Housing Prospects in Some Cities Hinge on Investors

Last year, investors accounted for about a quarter of home sales transaction, helping to boost prices in hot markets like Las Vegas. But this year, investors could hurt housing markets if they move their money out as fast as they moved it in, according to economists.

For the most part, economists who participated in a recent Homeownership Alliance conference call expect healthy housing markets in 2006, even as the pace of home sales and house price gains slows down.

But the behavior of investors is one of the "wildcards" that could pose a risk to generally favorable outlooks for housing, according to David Lereah, chief economist for the National Association of Realtors. The NAR found last year that investors accounted for about 23% of home sales transactions nationally.

He said the investor share of home purchases likely will decline in hot markets this year. If the pullout is unusually widespread, "that could hurt housing," he said.

Many investors buying properties with plans to re-sell them quickly, profiting from home price appreciation, are financing their purchases with interest-only loans, he noted.

If price growth stalls, those buyers may face a difficult economic decision about weather to sell their properties at a loss or continue paying the mortgage and waiting for gains to come back.

David Seiders, chief economist at the National Association of Home Builders, also says that investor activity is "uncharted territory" that could have an impact on housing forecasts this year.

"I think the biggest risk would be for investors not only to stop investing but to move those units they have bought back onto the market," he said. An influx of properties for sale could hurt prices, he noted.

David Berson, chief economist for Fannie Mae, said that investor appetite for home purchases may have tapered toward the end of 2005. Like other economists, he predicts that the investor share of home purchases will likely decline this year.

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