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Reduced investor presence, easing appreciation to help homebuyers in coming years

Housing market demand is expected to cool gradually over the next few years, most notably by way of fewer cash buyers and large-scale investors in competition with more traditional buyers.

Good news for prospective homebuyers came in the form of findings from the most recent Zillow Home Price Expectations Survey, which offered promise that residential property value appreciation rates will moderate over the next five years.

According to the survey, which was conducted conjunctively with financial analysis firm Pulsanomics LLC and pooled the opinions of 110 economists, housing market demand is expected to cool gradually over the next few years, most notably by way of fewer cash buyers and large-scale investors creating competition for more traditional buyers. Many of the former group, who presented themselves in large number during and after the recession by scooping up distressed or otherwise reduced-value properties, have either sold or are near selling the homes they purchased. That should help ease the price-driving trend that has contributed to a rather volatile dynamic in many metro markets such as the Bay Area, greater Los Angeles, Phoenix and San Diego.

While the relative absence of cash-wielding investors should help prospective first-time buyers, it could also level the playing field for property owners looking to enter the single-family rental market, HousingWire reported.

"Buyers entering the market in the next few months will not be competing with cash-rich investors like they were last year which should be some small solace given the higher prices and mortgage rates that they will encounter," said Stan Humphries, Zillow's chief economist. "The gradual decline of investor activity should be viewed as another sign of the market slowly returning to normal, and I agree with the panel's expectations that there will not be a rush for the exit by institutional investors."

Historical perspectives 
The survey, released Feb. 12,  found that economists expect home value appreciation rates to ease, eventually reaching a more sustainable pace between 3 and 5 percent, as was typical during the pre-housing bubble market of the late 1990s. The panel predicted an average rate of 4.5 percent through the fourth quarter of 2014, while offering an expectation that the cumulative change in home values through 2018 will total 19.7 percent.

Panelists generally expressed an anticipation that price gains will begin to slow by 2015, with the average estimate at 3.8 percent for that year and 3.3 percent by 2018. The average annual pace of appreciation predicted by the panel over the next five years was 3.7 percent - a figure much more representative of a theoretically healthy housing market. From 1987 to 1999, comparatively, the average annual appreciation rate was 3.6 percent. Conversely, from 2000 to 2007 when the market was simmering, that rate averaged 7 percent annually.

Nationwide, the U.S. market experienced an average appreciation rate of 6.4 percent in 2013, stoking genuine fears that another housing bubble could be forming. Using current home values and other fundamental economic indicators as a basis for their expectations, survey participants predicted that median U.S. home values would exceed their April 2007 peak by the first quarter of 2018 and could surpass the $200,000 threshold by the third quarter of that year. The rate of climbing, however, will by that point have moderated to the extent that the market will be improving in a manner that is sustainable.

The Fed factor 
Another topic on which panelists were asked to offer their opinion was the ongoing plans for stimulus spending by the Federal Reserve. In general, economists anticipate that the central bank, which has so far announced and triggered two separate cuts to its quantitative easing program in 2014, will complete the tapering process this year. That consensus was formed in advance of newly appointed Fed Chair Janet Yellen's Feb. 11 meeting address to Congress, in which she firmly laid out plans to proceed with bond-buying reductions. Yellen affirmed that the nation's economy is in a position of stability, noting that only with unforeseen underperformance from fundamentals will those plans change.

Meanwhile, 79 percent of respondents said that the pullback from large-scale investors would be "significant" or "somewhat significant" in 2014. That's important considering the effects such a trend would have on providing many areas with much-needed jolts of new housing inventory.

"Throughout the recovery, large-scale investors have purchased thousands of homes nationwide, particularly lower-priced vacant and foreclosed homes, fixing them up and keeping them in their portfolios as rental properties," read part of Zillow's release accompanying the study. "This investor activity helped keep sales volumes high, but also contributed to a shortage of homes for sale and rapid price spikes in some areas, which squeezed out many would-be buyers. Overall, for-sale inventory in 2013 was much lower than in 2010 or 2011, causing bidding wars in many areas with high demand for homes, such as Seattle or San Francisco."

According to the release, 57 percent of polled economists said they believed institutional investors would sell most of the homes in their portfolios within the next three to five years.