A nation’s homes shape the quality of its citizens’ lives. Homes are where the workaday world ends and family life begins. Life’s passages take place in our homes; they are where children grow up and memories are made. Homes form the building blocks of every community.
Not since the Depression has a man-made disaster so threatened America’s homes and housing stock as the plague of foreclosures that began with the subprime meltdown of 2006 and continues to this day.
Since 2006, some 4.5 million homes have completed the lengthy, sad ordeal of default, foreclosure, repossession and resale. About 6 million more are in process as 2012 begins. A smaller but substantial number of beleaguered borrowers chose short sales to avoid foreclosure. These distressed sales accounted for more than 40 percent of all home sales every month for the past 23 straight months, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey or real estate brokers.
Houses entering foreclosure often suffer neglect, disrepair and even vandalism at the hands of cash-strapped, angry owners. Once abandoned, they languish empty for more than a year, deteriorating and inviting decay and destruction. So many are in need of serious repair when they finally come on the market that a new category of distressed sales has been created: damaged REO. As foreclosure timelines have lengthened over the past 18 months, the damaged REO category has grown to 13.9 percent of all home sales and perhaps more this year, more than 400,000 properties in 2011 alone.
Discount on Damaged REOs
Damaged foreclosures have an incredibly toxic effect on home values. Even one or two long-vacant damaged homes can hurt the value every home in a neighborhood. They usually list at a 5 to 7 percent discount below other foreclosures, which sell at 20-30 percent below a comparable home in the same area, though in November, damaged REO homes sold at a significant discount—58 percent below other distressed properties, according to the November Inside Mortgage Finance survey.
The discount reflects how difficult they are to sell; few owner/occupant buyers can afford the cost of repair to make them move-in ready. They linger on market, dragging down prices and values of neighboring properties, until they are purchased by those investors who are willing to take the risk to make a serious investment.
In major foreclosure markets such as Las Vegas, Phoenix, and Miami, damaged foreclosures have played havoc. The Las Vegas Review Journal reported in July that the deterioration of vacant homes — many of them bank-owned — continued to drag down home values in Las Vegas while other housing markets were showing signs of stabilization.
Damaged REOs Plague Las Vegas
Las Vegas home values dropped more than 60 percent from their peak to a median price of $111,000 in May. Yet hundreds of foreclosed homes languished on the market for months, even years, often hurting home values in the surrounding neighborhood. They were consistently devalued by appraisers by $5,000 or more based simply on appearance.
“So here we’re stuck — the foreclosure capital of the nation — with a glut of vacant homes fueling the self-destruction of a once booming Las Vegas housing market. Local housing analysts estimate that three-fourths of the total real estate-owned inventory is empty homes,” wrote the RJ’s real estate reporter, Hubble Smith.
In October 2009 and again last April, Move, Inc., the company that operates Realtor.com, conducted national surveys to look at some of the key issues facing investors. I was fortunate enough to participate in these projects. What we found surprised us and skewered the “flip and run” image perpetuated on TV and elsewhere.
Move Investor Survey
The research defined and quantified for the first time the vital role investors play in repairing, restoring and rehabilitating the damaged foreclosure housing stock. Some 42 percent of investors said they plan to invest their own time and energy to improve, repair and maintain their properties. The remainder (29.5 percent) said they’ll hire a contractor for repairs and only 28 percent planned to purchase move-in-ready properties. Some 30 percent said that they expected the cost of repairs to exceed 20 percent of the purchase price.
The picture that emerges is one of an emerging community of small-scale, local, hands-on entrepreneurs, largely middle-aged men, who are risking their own money and putting serious time and sweat equity into repairing the bricks-and-mortar victims of the foreclosure crisis in hopes of making a good profit, either through rental or resale or both. Not only are they repairing the nation’s housing stock, they are improving home values and quality of life in their own communities.
The Move, Inc. study makes it possible to put a value on the contribution investors are making to the nation’s housing stock. Let’s look at 2011. About 20 percent of the 4.4 million existing homes purchased during the year were purchased by investors, according to NAR’s re-benchmarked numbers. That’s 880,000 homes. From the Move survey, 30 percent of investors said they planned to invest 20 percent or more of the value of the property in repairs. Thirty percent of the homes bought last year by investors is 264,000 homes. The median home price for the year will come in around about $165,000. At a discount of say, 35 percent, which is probably conservative, the median damaged REO sold for $107,250. The median repair cost per damaged REO at, say, 20 percent of the purchase price, which is also probably conservative, was $22,450. Multiply that number by 264,000 homes and the total amount investors spent repairing foreclosure-damaged homes in 2011 was $5.9 billion.
$5.9 Billion Invested in America
Imagine what America would be like today if investors were unwilling to step up to the foreclosure crisis. Over a four year period, HUD is spending about half of what investors are spending in a single year to repair abandoned foreclosures and restore foreclosure blighted communities in a Neighborhood Stabilization Program. Without investors, America’s neighborhoods would be overcome with abandoned and decaying foreclosures despite NSP. Not to mention that fewer affordable properties would be available for rent or purchase and as long as they were listed, damaged REOs would depress local home values and reduce every owner’s equity.
Image: John Morgan