Are housing investors creating a new bubble? Cash purchases cloud outlook for market

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Hope springs eternal

Despite worries that investors, not homeowners, are driving the market, many economists remain optimistic that the housing revival is real and here to stay.

Federal Reserve Chairman Ben S. Bernanke frequently touts the rebound of housing as one of the central bank’s main accomplishments in driving interest rates to historic lows in recent years. The rates on 30-year fixed-rate mortgages used by most consumers have been below 4 percent since the Fed started purchasing Fannie Mae and Freddie Mac mortgage bonds again last fall.

Patrick Newport, an economist at IHS Global Insight, said the Fed’s extraordinary easing is bearing fruit and, coupled with slow but steady job growth, is providing fuel for a lasting recovery in the housing market.

A drop in distressed sales, apparently as investors absorb much of the supply, is allowing home prices to firm up, enabling indebted homeowners to regain some of their lost wealth, he said. The Fed estimates that the value of homes nationwide increased $1.4 trillion last year, adding substantially to the principal source of middle-class wealth that was drastically depleted during the housing market collapse.

Higher home prices lifted 1.7 million homeowners above the underwater mark in 2012, according to CoreLogic.

Mr. Newport noted that higher home prices also are boosting property tax receipts for strapped state and local governments and making it more profitable again for developers to build homes and hire construction workers, producing dividends for the broader economy.

To many analysts, the influx of investors may not seem normal, but it has served an important purpose: It provided a jump-start to the market by prompting more traditional buyers to worry that they will miss the bottom in prices and interest rates if they don’t act soon.

“Expectations are starting to play a role,” said Mr. Newport. “Potential home buyers are entering the market now instead of later because they are afraid that prices will shoot up if they wait. Their expectations, which can become self-fulfilling, will magnify price increases in some places as housing markets improve,” creating a kind of virtuous cycle that is replacing the vicious downward cycle that prevailed in housing for years.

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