Are rising prices turning away investors?

An interesting piece in USA TODAY echoes some recent observations I’ve heard from agents in our local market – namely that investors are beginning to leave the Reno-Sparks market as prices have increased so dramatically over the past year. Indeed, with sales prices having gained nearly 39 percent throughout 2012, returns on recent rental home purchases must be falling if rents are not keeping pace. …and I have not heard that rents have gone up 39 percent.

The USA TODAY story, As prices rise, rental home investors seek new markets, reports that…

Rapid price increases are forcing real estate investors to shift their focus, and money, to new markets as they scramble to buy more homes to rent. …Phoenix, which has led the nation with rapid home-price gains, is among the first markets to see investors’ interest cool.

Upon reading the piece I asked how can we tell if this phenomenon is occurring in the Reno-Sparks market. A “quick and dirty” way to possibly get an idea would be to take a look at the proportion of cash purchases. The thought being that investors tend to purchase with all cash (as opposed to financing), more often that owner-occupant purchaser do. I realize that this is not an exact method, but given the MLS data at my disposal I didn’t have many options. At the very least I might uncover a revealing trend.

Readers may recall that last February I posted a blog post entitled Cash is King — more than ever. In that piece I showed the dramatic rise in the proportion of cash purchases over the past few years (see the table in that blog post). Specifically how the proportion of cash purchases went from a low of 6 percent in 2006 to more than 26 percent in 2011.

On the surface it appears that 2012 continued that trend — with cash sales accounting for a 27.8 percent share of all house sales for the year. However, if we dig a little deeper, and look at the numbers by quarter, we begin to see a downward trend forming (see the table below).

2012 units sold for cash % cash sales
Q4 1,545 413 26.7%
Q3 1,521 403 26.5%
Q2 1,564 452 28.9%
Q1 1,454 425 29.2%

Could it be that the number of cash sales has reached its peaked? And, if so, is this an indicator that the investors are beginning to move on from the Reno-Sparks market?

This is an interesting metric that I’ll be watching throughout the year. I’ll keep you posted.

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About Guy Johnson

I am a licensed Nevada REALTOR® (lic.# S.0075262.LLC) living and working in fabulous Reno, Nevada. I cover Reno, Sparks, Incline Village, Carson City, and beyond. Give me a call at 775-722-4011 and I will be happy to assist you with your real estate needs. I'm your Guy!
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8 Responses to Are rising prices turning away investors?

  1. Avatar Jacky says:

    I’m certainly a cash investor and current landlord and I will say for me personally the rising prices have prevented me from purchasing more property for cash. With almost zero choices and higher prices my money is best invested elsewhere.

    I’ve actually started to look at the south Florida market.

  2. Avatar Guy Johnson says:

    Thank you for your comment, Jacky.

  3. Avatar Sully says:

    In ’09, Mike McG wrote an article about NRES and a half dozen other local flippers, one of the half dozen bought a REO in Nov for 301K listed it at 420K on Dec 22, a week later it went pending loan.

    Also, in Oct the Nevada Affordable Housing Trust bought a REO for 170K and listed it for 249,950 in Nov. Price reduced on 1/18 to 243,950. Cannot find this company (agency) anywhere on Nevada govt agencies site, so could be a quirky name for a flipper.

    These mark ups really make NRES look like a “good guy” 🙂

    I haven’t done a detailed search, but ran across these two looking for something else.
    I too, will redirect my cash to other areas for the near future, that is, until the stock market crashes.

    There really isn’t much in the residential market looking good in this area. I’m thinking commercial is still a bit early at this stage, in this area.

  4. Avatar Stiller says:

    Is it really so hard to comprehend the notion that rising prices are going to turn away investors?
    I mean, c’mon.
    Do you need a Ph.D in economics to grasp this?

  5. Avatar Paul says:

    Guy, what is your opinion on rents? Mine is that they’re flat and the market is flush with for-rent inventory. Investors may still be snapping up SFR’s at 3-4% CAP rates because the median mortgage cost is still in the 3.5% range. What happens when interest rates normalize in the 5-6% range and investors demand a 5-6% CAP but rents haven’t moved?

  6. Avatar Jacky says:

    Paul

    With prices due for a correction there is no money to be made on a 3-5% cap rate. That isn’t even keeping up with inflation. All of my properties generate between 7-10% cap rates. You can buy AAA rated bonds right now that pay 3%, to buy a property at inflated prices for the same return is idiotic IMO.

  7. Avatar Bob says:

    Agree with Jacky. Too much shadow inventory and just waiting to go down

  8. Avatar Guy Johnson says:

    I wonder if these are some of the places investors are turing to: 10 Best Places to Buy a Foreclosure in 2013

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