Rising foreclosures saturated the headlines, airwaves and blogosphere in 2006 as media of every stripe caught wind of this emerging story.
And it certainly was a story worth some attention. More than 1.2 million foreclosure filings were reported nationwide during the year, up 42 percent from 2005 and a foreclosure rate of one foreclosure filing for every 92 U.S. households – or more than 1 percent of all households – according to the RealtyTrac U.S. Foreclosure Market Report®.
While rising foreclosures could spell opportunity for many real estate investors, it also signals the decline of a red-hot market in which rapidly appreciating home prices quickly multiplied investor dollars. Stagnant home price appreciation is giving many investors pause, which is decreasing demand and slowing the market even further.
“Most of the people who are buying now actually need a place to live. And I think all of the investors are kind of pulling out of the market,” said Miami agent Bill Gardner who closed most of his deals during the first half of 2006 with investors, but then saw investor interest decline in the second half of the year. “I don’t see them doing much more than tire kicking right now. My only sales are with people who want to occupy. The properties that are selling are the ones that are under-priced.”
Orestes Cruz attends foreclosure auctions at the Miami-Dade County courthouse and said there aren’t a lot of investors bidding on properties there.
“Normally the bank will just buy them back. No one is really trying to buy them,” he said, adding that he thinks many investors have their money tied up in properties that they’re having difficulty selling in the slower market.
Gardner, who described the market of the past few years as “artificially inflated,” predicted that many investors will return to the real estate market in 2007 when they realize that bargains are available.
“Even though it’s slower now, there are still bargains to be had and now is the time to buy,” he said.
Those sentiments were echoed across the country in Las Vegas – another real estate market that is rapidly cooling after a red-hot streak – by real estate agent Adam Hunt, who recently helped two first-time foreclosure investors find great deals by approaching homeowners in default.
“It’s the old saying: you sell when people are dancing in the streets and you buy when they are bleeding. It’s a blatant buyer’s market,” he said.
A few hours away in Orange County, Calif., investor Ryan Walker, who has purchased foreclosures in the past, isn’t quite ready to jump back in the market, although he’s keeping an eye out for good deals.
“What we’re seeing a lot of is people wanting to do short sales. They’re starting to come back, short sales,” he said, noting that short sales are popular because a lot of homeowners in default don’t have much equity (see “Short Sales Rising”, page 2).
“It’s all about how good of a deal you can get. But unfortunately there’s not a lot of equity in the homes any more,” he continued. “I think you’re going to have to hold on to the house a little while before you resell it to make any money off it.”
But the best foreclosure bargains for most of 2006 were not found in Los Angeles, Las Vegas, Miami or other previously hot markets, according to RealtyTrac’s survey of foreclosure sales in 2006. The survey shows foreclosure buyers in Las Vegas, Miami and Los Angeles on average saved less than 15 percent off full market value in 2006, while foreclosure buyers nationwide saved nearly 25 percent on average. Foreclosures discounts were biggest in several Midwestern states such as Ohio, where foreclosure buyers saved an average of nearly 40 percent, and Indiana, where foreclosure buyers saved more than 35 percent.
Those sales numbers may change in 2007 as some of the markets that have been propped up by steep price appreciation will be more vulnerable to a slowdown. It’s in those markets that real estate investing could easily morph from darling to devil in the eyes of many buyers and the media – which is exactly the point when wise investors with an eye for the long term can step in and set themselves up for sizable profits down the road.