In the wake of the housing crisis, vacation and investment buyers played an important role in sopping up excess inventory. As their participation wanes, the impact will vary around the country. Furthermore, deception and poor lending practices to some investors played a key role in fomenting the last crisis, so the robustness of their participation in the current environment is worth a closer look.
A Receding Tide
NAR Research recently released the 2017 Investment and Vacation Home Buyers Survey. This survey includes small “mom and pop” investors that will be the focus of this report as opposed to institutional investors. Purchases by vacation buyers in 2016 fell sharply to 15 percent from 19 percent in 2015, while purchases for investment held steady at 19 percent. That decline in part reflects growth in demand by owner occupants. This moderating pattern is important as researchers noted that investors played a key role in the foreclosure crisis. The investor share of home purchases rose sharply at the tail end of the housing boom and drove higher default rates. Researchers pointed to concentrations of investors in bubble areas, deception in holding multiple mortgages, and higher use of riskier loans by investors in driving this latter trend. However, these authors noted a large unexplained element. This element could be owners’ deeper ties to the community including schools and personal relationships as well as the magnified impact of foreclosure on persons unable to spread the shock across other investments or reserves.
Where Investor Call Home
Regionally, non-owner financed purchases tend to be in vacation areas including coastal Florida and the Carolinas, as well as New England. However, recreational areas of Michigan, Wisconsin, and Minnesota as well as in the mountain states, Arizona, and West Texas were also heavy users of investor or vacation financing in 2015. Metro areas in Florida dominated the top ten markets including Destin, Punta Gorda, and The Villages.
While investors played a role in the market’s crisis, they also played an important role in its recovery. From 2008 through 2011, there was regular discussion of the shadow inventory on banks’ balance sheets that would eventually hit the market. Investors helped the market to absorb this excess and frequently paid cash or provided significant down payments. Since then the shadow inventory has evaporated and a supply shortage has emerged. Are these new investors risky like those during the boom?
Unfortunately, the HMDA dataset does not provide information on the number of properties owned by an investor or their down payments, both indicators of stress. However, it does provide their income and the amount borrowed. This is important since an increasing number of investors are using mortgages to finance their purchase (versus cash) in a similar manor to 2004 and 2005. (See below)
NAR’s 2017 Investment and Vacation Home Buyers Survey can add color missing from the HMDA data. Cash purchases by this group fell from 50 percent in 2011 to 32 percent in 2016, but remained well above the 26 percent share during the buildup to the crisis. Furthermore, the share putting down 70 percent or more remains above 2011 levels and those from the period of risky lending. These figures do not include institutional investors whose presence rose dramatically in the wake of the recession.
 This survey does not include institutional investors
 Haughwout, Klaauw, Lee, and Tracy. “Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis.” Sept 2011