The Interest In Buying Foreclosures Craters

People do not have an interest in buying homes in foreclosure at anywhere near the level that they did earlier this year. Trulia.com and RealtyTrac released the latest results of an ongoing survey tracking homebuyers’ attitudes towards foreclosures. The new online poll conducted  between November 5th and 9th  by Harris Interactive showed a notable decrease in consumers’ willingness to buy foreclosed properties, “with 43 percent of U.S. adults age 18 and above indicating that they are at least somewhat likely to consider purchasing a foreclosed home in the future, compared to the 55 percent of U.S. adults age 18 and above surveyed online by between May 1-5, 2009.”

The reason that the researchers gave for the drop in interest as they sifted through the data was that buying properties in foreclosure have “hidden costs.” Legal fees and home engineer’s reports may be needed. Paperwork also has to be filed with local municipalities. Potential buyers also said that they believe “the process is risky.”  That was always true of distressed real estate, so the information is not illuminating.

The third reason people gave for faltering interest in property in foreclosure is the real one—“the home will lose value.” It is hard to imagine a home bought out of foreclosure being “underwater” shortly after a purchase, but that is almost certainly what the market is causing among some buyers willing to take the risk of purchasing someone else’s mess. A buyer who invests in a home that might have been worth $500,000 before a foreclosure and pays only $400,000 for it may still find that the value of the property drops to $300,000 depending on how bad the real estate market is in the place where the home is located. If the home is bought with a $350,000 mortgage, it moves “underwater” fairly fast.

The hard data and anecdotal information that home prices are still falling and falling rapidly in some geographic areas is likely to keep away shoppers even if it seems that they can get “extraordinary” deals. That means that distressed inventory will sit on the market and that the number of foreclosed homes without buyers will increase. Both of those are prescriptions for pushing housing prices down even further as buyers try to decide when it is time to catch a falling knife.

Douglas A. McIntyre