SALES OF SINGLE-FAMILY HOMES AND CONDO units reached extraordinary heights late last year and in the early months of 2005. Historically low mortgage rates and an improving economy definitely fueled purchases of homes for owner occupancy. But it is also clear that surging prices attracted investors/speculators into many hot housing markets, adding to demand and generating even more upward pressure on sales and prices.

Surging demand and rising prices ordinarily make sweet music for home builders. But such a surge can create serious complications for markets down the line when a lot of purchases are by investors/speculators seeking quick capital gains rather than primary residences. That's because units bought solely for price appreciation constitute a “hidden supply” that is not in inventory calculations but that is poised to come back onto the market at the first hint of trouble.

INVESTOR ACTIVITY Various data sources document a rise in investor activity in U.S. housing markets, particularly in hot markets in the West, the Northeast corridor, and Florida. The markets displayed outsized increases in house prices for several years, attracting investment capital. This extra demand added froth to many markets, leading various analysts to conclude that certain places really do exhibit bubble characteristics after all!

In April, the NAHB launched a targeted investigation of investor activity in about 30 hot metro markets (selected on the basis of volume and price appreciation), utilizing surveys of local HBAs and builders located in those areas. This investigation confirmed the importance of the speculator role in hot markets for both single-family homes and condo units, emphasized the concerns of builders about potential adverse implications, and identified steps that companies are taking to contain investor activity.

BUILDERS TAKE ACTION We found that very few companies in our survey actively market single-family homes or condo units to investors and that most have taken steps to limit purchases for investment. Three-fourths said that buyers cannot sell homes or “nominate” contracts before closing, more than half said that buyers cannot resell during the year after closing, and more than a third prohibit renting during the first year. Methods to discourage resales within the year include contract clauses giving the builder the right to buy homes back at the original price, transferring capital gains on resale back to the builder, or assessing a healthy penalty (often $50,000) on quick resales.

High-production builders are particularly sensitive to the potential adverse market effects of heavy investor activity, since their large pipelines of planned production could be seriously disrupted. Smaller builders may not sense the dangers to the same degree, but the whole market will be adversely affected if a lot of hidden supply cascades back onto the market.

Chief Economist, NAHB Washington, D.C.