Investors fueling housing recovery, first-time buyers back off


More cash rich investors, with a growing penchant for short sales, are energizing the housing market.

All-cash sales rose to 33 percent of transactions in February from 31 percent in January; they were 33 percent in February 2011. Investors account for the bulk of cash transactions, according to the National Association of Realtors’ (NAR) existing home sales report.

Investors purchased 23 percent of homes in February, unchanged from January, but up from 20 percent a year ago. Meanwhile, first-time buyers accounted for 32 percent of transactions in February, down from 33 percent in January and 34 percent in February 2011.

“The bottom line is investors and first-time buyers are competing for bargain-priced properties in much of the country, with home prices showing signs of stabilizing in many areas,” said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, FL.

NAR says distressed homes – foreclosures and short sales sold at deep discounts – accounted for 34 percent of February sales (20 percent were foreclosures and 14 percent were short sales), down from 35 percent in January and 39 percent in February 2011.

John Campbell’s Inside Mortgage Finance HousingPulse survey says distressed properties account for nearly 49 percent of homes on the market for sale.

That was the second highest level ever recorded by HousingPulse and the 25th month in a row that the Campbell’s Depressed Property Index (DPI) has been above 40 percent.

The report says all of the growth in the distressed property share of the housing market over the past six months has been driven by an increase in short sales, up from 17 percent to nearly 20 percent during the period.

In a short sale, the lender forgives a portion of the debt, provided a qualifed buyer is ready to purchase the property.

Campbell says the investor share of short sale buys also grew from nearly 26 percent to almost 31 percent during the period. In line with NAR’s overall report, Campbell says the share of first-time homebuyers and current homeowners purchasing short sales has dropped since September.

“Of the 15 closed and pending transactions I have for the first quarter this year, six of them are investment purchases. They are primarily families with young children that choose to live modestly, have enough money in the bank to make a 25 percent down payment and finance the rest and still have a bit of positive cash flow,” says short sale specialist Julie Wyss, a broker associate with Intero Real Estate Services-Los Gatos, CA.

Non-investors are leaving the short-sale market frustrated by mortgage servicers’ long-approval times, unpredictable closing dates and the risk the deal will never gel even after months of waiting.

“Five to six months can be the norm, but there are some exceptions to the rule and you never know how long a short sale will take. I’ve witnessed short sales taking more than a year to complete,” according to veteran real estate agent Robert Aldana, a veteran real estate agent at Let’

Also, there are protections in place, but the short sale market has been marred by fraud.

More of the deals are coming to market because mortgage servicers are offering “cash-for-keys” incentives. Servicers give delinquent homeowners cash to motivate them to sell short. Payments can range from a few thousand dollars up to $15,000 or more for high value properties in areas where foreclosures drag on, Campbell reports.

Investors find short sales attractive because they do not have to deal with the complications of breaking rental leases, moving from another home on short notice or jumping through mortgage underwriting hoops. Cash only buys also speed up the process.

“It’s pretty tough to compete when you are a young newlywed couple with 3.5 percent to 20 percent down and a cap on the purchase price. When the bidding wars stop, they are left behind. Even the investors with 25 percent down are getting outbid by the cash investors. Sales of condos that are in litigation are thriving because the cash buyers don’t seem to care and lenders will not lend on these condos,” said Wyss, also a mortgage broker at North Star Mortgage Associates.

On the other side of the deal, short sellers are trying to beat the clock on the Mortgage Debt Relief Act’s (MDRA) expiration later this year. MDRA is a federal tax law that allows qualified taxpayers to exclude from taxation, income derived from the forgiveness or discharge of debt associated with a mortgage on a principle residence.

(Update: “Congress to consider extending Mortgage Debt Relief Act, renewing mortgage insurance tax deduction”)

When a homeowners’ mortgage is underwater and the home is worth less than the mortgage, the lender forgives the portion of the mortgage that is greater than the home’s worth. Before MDRA the amount could have been considered taxable income.

MDRA is up for an extension until 2014 on the Obama Administration’s current budget proposal, but right now MDRA expires at the end of the year.

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  1. says:

    There was a time when bank owned sales would offer first time buyers a two week window to be the first to purchase. This gave some advantage to first time buyers but this seems to be gone now. Many of the recent lower priced bank owned homes and condos allow all offers in at the same time giving a big advantage to the all cash investors.

    It is also not just the litigation units that all cash investors are able to purchase without much first time buyer competition but also the condos with too many investor owners. Most banks have a low owner vs rental occupancy requirement to get loans, sometimes being as low as 15% rental units for a building. The amount of current rental units in a complex and the new rental restrictions law in place as of 1/1/2012 might actually create larger lending issues in the near future.

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