Builders Take Steps To Curb Speculation In Housing
Washington, Dc, June 21--Homebuilders 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 National Association of Home Builders (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 results of the three surveys are summarized below.
NAHB research has uncovered a good bit of concern in the home building industry about speculative home buying, i.e., purchases driven solely by the lure of short-term capital gains. Our research also found that many builders are taking steps to discourage sales to buyers that do not intend to occupy the homes and that these efforts have helped contain speculative activity in the national new-home market.
Builders are concerned about speculative home buying primarily because a lot of this activity can generate substantial "hidden supply" that could come back onto the market quickly if price appreciation should begin to falter; in that event, additional downward pressure would be put on market prices, and sales of new units coming onto the market would be severely disrupted. Indeed, speculators could not only unload units that they own but also fail to close on units they have contracted to buy -- 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 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.
Furthermore, it seems clear that investors often use "exotic" forms of adjustable-rate mortgages, financing vehicles that Federal Reserve Chairman Alan Greenspan recently called "developments of particular concern" in testimony before the Joint Economic Committee of the Congress. 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 turnover of existing homes as symptomatic of speculative activity.
