LANDLORD LAND A real estate dance party is being led by a new breed of rental property investors But some local markets may soon be left without a dance partner Housing Boom 2.0 The housing market is in full boom. Much has been written about various buyer groups, including cash investors, first time homebuyers, and Nationwide, single family homes and condos in the third international buyers, but this analysis is designed to quarter of 2016 sold for a median price of $223,500, just pair overall price trends against the overall trend of 1.5 percent below the pre-recession high of $227,000 in Q3 buyer profiles. Given the continued decline in the 2005, according to ATTOM Data Solutions. After bottoming homeownership rate, this analysis helps fill the gap in out at $143,500 in Q1 2012, median home prices have understanding who is leaving and how that exodus affects increased over the last 18 consecutive quarters and are different markets, focusing on three high-performing now 56 percent above that Q1 2012 bottom. markets: Dallas, Nashville, and Seattle. Price per square foot growth has continued to increase since the housing crash, according to a Clear Capital analysis, but continues to remain far below the housing Home Prices Per Square Foot Historically National PPSF Nashville PPSF Dallas PPSF Seattle PPSF $250.00 boom highs. National price per square foot has steadily increased over the last 21 quarters beginning in Q3 2011. However, as of Q3 2016, the price per square foot of single family homes and condos nationwide had climbed $200.00 $200 $150.00 $150 to around $93 a square foot –still more than 22 percent Jun 16 Jun 15 Oct 15 Feb 16 Jun 14 Oct 15 Feb 15 Jun 13 Oct 13 Feb 14 Jun 12 Oct 12 Feb 13 Jun 11 Oct 11 Feb 12 Jun 10 Oct 10 Feb 11 Jun 09 Oct 09 Feb 10 Jun 08 Oct 08 Feb 09 Jun 07 Oct 07 Feb 08 Jun 06 Oct 06 Feb 07 Jun 05 of weaker demand and constrained supply that was not $0.00 $0 Oct 05 according to ATTOM Data — indicating some combination Feb 06 — still 19 percent below the pre-recession peak in Q3 2016, $50.00 $50 Oct 04 Home sales volume numbers are also below previous highs $100.00 $100 Feb 05 below the pre-recession high of $120. present in the previous housing boom. In spite of this lowered housing turnover, demand is still outpacing supply, as evidenced by the continued strong growth in median sales prices over the past four and half years. But — given the nearly 50-year low in homeownership rates — the question as to what segment of the market is driving this recovery remains. ATTOM Data Solutions and Clear Capital set out to answer that question in this analysis. The overarching theme addressed in this analysis is dissecting current and historical price performance against the ‘Who’ of the buyer profile. Landlord Land ATTOM Data Solutions + Clear Capital Report Though prices in several markets are nearing pre-bust levels, the composition of both the supply and demand of today’s real estate market is starkly different than a decade ago. As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market.” Alex Villacorta, Vice President at Clear Capital, Research and Analytics P1 Institutional Investor Influx Given the stubbornly low rate of homeownership — in Q1 2012 — home prices bottomed out and began to nationwide, particularly among the younger buyers of the climb, providing these investors with the icing on the cake millennial and Gen-X generations, the housing recovery of rising home equity along with the rental returns that has been driven disproportionately by investors, primarily were the primary investment objective. those with large stores of cash or perhaps just better access to credit— particularly in traditionally lower-priced However, the overall health of the housing market began markets such as Dallas and Nashville. Leading the way to improve and new foreclosure rates softened as prices were institutional investors — entities that purchase at crept upward once again, and as a result the industry’s least 10 properties in a calendar year — who picked the share of distressed sales began to significantly shrink low-hanging fruit of distressed properties available at a after the market trough of 2011 to 2013. As a result, large discount between institutional investors began pulling back in their purchases 2009 and 2013. in 2014, today representing around just 2 percent of home sales nationwide. These institutional investors began ramping up on acquisitions in 2009 and 2010, breaking through the 7.0 Even after the pullback of institutional investments, percent mark of all home sales in Q3 2010, later ramping home prices have continued to rise over the last several up to as high as 9.5 percent of all home sales in Q1 2013. years. Who else is driving the demand that continues (see chart below) These investors often bought to put upward pressure on home prices? We’ll address foreclosure properties at a sizeable discount and held that question on Page 6 after taking a deeper dive into them as rental properties. institutional investor trends in the three local markets: Dallas, Nashville and Seattle. About two years into the institutional investor buying spree U.S. Home Prices and Institutional Sales YoY Pct Change in Price Pct of Institutional Inv Sales Investor-Owned Homes Heat Map Median Sales Price 15% 15% $250,000 $250,000 10% 10% Click on map to view interactive nationwide heat map $200,000 $200,000 5% 5% $150,000 $150,000 0% 0% -5% -5% $100,000 $100,000 -10% -10% $50,000 $50,000 -15% -15% -20% -20% 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 $0 $0 Landlord Land ATTOM Data Solutions + Clear Capital Report Percent Investor-Owned 0% 90% P2 Dallas Institutional Investor Trends Institutional investors did not dramatically increase property percent from the previous high of $172,235 in Q3 2007. acquisitions in Dallas in the wake of the Great Recession At the same time, the distressed share of the market was — in fact they were already relatively active in the Dallas continuing to decline, providing a smaller share of discounted market before, during, and after the recession. Unlike inventory for institutional investors to choose from. some other markets hit hard by the housing crisis, Dallas did not experience a massive wave of foreclosures being To achieve desired rental returns, the home price “sweet spot” sold for deep discounts on the courthouse steps, which for many institutional investors was between the $150,000 greatly limited the ability of the institutional investors to buy and $200,000 price points. Beginning in Q2 2013, the Dallas discounted properties in large quantities. market started becoming too expensive for an increasing number of investors as prices continued to rise during the However, the overall health of the Dallas economy — recovery. The median home price in Dallas reached a new combined with relatively low home prices compared to other all-time high of $236,208 in Q3 2016 — 63 percent above markets across the country — still provided institutional the post-recession bottom of $145,103 in Q1 2009 and 37 investors with strong rental returns, even on properties percent above the pre-recession high in Q3 2007. priced at full market value. Given these financial advantages, it’s not surprising to see that institutional investors Similar to the nationwide trends, home prices continue to represented an average of 10.5 percent of all home sales in post strong year-over-year increases in Dallas, indicating the Dallas area between Q1 2005 and Q1 2013. that other groups of buyers apart from institutional investors are helping to drive demand there. But by Q2 2013, the share of institutional investor purchases had dropped precipitously, down to 7.0 percent, and has continued to drop since then, falling to 2.7 percent in Q3 2016. There are two major contributing factors for the declining share of institutional investors. Median home prices in the Dallas metro area had reached a major milestone with a new post-recession high of $189,525 — up a whopping 10 Beginning in Q2 2013, the Dallas market started becoming too expensive for an increasing number of investors as prices continued to rise during the recovery.” Dallas Home Prices and Institutional Sales YoY Pct Change in Price Pct of Institutional Inv Sales Median Sales Price 20% 20% $250,000 $250,000 15% 15% $200,000 $200,000 10% 10% $150,000 $150,000 5% 5% 0% 0% $100,000 $100,000 -5% -5% $50,000 $50,000 -10% -10% -15% -15% $0 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 $0 Landlord Land ATTOM Data Solutions + Clear Capital Report P3 Nashville Institutional Investor Trends Although Nashville was not one of primary markets of Meanwhile the share of distressed saturation in the market opportunity such as Atlanta or Phoenix for institutional dropped below 12 percent in the Nashville market in Q1 investors as the Great Recession receded, the relatively low 2015 for the first time since 2009, falling to less than home prices of the area did ultimately attract these types half the peak distressed saturation of 27 percent in Q2 of investors. While the increase in institutional investor 2012. This ultimately translated to a smaller inventory of activity nationwide started circa Q3 2010, the increase in discounted and distressed homes for institutional investors Nashville began a couple quarters later in Q1 2011 — when to choose from. the share of purchases going to institutional investors jumped to 6.9 percent. Institutional investor activity in Nashville has continued to decline to 3.9 percent in Q3 2016 as median home prices Positive home price appreciation kicked in a little over a year reached a new all-time high of $212,000, a 12 percent year- later in Q2 2012, when home prices rose 6 percent year- over-year increase. over-year in Nashville following a nearly four-year trend in declining home prices. In Nashville, home prices have continued to strongly appreciate despite the pullback of institutional investor demand. We’ll look Similar to Dallas, however, the institutional investing strategy at who is filling that demand void on Page 8. became a victim of its own success. Institutional investors accounted for an average of 6.0 percent of all home sales between Q1 2011 and Q1 2015 — as high as 7.5 percent in some quarters — but the share of institutional investor purchases dropped significantly from 6.5 percent in Q1 2015 to 2.4 percent in Q2 2015. Home prices spiked in Q3 2015 to a new post-recession high of $189,900 — nearly the exactly same price point that coincided with the plummeting institutional investor activity in Dallas. Institutional investor activity in Nashville has continued to decline to 3.9 percent in Q3 2016 as median home prices reached a new all-time high of $212,000, a 12 percent yearover-year increase.” Nashville Home Prices and Institutional Sales YoY Pct Change in Price Pct of Institutional Inv Sales Median Sales Price $250,000 $250,000 14% 14% 12% 12% $200,000 $200,000 10% 10% 8%8% $150,000 $150,000 6%6% 4%4% $100,000 $100,000 2%2% 0%0% $50,000 $50,000 -2% -2% -4% -4% $0 $0 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 -6% -6% Landlord Land ATTOM Data Solutions + Clear Capital Report P4 Seattle Institutional Investor Trends Unlike both Dallas and Nashville, the price point in the large inventory of distressed properties, the relatively high Seattle market was disadvantageous for the buy-to-rent price of homes in Seattle still prevented significant market investing strategy employed by institutional investors. Even activity on the part of institutional investors. at the bottom of the market in Q1 2012, the Seattle median home price of $225,000 was well above the buy-to-rent Even without as much lift from institutional investors as in sweet spot of $150,000 to $200,000. Dallas and Nashville, Seattle home prices have still risen meteorically during this housing boom. Median home prices Institutional investors did dabble in the Seattle market, in Q3 2016 reached a new-all time peak of $375,000, a however, with a mini-surge in activity between Q1 2013 and staggering 67 percent above the low of $225,000 in Q1 2012. Q1 2014. During that time period, institutional investors Seattle’s recovery has been stronger than either Dallas or accounted for an average of 6.6 percent of all home sales Nashville, both of which have reported a median home price in Seattle. increase of 63 percent since bottoming out. As the housing market recovery continued, median home prices surged past the $300,000 milestone to $320,000 in Q2 2014, and the market share of institutional investors dropped from 6.1 percent in Q1 2014 to 4.8 percent in Q2 2014. Even in Seattle, with its infamously sky-high rents, this rising price point was too rich for many institutional investors, whose share continued to drop to just 1.8 percent in Q3 2016. There are a few hard money lenders here, and they bring people who are not fulltime investors and people who are end users … to the (foreclosure) auction and are outbidding anyone who is a traditional investor.” Seattle’s distressed saturation has actually been consistently higher than that of Dallas and Nashville throughout the housing recovery, reaching a peak of 38 percent in Q4 2011 Chris Richter, CEO at Audantic Real Estate Analytics in Seattle and still in double-digits as recently as Q2 2016. Despite a Seattle Home Prices and Institutional Sales YoY Pct Change in Price Pct of Institutional Inv Sales Median Sales Price 20% 20% $400,000 $400,000 15% 15% $350,000 10% 10% $300,000 5%5% $250,000 0%0% $200,000 -5%-5% $150,000 -10% -10% $100,000 -15% -15% $50,000 -20% -20% $0 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 $0 Landlord Land ATTOM Data Solutions + Clear Capital Report P5 Filling the Institutional Investor Void As the larger institutional investors pulled back on home As demand from FHA low-down payment buyers lessened, purchases due to the decreasing distressed share of the the demand from smaller investors actually increased. market, a different type of investor began to fill the void left Nationwide, the overall share of non-owner occupied homes by the bigger players; smaller investors, willing to purchase in purchased in 2015 was 32 percent and one year later a wider variety of market landscapes and operate on thinner jumped to nearly 37 percent — a 21-year high going back as margins, began ramping up activity in the wake of the Great far as ATTOM data is available. Recession. The nationwide share of non-owner occupied homes purchased in 2011 had risen to 32.0 percent, up from Early on it was the mid-size investors all the way up to the large institutions (that) had the most urgent need for capital. … We see a lot more opportunities from the smaller, midsized operators, and so that is where we are focusing our efforts: the broad base of the pyramid.” 30 percent in 2010 and 28 percent in 2009. During the peak activity of institutional investing, the market share of FHA buyers, who are typically first-time homebuyers with a low down payment, waned during the early housing recovery from 2012 to 2014. However, in January 2015, FHA lowered its insurance premium 50 basis points, and there was a modest resurgence in FHA buyers — a trend perhaps indicative of loosening credit requirements or of a desire to re-enter the housing market for those displaced during the crash. The FHA resurgence was short lived, however, as the Ryan McBride, COO at Colony American Finance, a lender to real estate investors share of FHA buyers essentially flat-lined in 2016 — at 21.7 percent compared to 22.3 percent in 2015. Who is Filling the Void Left by Institutional Investors Nationwide? Pct to Institutional Investors Pct Non-Owner Occupied (Investor-owned) Pct FHA Buyers U.S. Landlords by Number of Properties Owned 11 to 100 40% 40% 6 to 10 6% 100+ 3% 4% 35% 35% 30% 30% 3 to 5 8% 25% 25% 20% 20% 1 to 2 15% 15% 79% 10% 10% 5% 5% 0% 0% 2012 2012 2013 2013 2014 2014 2015 2015 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 2016 P6 Filling the Demand Void in Dallas Because the share of FHA buyers has not significantly increased since 2013, it’s evident that first-time homebuyers — at least those using FHA loans — are not filling the demand void left by the pullback in institutional investor purchases in Dallas. The share of FHA buyers in Dallas dropped dramatically during the early years of the housing recovering, falling from 29.0 percent of all sales in 2012 down to 19.6 percent of all sales in 2014. However, the nationwide uptick in FHA buyer share in 2015 was reflected in the Dallas market, where FHA buyers accounted for 21.3 percent of all sales in 2015, but that share dropped back down to 20.4 percent in 2016. ... smaller investors are clamoring to the Dallas market, with the share of non-owner occupied homes rising from around 21 percent purchased in 2012 and 2013 to 24 percent in 2014, 26 percent in 2015 and a new 21-year high of 32 percent in 2016.” Conversely, smaller rental property investors are clamoring to the Dallas market, with the share of non-owner occupied homes rising from around 21 percent purchased in 2012 and 2013 to 24 percent in 2014, 26 percent in 2015 and a new 21-year high of 32 percent in 2016. Who is Filling the Void Left by Institutional Investors in Dallas? Pct to Institutional Investors Pct Non-Owner Occupied (Investor-owned) Dallas Landlords by Number of Properties Owned Pct FHA Buyers 11 to 100 6 to 10 8% 100+ 4% 5% 35% 35% 30% 30% 3 to 5 11% 25% 25% 20% 20% 1 to 2 72% 15% 15% 10% 10% 5% 5% 0% 0% 2012 2013 2014 2015 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 P7 Filling the Demand Void in Nashville Demand from first-time homebuyers and others using FHA 2012 and 2013 and rising to 25 percent of all sales in 2015 loans did increase more dramatically in Nashville than in and 27 percent of all sales in 2016 — also a 21-year high. Dallas or other parts of the nation — increasing more than 4 percentage points from 20.1 percent of all sales in 2014 to 24.5 percent of all sales in 2015, before dropping back to A lot of demand is people in the Bay Area and New York City looking to buy in the Southeast. … We have one Google engineer who just bought his sixth house. He said ‘this is fantastic, real estate is so expensive here and I don’t want to be tied just to Bay Area real estate.“ 23.4 percent of all sales in 2016. This increase in FHA loan activity is likely due to less competition from investors than seen in Dallas or other markets and an attractive median home price that is slightly below the Dallas or national average. Even with the jump in FHA buyer share in 2015, FHA loan activity continued to track below the share of non-owner occupied home purchases. While the share of non-owner occupied purchases in Gary Beasley, CEO and founder at Roofstock, an online marketplace for single family rentals Nashville is not as high as in Dallas, it does follow a similar pattern of trending upward throughout the housing recovery, starting at about 24 percent of all home sales in Who is Filling the Void Left by Institutional Investors in Nashville? Pct to Institutional Investors Pct Non-Owner Occupied (Investor-owned) Nashville Landlords by Number of Properties Owned Pct FHA Buyers 11 to 100 11% 35% 40% 100+ 4% 6 to 10 30% 35% 5% 30% 25% 3 to 5 10% 25% 20% 1 to 2 20% 70% 15% 15% 10% 10% 5% 5% 0% 0% 2012 2013 2014 2015 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 P8 Filling the Demand Void in Seattle Similar to Nashville, Seattle saw a more than 4 percentage buyers is helping to drive demand, likely those somewhere point rise in FHA buyer share in 2015 compared to 2014 in the middle of the buyer spectrum between first-time — indicating stronger demand from first time homebuyers homebuyers and investors. This may include move-up and others using FHA loans. But as with the other two buyers, first time homebuyers getting down payment markets, that share of FHA buyers drifted lower in 2016, assistance from family, and international owner-occupant reflecting once again the short-lived surge evident in the buyers purchasing with cash or large down payments. nationwide numbers. Unlike the Dallas and Nashville markets, however, there has In the last year I’ve noticed more millennials or their parents calling me and saying … ‘my son wants to buy a house and we’re willing to help with the down payment. He’s been living with several other friends in an apartment … and they want to continue to live together.’” not been a steady increase in the share of overall investor purchases in Seattle during the recovery. To the contrary, the share of non-owner occupied home purchases has trended lower, starting at 22 percent in 2012 and ending at 21 percent in 2016. Of the three markets, Seattle had the lowest share of overall investor purchases in 2016 and was significantly below the national average. Both ends of the buying spectrum — low down payment borrowers and cash-flush real estate investors — are exhibiting signs of weakening demand in Seattle, but Edward Krigsman, Managing Broker, Windermere Real Estate, Seattle home sales and prices are continuing to trend higher. These trends would indicate that some other pool of Who is Filling the Void Left by Institutional Investors in Seattle? Pct to Institutional Investors Pct Non-Owner Occupied (Investor-owned) Seattle Landlords by Number of Properties Owned Pct FHA Buyers 11 to 100 6 to 10 25% 25% 3 to 5 2% 100+ 4% 3% 6% 20% 20% 15% 15% 1 to 2 85% 10% 10% 5% 5% 0% 0% 2012 2013 2014 2015 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 P9 Feeding the Flipping Frenzy The national trend of investor-driven demand for homes boom this time around is much more heavily driven by other was led by cities like Nashville and Dallas, areas typically investors tapping into the hot rental market grounded in more attractive to investors because of relatively low-priced ongoing low homeownership rates. homes that can provide better potential for strong cash flow on rental properties. The strong demand from buy-and-hold 2016 Home Flipping Heat Map rental investors in these markets has also helped to fuel the markets for flippers who rehab older, outdated housing inventory into turn-key rentals for the passive buy-and-hold Click on map to view interactive nationwide heat map investors to purchase for their portfolios. In Nashville, 30.6 percent of all homes flipped in Q3 2016 were sold to all-cash buyers — likely other investors planning to buy and hold the property while collecting rents. That share has trended higher throughout the housing recovery, averaging 33 percent since Q1 2012 compared to an 18.7 percent average during the house flipping surge 10 years ago between Q2 2005 and Q3 2007. While the home flipping boom 10 years ago in Nashville — and many markets Flips Pct of All Sales nationwide — was driven by demand from owner-occupant -8% buyers with easy access to no-document loans, the flipping 100% What is Fueling Flipping Comeback in Nashville? Number of Home Flips Share Sold to Cash Buyers Trend 35% 35% 1,000 1,000 900 900 30% 30% 800 800 25% 25% 700 700 600 600 20% 20% 500 500 15% 15% 400 400 300 300 10% 10% 200 200 5% 5% 100 100 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 2010 Q2 2010 Q1 2009 Q4 2009 Q3 2009 Q2 2009 Q1 2008 Q4 2008 Q3 2008 Q2 2008 Q1 2007 Q4 2007 Q3 2007 Q2 2007 Q1 2006 Q4 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2 0% 0% 2005 Q1 00 P10 Seattle Flipping Bucks the Trend Bucking the national trend to a large degree was Seattle, where the housing recovery has been less dependent on investors and driven largely by traditional buyers. In Seattle, relatively high home prices combined with a low share of distressed properties available on the market deterred many investors from taking the plunge, but strong wage growth has been able to help fuel a rise in home prices without the additional demand of a large investment sector. So while home flipping is on the rise in Seattle — where the number of homes flipped reaching a 10-year high in Q2 2016 — homes flipped are much less likely to be sold to cash buying investors than in Nashville. Moreover this trend is declining, indicating that even fewer investors are purchasing from flippers. Instead an increasing share of flipped properties is Inventory constraints and climbing home prices … limit the (home flipping) profit potential and make these purchases inherently more risky.” likely going to traditional, owner-occupant buyers. “Inventory constraints and climbing home prices … limit the profit potential and make these purchases inherently more risky,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market. “The fact that over half of homes that are bought for flipping are financed rather Matthew Gardner, Chief economist at Windermere Real Estate than cash purchases signifies that prices are getting to levels that are out of reach for flippers.” What is Fueling Flipping Comeback in Seattle? Number of Home Flips Share Sold to Cash Buyers Trend 1,400 1,400 25% 25% 1,200 1,200 20% 20% 1,000 1,000 15% 15% 800 800 600 600 10% 10% 400 400 5% 5% 200 200 0% 0% Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 2010 Q4 2010 Q3 2010 Q2 2010 Q1 2009 Q4 2009 Q3 2009 Q2 2009 Q1 2008 Q4 2008 Q3 2008 Q2 2008 Q1 2007 Q4 2007 Q3 2007 Q2 2007 Q1 2006 Q4 2006 Q3 2006 Q2 2006 Q1 2005 Q4 2005 Q3 2005 Q2 2005 Q1 00 P11 Dance with the One That Brung Ya Data from this analysis supports the theory that the housing particularly in markets like Dallas and Nashville that have boom of the past four and a half years has been driven in been more heavily dependent on investors thus far in the large part by non-owner occupant buyers (investors) — first recovery. Meanwhile, markets like Seattle are more poised the large institutional investors acting as the tip of the spear to see growth coming from the traditional buyer segment and followed by the much broader base of smaller investors of the industry. chasing a similar strategy. Even though median home prices are substantially higher in First-time homebuyers have played a part in driving demand Seattle than in either Dallas or Nashville, the Seattle market in this housing boom, but in many markets they have played is more in line with its own historical affordability standards, a relatively small role, as evidenced by the stubbornly low allowing for continued growth from average-wage-earning homeownership rate nationwide and the flat-lining of FHA traditional buyers in that market. Contrastingly, both buyer share following a short-term surge in 2015. Nashville and Dallas are now significantly less affordable than their high historical affordability norms — putting Because the driving force behind this housing recovery would-be buyers,who are now renters in those markets has been real estate investors, home prices have risen between a rock and hard place. higher and more quickly than if the recovery had been driven more heavily by first time homebuyers. Buyers new In short, markets will likely be forced to dance with the one to the housing industry are more directly constrained by who brought them to the housing boom party — and hope affordability and the availability of credit in a tight market, their dance partner has strong legs. while investors are constrained by rate of return — typically in the form of rental cap rates. In many markets, this results in investors more willing and able to pay a higher price point than first-time homebuyers. Ultimately, these trends have left a market in a precarious position, with affordability for average wage earners nationwide inching closer to its long-term norm, according to the ATTOM Affordability Index. Given the current trajectory of home prices and interest rates, affordability will go below the long-term norm of 100 in 2017, locking an increasing number of would-be first time homebuyers out A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword. Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth.” of the housing market. As a result, future growth in the housing market will continue to be largely in the laps of landlords — Landlord Land ATTOM Data Solutions + Clear Capital Report Daren Blomquist, SVP at ATTOM Data Solutions P12 U.S. Affordability & Low Down Payment Buyers U.S. Affordability Index FHA Buyer Share Normal Affordability 25% 25% 180 180 160 160 20% 20% 140 140 120 120 15% 15% 100 100 80 80 10% 10% 60 60 40 40 5% 5% 20 20 0% 0% 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 00 Seattle Affordability & Low Down Payment Buyers Avg Affordability Index for Seattle-Area Counties Normal Affordability FHA Buyer Share 180 180 18% 18% 160 160 16% 16% 140 140 14% 14% 120 120 12% 12% 100 100 10% 10% Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 0% 0% 2014 Q1 00 2013 Q4 2% 2% 2013 Q3 2020 2013 Q2 4% 4% 2013 Q1 4040 2012 Q4 6% 6% 2012 Q3 6060 2012 Q2 8% 8% 2012 Q1 8080 P13 Dallas Affordability & Low Down Payment Buyers Avg Affordability Index for Dallas-Area Counties Normal Affordability FHA Buyer Share 140 140 25% 25% 120 120 20% 20% 100 100 15% 15% 80 80 60 60 10% 10% 40 40 5% 5% 20 20 0% 0% 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 00 Nashville Affordability & Low Down Payment Buyers Normal Affordability FHA Buyer Share Avg Affordability Index for Nashville-Area Counties 140 140 30% 30% 120 120 25% 25% 100 100 20% 20% 80 80 15% 15% 60 60 10% 10% 40 40 5% 5% 20 20 0% 0% 0 Landlord Land ATTOM Data Solutions + Clear Capital Report 2016 Q3 2016 Q2 2016 Q1 2015 Q4 2015 Q3 2015 Q2 2015 Q1 2014 Q4 2014 Q3 2014 Q2 2014 Q1 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 0 P14