By Stephanie Armour, USA TODAY
Kelly Butler just got a bargain.
Sure,
her new three-bedroom home came with fake barn wood nailed to the
bathroom walls, carpet that had to be ripped up, broken closet doors
and a need for plumbing and tile work.
No
matter. Butler, 27, and her husband, Jim, 28, represent the new face of
today's home buyers: first-timers who are snapping up distressed homes
and fixer-uppers that are being sold at bargain prices.
Up
to 45% of homes being purchased today are in that category, according
to an April report by the National Association of Realtors (NAR) — and
that's a major force driving existing home sales. First-time buyers
accounted for more than half of all home sales in March, with activity
concentrated in lower price ranges. But there is a troublesome side,
because sales of foreclosed and other distressed homes tend to drag
down overall home prices across the USA. These properties typically
sell for 20% less than traditional homes.
Economists
tracking the beleaguered housing market say these first-time home
buyers represent a critical demographic that could help lead the
industry out of its doldrums by buying up much of the excess inventory
of homes that is drawing down home values nationwide. And in one
promising sign, the inventory of unsold homes is starting to shrink.
Total housing inventory at the end of March fell 1.6% to 3.74 million
existing homes for sale, which represents a 9.8-month supply at the
current sales pace, compared with a 9.7-month supply in February.
The
Butlers have been fixing up their home since they moved in on Jan. 31.
They plan to paint the brown exterior a cheerier white, with blue
shutters. For 3% down, they got the foreclosed home in Stratford,
Conn., with three bedrooms and two baths for $213,000 and a fixed loan
at a 5.5% interest rate. The price was about 35% less than the previous
owners paid a few years ago.
"Yeah, it's a
little scary from the outside," says Kelly, an operations manager at
The Regus Group, which rents office space. "But these fixer-uppers are
really selling. There were even bidding wars. All these people were
fighting for these houses."
The hope among
housing experts is that interest in millions of such properties across
the nation will rise because of low interest rates, a tax credit for
first-time home buyers of up to $8,000, and home prices that have sunk
in some markets by more than 20%. Distressed homes are moving fast
because they often sell below market value.
"In
the open houses, many first-time home buyers are walking through," says
Lawrence Yun, chief economist at NAR. "It's a very good sign that
first-time home buyers are responding to tax incentives and
historically low interest rates. I'm hopeful. This all points toward
improving market conditions."
An unwanted side effect
Signs
that buyers are jumping off the sidelines to purchase distressed
properties is a welcome indication that sales overall could pick up.
But sales at these low prices are having the unwanted side effect of
drawing down home prices across the board.
Although
prices rose from February to March, the national median existing-home
prices for all housing types was $175,200, down 12.4% from March 2008,
according to NAR, which attributes much of the downward pressure on
prices to the sale of distressed homes.
And
there are potential risks to home buyers, who may leap at the good
prices on distressed properties only to find they lose any cost savings
because the homes need so much work. The national average cost of a
bathroom remodel in 2008-09 is nearly $16,000; a major kitchen remodel
runs more than $56,000, and replacing a roof is $18,825, according to
Hanley Wood, which analyzes the housing industry.
"It can become like that movie The Money Pit,"
says Leif Thomsen at Mortgage Master, a provider of mortgage services.
"These first-time home buyers getting distressed properties can easily
get in over their heads if they don't know what they're doing. We
strongly recommend against buying any home at auction, because you
can't inspect the property first and have an inspection. There are real
risks."
The shift toward buying distressed
properties does have an upside: In areas hard hit by foreclosures such
as Florida, California and Nevada, some neighborhoods peppered with
boarded-up homes with overgrown lawns now are showing signs of
revitalization.
Florida was among the 10
states with the highest foreclosure rates, according to an April report
by RealtyTrac. Despite a 12% decrease from the previous quarter,
Florida's first-quarter total of foreclosures was still the second
highest in the nation.
Foreclosure filings
were reported on 119,220 Florida properties, a 36% increase from the
first quarter of 2008. The state posted the nation's fourth-highest
state foreclosure rate during the quarter, with one in every 73 housing
units receiving a foreclosure filing.
Some
houses that were in foreclosure had previous owners who took everything
that wasn't nailed down, so the homes have had sinks ripped out,
baseboards missing and wires dangling where light fixtures used to be;
some banks that own the homes have gone in first and done some fix-up
work, such as installing sinks, to spur sales.
Those distressed properties and low prices are boosting sales, with NAR reporting home sales higher than a year ago in Florida.
"What
I'm seeing is incredible. At ground zero in Florida, my business has
tripled overnight," says Suzanne White, an agent at ZipRealty in Tampa.
"There isn't grass overgrown and mosquitoes all around in these
neighborhoods anymore. First-time home buyers are saying rates are so
low they can pay less than rent. The bank-owned properties are getting
multiple offers and selling higher than asking price."
Sacrifices for fixer-uppers
Financing
isn't as easy to get as it was during 2006, the peak of the housing
boom. Buyers need good credit and a solid income that can be
documented, and they need to be prepared to put money down.
The
median down payment by first-time buyers was 4% in 2008, up from 2% in
2007, according to NAR. Many are turning to Federal Housing
Administration (FHA) loans, which can require as little as 3.5% down.
The
volume of single-family FHA-insured loans originated has tripled from
$59 billion in fiscal year 2007 to more than $180 billion in 2008.
Buying
a fixer-upper also can mean sacrifices: Buyers may have to wait before
they can move in because the homes need work, and first-time buyers
often have to look past a home's problems to see the potential. For
those buying foreclosed homes, dealing with a bank instead of a private
owner can sometimes mean lengthy delays.
The
sale of distressed properties could have a trickle-down effect that may
help boost remodeling businesses, which have seen business slump as
homeowners halt renovation plans.
And
first-time home buyers are showing more interest. More than
three-quarters of first-time home buyers say now is a good time to buy
a home despite concern about the economy, according to a March survey
by Century 21 Real Estate of 1,000 prospective first-time buyers. More
than 80% say prices are affordable, and 68% say now is a better time to
buy than six months ago.
Kimberly Miles, 26,
is one of them. In February, she got an FHA-insured mortgage on a
three-bedroom house with a two-car garage, overlooking a lake in Myrtle
Beach, S.C.
The flooring, which smelled
because of the previous owner's pets and smoking habit, was ripped up.
The drywall needed caulking, and the previous owner had taken the
fridge.
The home, which had been in
foreclosure, was listed at $142,000 in November and dropped to $122,000
in January. With the FHA-loan, she had to put down only 3.5%, and the
$8,000 federal tax credit will pay for a lot of the renovations.
"It
smelled awful. You couldn't breathe in there, but I saw the potential,"
says Miles, who works for the Myrtle Beach Area Chamber of Commerce and
Convention and Visitors Bureau. "During the housing boom, I could never
have gotten it."
>
 FIRST-TIME HOMEBUYERS FIND DEALS | Story |
Buyers: Brian McGee, Chelsea Johnson
- Where: East Atlanta neighborhood in Georgia.
- What did they get?
The new home, which stood empty 1 1/2 years, has four bedrooms, 3 1/2
baths, hardwood floors, large deck and is eight minutes from downtown
Atlanta. The original asking price was $400,000; the purchase price was
$280,000 (seller pays closing costs).
William Kincaid
- Where: Mason City, Iowa.
- What did he get? The
home is new construction in a new cul-de-sac carved out of an Iowa corn
field. It was on the market a year or more, and the homebuilder has
since gone bankrupt. Kincaid said he saved maybe $30,000 to $40,0000
and only looked a few months.
