Investors are pouring into housing markets across the country. According to the November Report of Market Conditions by Inside Mortgage Finance, 20% of all home purchases nationwide are now made by investors. In some major markets, this percentage is much higher.
What attracts investors these days is very different from what drew them during the bubble years. They are not really enticed by appreciation potential and leverage. Investors are lured mainly by low prices and positive cash flows.
Many of them are also searching for an alternative to the ridiculously low rates they now receive from money market funds, U.S. Treasury securities or bank CDs. One knowledgeable Phoenix broker explained that his investor-clients are often 50 and older who have been pulled into residential investing because of the plunge in interest rates they've had to endure. Quite a few have liquid assets over $1 million and are looking for a better return.
Metros that experienced the greatest price bubbles and subsequent collapse have seen hordes of investors leap into their housing markets - especially Las Vegas, Phoenix, several Florida cities, and cities in the California Inland Empire. These investors are fairly confident that prices are nearing a bottom and that the risks of major declines are minimal.
Let's take a look at some of these markets to see whether investors are acting on sound information. The following table from CoreLogic data shows the ten weakest large counties in the U.S. in terms of distressed properties which have not yet been foreclosed and repossessed by lenders as of the end of September 2010.
| Top Ten Larger Counties Distressed Mortgage Percentages - 3d Quarter 2010 | ||||||
| COUNTY | Active Loan Count | 90+ Days Delinquent | % Delinquent | Defaults | % Defaults | Distressed Total |
|---|---|---|---|---|---|---|
| Miami-Dade | 366,775 | 26,735 | 7.29% | 64,708 | 17.64% | 24.9% |
| Broward (Ft. Lauderdale) | 328,721 | 21,939 | 6.67% | 44,251 | 13.46% | 20.1% |
| Orange (Orlando) | 204,944 | 13,020 | 6.35% | 24,839 | 12.12% | 18.5% |
| Clark (Las Vegas) | 360,192 | 32,932 | 9.14% | 32,388 | 8.99% | 18.1% |
| Riverside (CA) | 368,432 | 32,622 | 8.85% | 17,965 | 4.88% | 13.7% |
| Prince George's (MD) | 148,228 | 13,800 | 9.31% | 6,367 | 4.30% | 13.6% |
| San Bernardino (CA) | 315,992 | 27,051 | 8.56% | 14,980 | 4.74% | 13.3% |
| San Joaquin (Stockton, CA) | 105,519 | 8,887 | 8.42% | 5,021 | 4.76% | 13.2% |
| Kern (Bakersfield, CA) | 114,247 | 8,031 | 7.03% | 4,929 | 4.31% | 11.3% |
| Maricopa (Phoenix) | 715,944 | 43,164 | 6.03% | 31,807 | 4.44% | 10.5% |
Source: CoreLogic
Note that this table shows the ten large counties with the highest total percentage of first liens which were either seriously delinquent or had been placed into default. Keep in mind that these are properties which had not yet been foreclosed and repossessed. We know from historical cure rates that roughly 98% of these properties will eventually be forced onto the market as either foreclosures or short sales.
It is also important to know that CoreLogic's enormous database of nearly 42 million loans does not include the entire universe of first liens. I was informed by their key database person that they do not extrapolate from their database to estimate the total number of loans or distressed properties. Thus the total number of seriously delinquent and defaulted first liens in these ten counties is somewhat higher.
Three of these counties contain the major bubble metros of Las Vegas, Miami, and Phoenix. This so-called "shadow inventory" will be thrown onto the market in the not-too-distant future and will clearly add to the glut of MLS listings.
It is very hard to determine how soon the banks will start to reduce this backlog of distressed properties. The servicing banks are clearly in no rush either to put seriously delinquent homeowners into default or to foreclose on those properties which are already in default. In February 2011, according to Lender Processing Services, an incredible 30% of seriously delinquent homeowners in default had not made a mortgage payment in at least 24 months. In January 2009, that number was only 8%.
The servicing banks can delay putting these homes into foreclosure to avoid having to write them down, but they will definitely be hitting the housing markets in these counties over the next few years. This will put enormous downward pressure on home prices in nearly every major market. Perhaps it's time to batten down the hatches.
Note: This article is excerpted from the first issue of Keith's new Housing Market Report. You can read the entire issue for free here.
