By If you’re in real estate or mortgage lending, you’re always getting inundated with data and statistics. Among the many statistics I’ve seen lately, one kind of jumped out at me.
I read recently that something like 70% of all buyers of foreclosed home are speculators. Wow.
I had a few quick reactions. My first one was one of surprise. I don’t know what I might have expected, but probably something like 30-40% would have been closer. My second reaction was that we should all be grateful for these speculators, since we need someone to be out there buying real estate. My third reaction was to wonder what will happen when the speculators all go away.
Let’s look at these assumptions or reactions.
First, having speculators represent such a large percentage of buyers probably shouldn’t be surprising. As speculators, they’re prepared to take risk in return for reward, and given how questionable housing values are these days, they’re willing to take great risk for great reward.
It’s speculators who are so key in the price discovery process. Speculators who get in too early and pay too much will lose money, and that’s precisely how end-users, people buying homes to live in, know whether and when it’s time to buy. The people looking to buy homes to live in are afforded the luxury of standing off to the side where they can watch speculators determine the true value of local homes.
In this sense speculators are as much a part of the recovery process as they are of the discovery process.
But what happens when they go away? First, we need to remember that the 70% statistic is only for foreclosed homes. Second, they will go away when the easy profits are no longer there. And why will this happen? It will happen because supply and demand are getting closer to equilibrium, and this has to happen before housing prices can stop falling and return to normal.
Speculators thrive when there is a wide disparity between what sellers want and what buyers will pay. True end-users want a market in which such disparities don’t exist.
The speculator stops playing the game because the easy profits are gone, but that also means that prices have stabilized. After all, profits are much harder to come by once prices have stabilized.
The speculators will leave precisely when true end-users enter.
The absence of speculators will, by definition, mean that things have returned to normal.
And isn’t that what we all truly want?
