Investor Soundness

Financing for small investors was difficult to come by in the wake of the crisis. As a result, cash purchases surged. Based on data from the Home Mortgage Disclosure Act (HMDA), financing constraints eased over time and the share of financed purchases for non-occupation rose from a low of 10.4 percent in 2009 or 285 thousand purchases to 13.1 percent in 2012 or 352 thousand. That figure grew to 402 thousand by 2015, but their share eased to 11.1 percent as total sales volume increased lead by owner occupants who tend to finance their home purchases. This trend suggests that investors and vacation buyers have increasingly relied on financing.

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.

2005 All Over Again?

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)

In 2015, the ratio of the average mortgage balance at origination relative to average income for non-occupant purchases stood 11.7 percent higher than in 2004, while the same ratio was only 2.8 percent higher for owner occupants. This ratio does not account for historically strong affordability through low mortgage rates, but it does highlight the relative decline in affordability for investors compared to owner occupants.

Another useful tool in the HMDA dataset is the rate spreads above average prime offer (APOR) for financed purchases. A higher rate spread suggests a riskier loan and likely a lower credit score, smaller down payment, or some other risk factor(s). It is clear from the chart above that the share of loans for non-occupancy that are higher priced remains well below that of the boom period. The share that was 3 percent above the APOR was just 0.7 percent in 2015 compared with 18.2 percent at the markets peak in 2006. The share with a spread of 1.5 percent to 3 percent above was 2.6 percent in 2015. Unfortunately, this variable has changed over time and this category was not collected until 2009. It is still clear that higher priced loans remain well below crisis levels.

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.

Investors played an important role in the market over the last decade and can help support a growing rental population. However, a growing share of small investment and vacation buyers now finance their purchases giving them less “skin in the game” and average mortgage-to-income ratios are on the rise. To date lending to investors appears more robust than during the pre-crisis period, but given past precedence, their participation including institutional investors should be monitored for resilience.

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