Investors Run for the Exits

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Spooked by the rapid U.S real-estate slowdown, investors are fleeing top-gaining markets and driving up unsold-home inventories that threaten to deflate prices in many areas.
The nationwide supply of unsold homes hit a record in July and sales fell 11 percent from a year earlier as rising mortgage rates and market leeriness sent buyers to the sidelines. Since investors and second-home shoppers accounted for an unprecedented 40 percent of last year’s buyers, their

Spooked by the rapid U.S real-estate slowdown, investors are fleeing top-gaining markets and driving up unsold-home inventories that threaten to deflate prices in many areas.

The nationwide supply of unsold homes hit a record in July and sales fell 11 percent from a year earlier as rising mortgage rates and market leeriness sent buyers to the sidelines. Since investors and second-home shoppers accounted for an unprecedented 40 percent of last year’s buyers, their change of heart is having a staggering impact.

From the once sizzling markets of Miami, Phoenix and Las Vegas to the major metro areas of New York, Boston, Chicago and California, investors of all types are dumping their holdings, experts say, especially inexperienced ones who bought in the last 18 months with minimal down-payments, hoping to flip properties for fast profits

“They’re trying to escape a burning building and jamming all the exits,” said John T. Reed, a noted real-estate newsletter publisher based near San Francisco.

From coast-to-coast

In Seattle, a survey of 350 members of the Real Estate Investors Association of Puget Sound last month found 25% were liquidating their portfolios of area properties to move into less-costly housing markets elsewhere.

On Virginia’s Eastern Shore, a long-sleepy peninsula now drawing retirees from New York to Washington, D.C., investors accounted for about half of all new listings from June through August, according to a search of multiple listing records. They also were the majority of sellers cutting their asking prices twice or more in recent months.

“Nobody’s flipping properties anymore; they’re just clearing out,” said David Lindahl, a Boston-based real-estate investment seminar leader. “They’re trying to unload whatever they can.”

Deja’ vu all over again

Just as it did to the stock market from 2000 to 2002, investors’ sudden exodus has reversed the supply-and-demand equation. But unlike Wall Street’s collapse, which hurt shareholders and workers’ 401(k) accounts, this loss of nerve is undermining the net wealth of two-thirds of Americans who own their homes.

The ranks of U.S. real-estate investors swelled from 2000 to 20005 as money fleeing the stock market moved into a more tangible asset, juiced by the lowest mortgage rates in 50 years and vastly loosened, mortgage-qualification requirements. In the last two years especially, countless U.S. investors bought multiple properties with little money down, rather than the 25% to 35% down-payments once typically required on investment property.

Yet all manner of investors are pocketing their gains or seeking to avoid steep losses, according to Realtors and investor-education groups around the country:

Veteran real-estate investors began selling their properties before this spring’s rapid slowdown to move into cash and see where prices and borrowing rates go.

  • Small investors have been exiting top-gaining markets and moving cautiously into areas like Texas and Tennessee, and affordable smaller cities in their own states.

  • Long-time investors in their 60s through 80s, seeing little likely price appreciation in coming years, are cashing out of rentals they’ve owned for decades to move into bonds, CDs and money-market accounts.

  • Opportunistic bottom-feeders are trying to cash out now to capitalize later on a foreclosure boom they see coming once low-interest, adjustable rate mortgages start moving upward.

    Said Robert Campbell, San Diego-based author of “Timing the Real Estate Market:” “Some local markets are going to be nothing but rubble, all because of the easy credit that’s been out there.”

    Still, market equilibrium could be re-established soon, experts say. The two catalysts: A continuation of the recent stability in mortgage rates, and the removal from inventory of countless properties owned by investors who never intended to be landlords, but will soon resign themselves to just that to cover their mortgage payments.

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