Perhaps the least appreciated contribution investors make is the virtually invisible role they play by renovating the nation’s deteriorating foreclosed housing stock and returning it to use, providing either affordable rental or ownership housing.
For years, investors knew they weren’t getting credit for the positive impact they have on communities. (See Why Investors Were the Real Heroes of 2011). Last summer, when we conducted the BiggerPockets/ Memphis Invest Survey, getting some hard numbers to value the scope of investor-sponsored rehabilitation was an important goal. Our survey found that the median expenditure was $7500 per property, or $9.2 Billion a Year.
Now a more authoritative source — Harvard University, no less — has even better data on this question. A study released today by Harvard’s Joint Center for Housing Studies on “The U.S. Housing Stock: Ready for Renewal” found that investors played not only an important role, but by far THE most important role in returning damaged foreclosures to the housing stock.
In 2011, the Harvard study found that more than a million distressed properties came back onto the housing market, including 760,000 lender-owned units and 300,000 short sales. Lenders improved about a third of their foreclosed properties prior to sale, with an average expenditure of about $6,500 per unit. About 60 percent of owner-occupant purchasers undertook improvements, averaging $11,100, while investors spent even more per unit on average than either lenders or owner-occupants, $15,600, more than twice as much as median expenditure in the BiggerPockets/Memphis Invest survey.
Foreclosures to Rentals
The Harvard study also noted the role investors are playing turning foreclosures into affordable rentals. Some 4.4 million formerly owner-occupied units were shifted to the rental market between 2007 and 2011. Another 4.6 million were vacant in 2011 and may become part of the rental stock as demand continues to grow.
The unexpected investor expenditures to improve the quality of America’s single family housing stock came as the nation began to experience what the Harvard study calls an “uptick” in the deterioration of housing quality at the outset of the housing crash. In 1997, 4.4 percent of owner-occupied homes were considered inadequate, the study said. By 2007, these same units accounted for almost 8 percent of homes that were no longer owner-occupied (i.e., stood vacant or were converted to rental or nonresidential uses), indicating their increasing deterioration. Even more telling is that these inadequate units accounted for almost 17 percent of the homes that were demolished within the decade.
Lenders Are Also Spending More
The study also tracked lender spending to restore REO properties for sale. During the housing downturn, the plunge in house prices precipitated a wave of foreclosures in many metropolitan areas. The foreclosure process often takes years to complete, wreaking havoc on mothballed and backlogged properties. But once foreclosure is completed, banks and other institutions typically invest in repairs to get the homes ready for sale and back into active use.
According to Joint Center estimates, lender expenditures on distressed properties amounted to $1.7 billion in 2011, with Atlanta, Las Vegas, Orlando, Phoenix, and Riverside posting the highest shares of spending . Local housing market conditions dictate the average amount that banks and institutions expend to prepare distressed properties for the market. In 2011, lenders invested considerably more per property in higher-priced markets such as Denver, Los Angeles, Portland, Raleigh, and Washington, DC. In largemeasure, this disparity reflects the fact that properties inthese markets often need to be in better condition to sell at a competitive price within a reasonable amount of time.
By comparison, in depressed Rust Belt metros such as Cleveland, Detroit, Milwaukee, and Pittsburgh, improvement spending per REO property was less than a third of outlays in more competitive markets.
“Renovating foreclosed or abandoned homes benefits the entire neighborhood. Joint Center research has shown that home prices in neighborhoods with higher levels of improvement spending appreciate more rapidly, explaining why investing in blighted neighborhoods has been a national priority in dealing with the foreclosure crisis,” said the report.