Home builders seek to curb speculative buying

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 National Association of Home Builders.

"Builders, especially the largest builders early on recognized the dangers of excessive

The association conducted three surveys earlier this year to assess the degree of concern by home builders about speculative activity in local housing markets, to gauge the extent of speculative newhome buying, and to determine how home builders are responding to the threat of speculative activity.

It says its research has uncovered "a good bit of concern" about speculative home buying, which refers to purchases driven solely by the lure of short-term capital gains. It says its research also found that many builders are taking steps to discourage sales to buyers that don't intend to occupy the homes.

Builders are concerned about speculative home buying primarily because a lot of that 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 disrupted, the association says. Indeed, speculators not only could unload units that they own, but also fail to close on units they have contracted to buya key risk in the new-home market because of typically long lags between sales contracts and closings, it says.

Many builders also are concerned about investor-owned units standing empty in new communities they are developing, the research shows.

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.

The concerns of home builders appear to be well founded. The Federal Deposit Insurance Corp. (FDIC) earlier this year identified 55 metro areas where price appreciation had reached "boom" proportions by the end of 2004, and mortgage loan data show not only an upswing in investor activity nationally but also relatively high shares of investor purchases in many "boom" markets.

Furthermore, the association says it seems clear that investors often use "exotic" forms of adjustable-rate mortgages, financing vehicles that Federal Reserve Chairman Alan Greenspan 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.

The trade association began surveying home builders about the investor-speculator phenomenon in March, gathering information from more than 500 companies in the U.S. At that time, 60 percent of the builders who responded reported some investor-speculator activity in their markets, and a majority of those companies felt that this activity was fueling house prices to some degree.

Concerns about potential price "bubbles" ran relatively deep among larger companies and those located in the Northeast and West regions. 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, or rising principal balances.

In April, the home-builders group launched a targeted investigation of investor-speculator activity in various 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 "hot" metro markets. The hot-market samples were selected by local affiliate home builder associations.

The panel of large builders said that 93 percent of their single-family home sales during the previous six months were for primary residences, 4 percent were for vacation homes, and 3 percent were for investment, including units bought as long-term rental properties. About 10 percent of their 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 those loans required higher interest rates, larger down payments, and/or stiffer underwriting standards than on loans to owner-occupants.

The April survey of builders located in hot metro markets showed significantly larger proportions of investor purchases in both the single-family market (11 percent) and the condo market (15 percent). That group of builders reported that most investor sales were to individuals from within the market area, although some investors were institutional buyers (6 percent) or foreign buyers (2 percent).

All members of the large-builder panel, and 89 percent 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):

* 82 percent said they would sell only to buyers for owner occupancy.

* 64 percent said the buyer cannot sell the home or "nominate" the contract before closing.

* 55 percent said the buyer cannot sell during the first year after purchase.

* 36 percent said the buyer must give the builder the first right to buy back if the home is sold within the first year, and 36 percent also said the home can't be rented within the first year.

* 36 percent said they were limiting the number of investor sales per lot release.

* 27 percent said they would not provide sales incentives to investors.

* 18 percent said they would not sell more than one home to buyers with the same last names.

* 18 percent used a variety of other measures, including charging a fee (often $50,000) if homes are resold within the first year.

From a national perspective, the amount of speculative buying of new single-family homes still appears to be quite limited, the association says. Indeed, a comprehensive national survey of more than 500 home builders that it conducted recently shows that only 4 percent of singlefamily homes sold in the first half of this year were to investors (not for primary residence or vacation home), compared with 13 percent of multifamily condo units sold during the same period.

Some of the units sold to investors-particularly condos-we bought as long-term rental investments, of course, leaving even smaller shares for short-term speculative activity. Only 6 percent of respondents to its June survey said they were actively marketing homes to investors.