Investors, First-Time Buyers Growing Leary of Distressed Market

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

First-time homebuyers have sharply reduced their purchases of properties involved in short-sale situations.  These buyers now account for 39.7 percent of such transactions (where the lender agrees to release the lien for less than the outstanding balance on the existing mortgage.)   This was the third month first-time buyer/short sale numbers fell and they are now at the lowest level ever recorded by the survey.  At the same time, the survey showed that the proportion of first-time homebuyers in the housing market rose to 36.9 percent in July from 35.4 percent in June.  

This seems to indicate that first-time buyers are not sitting on the sidelines but are choosing to purchase homes through traditional channels or those for which the foreclosure is complete.  The authors of the survey placed the blame for the decline on lengthy short sale processing delays, a refrain which has been heard for a long time from real estate agents and loan officers.  While the average price of a short sale is 27 percent lower than a market-rate property, the average time to walk a property through the short-sale process is now 16.6 weeks, with the majority of that time spent waiting for lender approval.  Among the factors slowing down short sale approvals are lost paperwork, coordination with multiple investors, slow appraisals, and mortgage servicer understaffing.

Real estate agents said that homebuyers were often responding to the delays by placing offers on multiple properties with the intention of closing on only one.  This, respondents said, further bogs down the approval process for mortgage servicers.

In August, short sales accounted for 17.1 percent of the home purchase market; damaged REO 13.2 percent and move-in condition REO 15.6 percent.  All distressed property sales fell to 45.9 percent of the market in August from 46.2 percent in June. 

The gap between first-time homebuyers and distressed property supply was 9.3 percentage points in July, unchanged from June. Given that home purchases by current homeowners do little to absorb the supply of distressed properties, the housing market is increasingly dependent on investors to pick up any slack in purchases by first-time homebuyers.  And that brings us to the second bit of grim news.

Investor purchases declined for the third straight month because, the survey said, the traditional "buy-and-flip" model employed by many investors is no longer working and investors have turned to renting the properties rather than selling. Consequently the investor sector, which accounted for 23 percent of the real estate market as recently as April is now at 19.6 percent, the lowest level in a year.  Campbell Surveys estimates that investors will ultimately rent out 48 percent of the properties they purchased in July.  In July 2010, 28 percent of investor purchases were destined to end up as rental property.  

If this trend continues, it is obvious that many investors will find their cash and possibly their enthusiasm for additional purchases constrained, putting further downward pressure on the housing market.

At the same time, the HousingPulse Distressed Property Index (DPI) climbed to 46.2% in July from 44.7% in June, indicating a high percentage of foreclosed property sales and short sale transactions in the housing market.

More generally, the survey report noted that real estate agents responding to the July HousingPulse survey indicated that the debate in Congress over the U.S. debt ceiling negatively affected homebuyer activity last month.  It quoted an agent in Washington State who said, "I spoke with several would-be buyers who, because of the ridiculous behavior of our government, felt uneasy about purchasing at this time. This may be contributing to the hot rental market."