Investor participation in the housing market dropped sharply in July, establishing a two-month trend and showing a clear reversal of long-term growth in investor purchases of residential properties, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.

Investor participation in the housing market fell to 21.9 percent of all transactions in July, from 23.5 percent in June, based on a three-month moving average. Investor participation back in May of this year hit a two-year peak of 25.3 percent of all transactions.

Real estate agents responding to the HousingPulse survey indicated that recent price increases caused the sharp reversal in investor interest. “Investors are dropping out due to the increase in prices,” reported an agent in California. “Prices are too high here for investors,” added an agent in Massachusetts.

“Smart money” is beginning to leave from the market, according to HousingPulse survey respondents. “Investors are having a hard time finding what they want. Starting to see ‘dumb’ investors enter the market, the ’smart’ ones are exiting the buying,” reported an agent from Arizona. “Investors need a deal. There are not as many opportunities as there was this time last year. It seems all the rookie investors are buying now and paying too much,” observed an agent in Florida.

The proportion of distressed properties in the housing market fell sharply to 42.2 pe rcent in July, from 45.1 percent  in June and 46.1 percent in May, according to the HousingPulse Distressed Property Index (DPI). While investors often concentrate their purchases on distressed properties, the decline in investor purchases was also apparent in the non-distressed market. Investors bought 14.4 percent of non-distressed properties in May, but only 11.5 percent in July-a precipitous two-month decline.

In contrast to investors, current homeowners showed strong interest in buying homes, accounting for 43.5 percent of home purchases in July, up from 40.3 percent in May and 42.0 percent in June. Participation by first-time homebuyers was mostly flat. Use of cheap mortgage financing by current homeowners increased strongly during the months of June and July.

“Overall homebuyer demand and home price appreciation is being driven by historically low interest rates,” commented Thomas Popik, research director for Campbell Surveys. “But savvy investors are the canaries in the coal mine-they are warning that if rates rise, the high proportion of distressed properties could once again push home prices down.”

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