Real estate boost: Fixer-uppers draw first-time buyers in droves

Thursday, April 30th, 2009

First-time buyers find deals, help perk up house sales

Stephanie Armour
USA Today

Kelly and Jim Butler paint a room in their new home in Stratford, Conn. They paid $213,000 for the foreclosed home, $76,000 less than the previous owners. By Amy C. Etra for 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.”

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