Investor Activity...Has It Been Driving Home Values Up?

Special Commentary from the Office of the Chief Economist
by Frank E. Nothaft, Freddie Mac's chief economist
October 29, 2004

Home sales will set another record in 2004, and along with this will be another strong year for home-value appreciation. Over the four years from the second quarter of 2000 to the second quarter of this year, the average single-family home in the United States rose 35 percent in value. Other assets, in contrast, have not performed as well; the S&P 500, for example, declined 22 percent between mid-2000 and mid-2004. The home has been a very good investment. But is investor demand the reason why homes have continued to appreciate strongly this year?

Investor Share of Home Sales Remains Low

In contrast to foreign trends, investor interest in the U.S. housing market does not seem to be driving local house-price patterns. For example, an Australian government report cited a doubling in the investor share of new residential loan commitments to about 40 percent between the early 1990s and 2003 (Australian Government Productivity Commission, First Home Ownership, Report No. 28, Melbourne, p. XVIII). Australian housing analysts have attributed this to tax laws that favor rental investment; banking reforms that have increased the willingness of banks to lend to investors; and low stock-market returns that have led investors to put money into residential real estate. This does not seem to be the case here at home. While there has been some rise in the investor share of overall U.S. home-purchase lending in recent years (from 7 percent of purchase-money loans in 1998 to 11 percent in 2003), the investor share has generally remained near or below 7 percent in most markets experiencing significant price gains in recent years (Exhibit 1).

Exhibit 1: Investor Share of Purchase Originations Remains Low in Most Large Markets

Homeowners Are Not "Flipping Out"

Another telling sign that undue investor interest might be driving rising house prices is anecdotal reports of home-buyer speculation. A Wall Street Journal article ("Builders Curb Home Buyers’ Quick Sell Plans," July 14, 2004, p. B1) noted that homebuilders were cracking down on speculators who purchased new homes in strongly appreciating markets. Allegedly, speculators would take delivery of the new home and then sell the home at a sizeable gain. However, there is no evidence of this occurring on a large scale in the new-home market or in the previously owned market. An analysis of purchase-money loans in Freddie Mac’s Conventional Mortgage Home Price Index dataset shows little change in the proportion of homes resold within 12 months of the previous sale. A comparison of home purchases over the first six months of 2004 with those over the first half of 1999 shows a very small increase from 5 percent to 6 percent over this five-year period (Exhibit 2). In markets with strong housing demand and relatively fast appreciation, there may be a slightly higher proportion of homes resold within a year, but some of this may reflect acquisition of older housing stock that is torn down by a developer and replaced with a new home. The average number of years that the homeowner had owned the home before selling it was actually a little higher in the more recent market: 7.0 years for homes sold in the first half of 2004, compared with 6.5 years for homes sold during the first six months of 1999.

Exhibit 2: Average Length of Owning Has Changed Little

Thus, neither investor nor speculative demand is driving home-value appreciation in the aggregate. Low mortgage rates, coupled with employment growth, are the factors that have led a brisk housing market – including home-value appreciation – this year.