30 year mortgage rates at an all time low

As prices rise, investor demand falls. What’s next?

Investors and all-cash home buyers accounted for about 19 percent and 30 percent, respectively, of all sales in March, according to the National Association of Realtors®. That represents a significant share of the market, and some analysts are concerned that investor and all-cash demand will start to shrink as home prices rise.

Who will step up in their place?

Robert Dietz, an economist with the National Association of Home Builders, notes in a recent article for U.S. News & World Report that “missing households” – the ones who delayed homeownership thanks to the recession – might make the transition from investors to private homeowners seamless.

Notably, recent college grads who delayed homeownership by moving in with their parents or renting are expected to increase their homebuying activity. Also, surveys show a growth in the number of Americans living together as roommates who are not relatives because Americans have doubled or even tripled up in rentals to help cut costs.

But as more people get married, start families and jobs stabilize, household formation will likely grow, Dietz says.

The Census Bureau’s American Community Survey shows that the population from 2006 to 2011 grew by more than 4 percent, but there was only about a 3 percent growth in the number of households. The nation’s population has grown, but the number of independent households of renters and owners has not kept pace.

Dietz expects to see future homebuying demand come strongly from rental households created over the last seven years. In that time, the number of rental households in single-family homes grew by 2.5 million, or 22 percent. Traditional renting households in multifamily units increased by nearly 7 percent.

The “real demand for housing is on the sidelines, particularly among younger Americans,” Dietz says. “For these younger prospective homebuyers, policy debates concerning the future of the housing finance system and homeownership programs like the mortgage interest deduction will have real impacts on their housing and wealth status in the years to come.”

Source: “What Happens to the Housing Market When the Investors Leave?” U.S. News & World Report (May 3, 2013)