Do speculators help or hinder a recovering real estate market?

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As we head deeper into the 2020 recession, now is a good time for real estate professionals to prepare for the market forces ahead. On the horizon now is the coming wave of real estate speculators.

What’s the difference between speculators and regular absentee buyers?

Absentee buyers are any type of homebuyer who purchases without the intent of occupying the home, including long-term buy-to-let investors and short-term investors who make major improvements to the home to sell at a profit. However, speculators — sometimes flippers — purchase on the belief that prices will rise quickly and significantly enough to turn a profit on sheer market momentum.

Sandwiching themselves between the seller and the end user, who will ultimately occupy the property, speculators can be a natural occurrence in the market, typically responsible for around 20% of all transactions. For example, when home sales and prices drop, speculators can provide much-needed support in the form of cash and liquidity, taking unwanted homes off the hands of sellers unable to locate a buyer-occupant. In fact, there is a long history of speculation in U.S. real estate.

But when the magnitude of speculation increases past the point of stability, the market can become artificially inflated by speculator momentum.

On an annual basis, speculators tend to peak as a percentage of total homebuyers during the weaker winter months of January and February. In 2013, when speculation was last at its peak, speculators made up more than half of all home purchasers.

The speculators to come

While speculators are more likely to be sellers than buyers in today’s market, rest assured, the influx of buyer speculators is coming.

Presently, home prices are still rising in California, though sales volume is quickly waning. This is the opposite of an ideal situation for speculators, since homes are both difficult to acquire and are overpriced when available. However, after months of declining sales volume, alongside historic job losses, home prices are primed to fall going into 2021.

When prices do slip, homebuyers will prefer to sit on the sidelines, waiting to see when prices will bottom. When that happens, sales volume will continue to slow, and prices will fall. Enter the speculator.

Unconcerned with disclosures or even most material facts, speculators are cash-heavy and simply want to make the sale so they can flip a quick profit. Agents may find that dealing with this type of buyer is easy — after all, they’re hardly picky and present few problems throughout the escrow process. But the overabundance of speculators in a market keeps homes out of the hands of end users — your long-term, repeat clients who are the bread and butter of the real estate profession.

As during the recovery from the 2008 recession, their interference creates mini price bubbles, which can be misleading to real estate professionals and end users alike. Absent the inventory issues of the past couple years, sustainable price increases only occur when end users have access to quality, secure jobs. The current jobs recovery is not expected to occur until 2023 at the earliest.

Expect to hear more about speculators over the next two-to-three years. The recession is not over yet, and the housing market has yet to adjust to the new economic reality.

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