions are showing the first signs of heading to the exits as they scale back their acquisitions and take money off the table in the form of IPO’s. It is worth remembering, a smart investor is not likely to tell you what they are doing until they have locked in their position so they can profit off your response.