REPORTS OF RAMPANT BUYING BY INVESTORS and speculators in hot U.S. housing markets have proliferated in recent times. The buying binge, in turn, supposedly has driven house prices to unsustainable levels, creating an unstable condition that could quickly reverse course and seriously damage a number of markets. An increase in mortgage rates commonly is fingered as the factor that could trigger such a reversal.

The share of homes bought solely for investment purposes definitely has increased over the past year or so, and it seems clear that a rising share of such purchases has been driven by prospects for capital gains rather than the lure of rental income. This process can create a “hidden supply” of homes that's poised to come back onto housing markets if and when market prices threaten to flatten or reverse course.

The NAHB has been surveying builders about the investor/speculator phenomenon and the development of house price “bubbles” since late last year; our most recent survey was conducted in March. We got responses from 536 builders of all sizes from across the country. The results show growing levels of concern in the home building industry.

Price Bubbles? More and more builders report high rates of price appreciation in their markets (for homes of similar size and quality). In March, 40 percent of respondents said prices were up by more than 10 percent from a year earlier, compared with 27 percent of builders in our late 2004 survey. Nearly three-fifths of builders in the Northeast and West regions said year-over-year price increases exceeded 10 percent in March.

Nearly two-thirds of builders in our March survey said they are concerned about price bubbles—and the danger of significant price declines—in their markets, and 10 percent said they are “very concerned.” The concerns were widespread, depending largely on the size of the builder and the area of the country, although concerns ran relatively deep among larger companies (starting more than 100 units per year) and in the Northeast and West regions.

Investor Role? Many builders are reporting a growing share of home purchases by investors/speculators in their market areas. In March, 60 percent of builders reported some investor/speculator activity, up from 50 percent late last year, and 11 percent said the share of home purchases exceeded 10 percent. In the West region, 80 percent of builders reported some investor/speculator activity, and 20 percent said the share of home purchases had risen above 10 percent.

Builders increasingly believe that purchases by investors/speculators are fueling house prices and contributing to bubble conditions. In March, half the builders said investors/speculators had affected prices in their areas, up from 40 percent of respondents late last year, and nearly 70 percent of builders in the West cited upward price pressure from this source.

Where's It Going? Many builders are trying to limit sales to investors/ speculators, and gradually, rising interest rates may help to diffuse the issue without seriously damaging the markets. The NAHB will continue to assess the situation as the year progresses. Stay tuned.

David Seiders
Chief Economist, NAHB, Washington, D.C.