Builders Curbing Speculation in Housing
Home builders have been taking steps to curb speculative home buying by investors in the nation’s hottest housing markets, according to a series of surveys conducted by the NAHB. “Builders — especially the largest builders — early on recognized the dangers of excessive speculative activity and took steps to discourage sales to investors who did not intend to occupy the new homes,” said NAHB Chief Economist David Seiders. “As a result of these proactive efforts, speculative activity in the national market for new single-family homes has been well contained.” NAHB conducted a series of three surveys in March, April and June of this year to assess the degree of concern by home builders about speculative activity in local housing markets, to gauge the extent of speculative new-home buying and to determine how home builders are responding to the threat of speculative activity. The research by NAHB uncovered a good bit of concern in the home building industry about speculative purchases by buyers who are solely interested in selling the property for short-term capital gains. The research also found that many builders are taking steps to discourage sales to buyers who do not intend to occupy the homes and that these efforts have helped contain speculative activity in the national new-home market. Generating a ‘Hidden Supply’ Builders are concerned about speculative home buying primarily because this activity can generate a substantial “hidden supply” that could come back onto the market quickly if price appreciation should begin to falter. This would put additional downward pressure on market prices, and sales of new units coming onto the market would be severely disrupted. In addition to unloading units that they own, speculators could also decide not to close on units they have contracted to buy, which is a key risk in the new-home market because of typically long lags between sales contracts and closings. Many builders also are concerned about investor-owned units standing empty in new communities they are developing. Large numbers of sold but vacant units can detract from the sense of community as well as the overall look and feel of an area under development. Recent concerns about speculative buying appear to be concentrated among larger builders operating in markets where relatively rapid price appreciation has the potential to attract substantial speculator interest. Builders with large production pipelines naturally place heavy emphasis on the sustainability of market fundamentals going forward. The concerns of home builders appear to be well founded. The Federal Deposit Insurance Corporation (FDIC) recently identified 55 metro areas where price appreciation had reached “boom” proportions by the end of 2004, and mortgage loan data files (from LoanPerformance) show not only an upswing in investor activity nationally but also relatively high shares of investor purchases in many of the “boom” markets identified by the FDIC. It also seems clear that investors often use “exotic” forms of adjustable-rate mortgages, which are financing vehicles that Federal Reserve Chairman Alan Greenspan in recent testimony before the Joint Economic Committee in Congress called “developments of particular concern." Greenspan also told Congress that “speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past,” and he cited a quickened pace of existing home turnover as symptomatic of speculative activity. Price ‘Bubble’ Concerns NAHB began surveying home builders about the investor phenomenon in March, gathering information from more than 500 companies throughout the country. At that time, a majority of single-family builders (60%) reported some speculator activity in their markets, and a majority of those companies felt that this activity was fueling house price appreciation to some degree. Concerns about potential price “bubbles” ran relatively deep among larger companies, particularly in the Northeast and West. Builders in the West also noted relatively heavy usage in their markets of adjustable-rate mortgages with deeply discounted (“teaser”) initial rates, with interest-only monthly payments and with the potential for negative amortization (rising principal balances). Targeting the Investigation In April, NAHB launched a targeted investigation of investor activity in the markets for new single-family homes and condo units, utilizing a panel of 12 large home builders operating nationally or regionally, as well as samples of builders of all sizes located in 30 sizeable “hot” metro markets with relatively rapid rates of home price appreciation through the first quarter of this year. The hot-market samples were selected by local home builders associations within the NAHB federation. The panel of large builders reported that 93% of their single-family home sales during the previous six months were for primary residences, 4% were for vacation homes and 3% were for investment — including units bought as long-term rental properties. Ten percent of the large builder sales of condo units in new multifamily buildings were for investment during that period. Some large companies provided mortgage financing to investors through their own finance subsidiaries, but in all cases these loans required higher interest rates, larger downpayments and/or stiffer underwriting standards than on loans to owner-occupants. The April survey of builders located in hot metro markets found significantly larger proportions of investor purchases in both the single-family market (11%) and the condo market (15%). This group reported that most investor sales were to individuals from within the market area, although some investors were institutional buyers (6%) or foreigners (2%). All members of the large-builder panel, and a large majority (89%) of the builders surveyed in the hot metro markets, said they were taking steps to reduce sales to investors. The panel of large builders described their efforts as follows (multiple responses were permitted): - Eighty-two percent said they would sell only to buyers for owner occupancy.
- Sixty-four percent said the buyer cannot sell the home or “nominate” the contract before closing.
- Fifty-five percent said the buyer cannot sell during the first year after purchase.
- Thirty-six percent said the buyer must give the builder the first right to buy the home back if it is sold within the first year.
- Thirty-six percent said the home cannot be rented within the first year.
- Thirty-six percent said they were limiting the number of investor sales per lot release.
- Twenty-seven percent said they would not provide sales incentives to investors.
- Eighteen percent said they would not sell more than one home to buyers with the same last names.
- Eighteen percent used a variety of other measures, including charging a fee (often $50,000) if homes are resold within the first year.
Speculation Limited Nationally
From a national perspective, the amount of speculative buying in the market for new single-family homes appears to be quite limited at this time, thanks largely to the efforts of large national and regional builders and those companies in hot metro markets that recognize the dangers of speculative activity. A comprehensive national survey of more than 500 home builders conducted by NAHB in June shows that only 4% of single-family homes sold in the first half of this year were to investors who were not buying the property as a primary residence or vacation home, compared with 13% of the multifamily condo units sold during that same period. Some of the units sold to investors, particularly condos, are bought as long-term rental investments, leaving even smaller shares for short-term speculative activity. Only 6% of respondents to NAHB’s June survey said they were actively marketing single-family homes or condos to investors. The investor share of new single-family home sales identified in NAHB’s June survey of builders is well below the share computed from the LoanPerformance database for the entire single-family market of new and existing units combined. Those data show that the investor share of prime conventional conforming mortgage loans to buyers of both new and existing single-family homes (excluding purchases of primary residences and vacation homes) was 9.5% in December of 2004 and 9.9% in March of this year, which is the latest month for which statistics are available. Neither LoanPerformance data nor the Home Mortgage Disclosure Act (HMDA) database distinguishes between new and existing homes. NAHB analysis of recently released data from the 2001 Survey of Residential Finance, conducted by the U.S. Census Bureau for the Department of Housing Development as a supplement to the 2000 Census, shows that the investor share of single-family homes purchased in 1999 was much lower in the new-home market than in the market for existing homes. | 
