Change is all around us. Foreclosure inventories and discounts are fluctuating in ways that are virtually impossible to predict at a local level. A massive wave of new multifamily construction could change the rental equation in hundreds of markets. Government and lender bulk REO-to-rental experiments could take off, drying up inventories and introducing new competition for SFR tenants. Well-heeled investment consortia promise to change the face of residential investing by driving out small investors.
Another almost invisible change is underway yet its impact may be greater and last longer than any other.
Realtor.com today released a new survey on attitudes towards foreclosures that it had commissioned by the pre-eminent research firm Gfk. (GfK conducts research for Associated Press and other blue chip organizations). As a consultant involved in the project, I had the opportunity to review and analyze the results before they were made public.
I was very surprised by the survey’s major takeaway: Interest in buying foreclosures has almost tripled among potential home buyers in the past two and half years. Some 92.1 percent of potential foreclosure buyers plan to live in them rather than use them as investments. Homebuyer interest in foreclosures jumped 159 percent since October 2009, the last time Realtor.com asked that question. In fact, more than two-thirds (64.9 percent) of today’s homebuyers said they’re likely to buy a foreclosure compared to 25.3 percent two and a half years ago.
Where have all these people been?
I think we’re seeing several attitudinal changes at work. First, despite the current sales data that shows foreclosures and short sales occupying as big a slice of the home sales market as ever, owner occupants may realize that on a national level we are already on the downside of the Foreclosure Time (See Twilight of the Foreclosure Time). The day is approaching when the tougher lending standards imposed between 2007 and 2010 will greatly lower defaults and foreclosures; in fact, defaults already are down significantly. The 30 to 40 percent distress sale market share will become a thing of the past. There is clearly a pent-up demand among folks handy with a hammer who are willing and able to turn a foreclosure into a home that they probably couldn’t afford any other way. For them, the clock is ticking.
“Foreclosures can present a new opportunity for buyers to become homeowners, especially considering the discounted purchase prices and lower down payment requirements. This is especially true for owner-occupants interested in improving the property, and holding to it long enough to realize appreciation that can be carried over to future home purchases,” said Realtor.com President Errol Samuelson in the news release.
The number that surprised me most was the very small percentage of buyers who consider themselves to be investors. Only 6.9 percent of today’s potential home buyers are interested in buying a foreclosure as an investment, down from 13.2 percent in October 2009. That’s a decline of more than 50 percent.
Is the bloom off the investor boom?
That’s a question that can’t be answered by one survey. Unfortunately there is a real scarcity of information about residential real estate investors and the investing phenomenon that coincided with the boom in foreclosures. Thus, it’s hard to put these numbers into context; they are more or less unique.
At Realtor.com, we’ve been polling real estate investors for three years and establishing trend data. A year ago, Realtor.com’s survey on investors helped put the investor boom on the map by establishing the market potential for investor-generated demand. We found that real estate investors, by three to one, would be more active in their local markets compared to typical homebuyers in 2011 and 2012. Two-thirds of investors said they expected the problems first-time buyers have in getting mortgages will make it easier for them to compete for properties.
That survey certainly proved to be true. Will this latest one as well? Will we see a decline in the “amateur” investor or the one or two property investor? Despite the hard-sell TV advertorials, webinars and get-rich-yesterday books, are potential investors growing cautions? Have they heard about the challenges of financing, cash flow and property management? Is the pay-off timeline still too long as the nation takes baby steps towards recovery? Are discounts shrinking beyond the point where profits are less attractive than other investment vehicles?
If nothing else, this latest survey found that potential foreclosure buyers have a good idea of the some of the realities involved, which is probably why they have decided not to invest, but to do a foreclosure as a place to live. Most expect to receive a discount of anywhere from 10 to up to 30 percent on their property purchase, which is in line with today’s average discount of approximately 29 percent.
Expectations on return on investment have changed dramatically in a year. In last year’s survey, nearly half (48 percent) expected a profit of 20 percent or more from their property investments over five years, or 4 percent a year. Another 40 percent expected a profit of 10 percent. In this year’s survey, 56.4 percent expect their purchases to appreciate 10 percent or less over five years, or 2 percent a year. Younger buyers (age 18-34) are most realistic. More than half those in the first time buyer age group, 25-34 (57.1 percent), expect their purchases to appreciate less than 5 percent, or 1 percent a year. Most middle income buyers ($30-40K) are more conservative and anticipate an appreciation of less than 5 percent in five years.
In short, we are witnessing a maturation of the investor phenomenon. People are realizing that buying and rehabbing a foreclosure as a place to live is one thing. Making money off it is another. It’s not as easy as some investor gurus make it sound. Risk is real and rewards can be elusive. The message is getting through. Fewer and fewer people are entering investing lightly. Reality, we can all agree, is a good thing.