Investors, First-Time Buyers Growing Leary of Distressed Market

by devteam September 27th, 2011 | Share

The latest Campbell/Inside MortgagernFinance HousingPulse Tracking Survey, released on Monday, has a pair ofrnfindings that should be distressing to lenders holding both foreclosed realrnestate (REO) and distressed mortgages. rnThe survey data, gleaned from regular email surveys of 2,500 active realrnestate agents and brokers, found that, although their reasons are different,rnfirst time homebuyers and investors are both losing interest in the distressedrnreal estate market.</p

First-time homebuyers have sharplyrnreduced their purchases of properties involved in short-sale situations.  These buyers now account for 39.7 percent ofrnsuch transactions (where the lender agrees to release the lien for less thanrnthe outstanding balance on the existing mortgage.)   Thisrnwas the third month first-time buyer/short sale numbers fell and they are now atrnthe lowest level ever recorded by the survey. rnAt the same time, the survey showed that the proportion of first-timernhomebuyers in the housing market rose to 36.9 percent in July from 35.4 percentrnin June.  </p

This seems to indicate that first-timernbuyers are not sitting on the sidelines but are choosing to purchase homesrnthrough traditional channels or those for which the foreclosure isrncomplete.  The authors of the surveyrnplaced the blame for the decline on lengthy short sale processing delays, arnrefrain which has been heard for a long time from real estate agents and loanrnofficers.  While the average price of arnshort sale is 27 percent lower than a market-rate property, the average time tornwalk a property through the short-sale process is now 16.6 weeks, with thernmajority of that time spent waiting for lender approval.  Among the factors slowing down short salernapprovals are lost paperwork, coordination with multiple investors, slowrnappraisals, and mortgage servicer understaffing. </p

Real estate agents said that homebuyers werernoften responding to the delays by placing offers on multiple properties withrnthe intention of closing on only one.  This,rnrespondents said, further bogs down the approval process for mortgagernservicers.</p

In August, short sales accounted for 17.1rnpercent of the home purchase market; damaged REO 13.2 percent and move-inrncondition REO 15.6 percent.  All distressedrnproperty sales fell to 45.9 percent of the market in August from 46.2 percentrnin June. </p

The gap between first-time homebuyersrnand distressed property supply was 9.3 percentage points in July, unchanged fromrnJune. Given that home purchases by current homeowners do little to absorb thernsupply of distressed properties, the housing market is increasingly dependentrnon investors to pick up any slack in purchases by first-time homebuyers.  And that brings us to the second bit of grimrnnews.</p

Investor purchases declined for thernthird straight month because, the survey said, the traditional “buy-and-flip”rnmodel employed by many investors is no longer working and investors have turnedrnto renting the properties rather than selling. Consequently the investorrnsector, which accounted for 23 percent of the real estate market as recently asrnApril is now at 19.6 percent, the lowest level in a year.  Campbell Surveys estimates that investorsrnwill ultimately rent out 48 percent of the properties they purchased inrnJuly.  In July 2010, 28 percent ofrninvestor purchases were destined to end up as rental property.  </p

If this trend continues, it is obviousrnthat many investors will find their cash and possibly their enthusiasm for additionalrnpurchases constrained, putting further downward pressure on the housing market.</p

At the same time, the HousingPulsernDistressed Property Index (DPI) climbed to 46.2% in July from 44.7% in June,rnindicating a high percentage of foreclosed property sales and short salerntransactions in the housing market.</p

More generally, the survey report notedrnthat real estate agents responding to the July HousingPulse survey indicatedrnthat the debate in Congress over the U.S. debt ceiling negatively affectedrnhomebuyer activity last month.  It quotedrnan agent in Washington State who said, “I spoke with several would-be buyersrnwho, because of the ridiculous behavior of our government, felt uneasy aboutrnpurchasing at this time. This may be contributing to the hot rental market.”  

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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