Real Estate & Mortgage Insights

Finally, the Real Cause of the Financial Crisis...Or Not

In its latest report on existing-home sales, the National Association of Realtors reported that the number of first-time home buyers entering the housing market is declining, while the number of investors picking up rental properties is rising. The numbers suggest that tightened lending standards are pricing all but the wealthy out of the mortgage scene.

The NAR reported that only 29 percent of all existing-home sales went to first-timers in January. That is down from 33 percent in December and 40 percent in January 2010 (when the tax credit was still in effect.) However, investors made up 17 percent of buyers last year, and by last month they had claimed 20 percent of the market share, and made up 23 percent of all existing-home buyers in January.

Similarly all-cash sales grew to 32 percent in January, about three times the historical average, up from 29 percent in December and 26 percent the year before. This new level is a record high on the NAR charts. All-cash deals averaged just 20 percent of all sales in 2009 and moved up to 28 percent in 2010.

"Increases in all-cash transactions, the investor market share and distressed home sales all go hand-in-hand. With tight credit standards, it's not surprising to see so much activity where cash is king and investors are taking advantage of conditions to purchase undervalued homes," said Lawrence Yun, NAR chief economist said.

And while sales did increase, the rise in investors does not necessarily indicate a strengthening of the market, but it is more a sign of the weakness. The large number of foreclosures are keeping prices down, and attracting those with cash to buy up bargains.

"It is really a foreclosure-driven market," said Ethan Harris, head of developed markets at Bank of America Merrill Lynch Global Research in New York, as quoted by Bloomberg News. "I don't think it is a sign of the market returning to health."

The NAR also reported that distressed properties made up 37 percent of the sold home inventory in January, a 12-month high, up slightly from 36 percent in December.

The high number of foreclosures for sale is putting downward pressure on home prices, which seems to only benefit investors at the moment, as lower-income or lower-credit buyers are unable to qualify for funds in the current mortgage climate.

Investors with ready cash can compound the falling prices issue, as they have such an attractive bargaining chip with banks: full, immediate payment for these properties that are essentially thorns in the banks' sides.

Many analysts say that things will only improve for borrowers with small down payments when the unemployment falls substantially. And the rate did fall in January, but it's going to have to move much closer to the comfortable 5 percent level before real change will make its way into the mortgage world. In the meantime, foreclosures are likely to rise, with RealtyTrac predicting a 20 percent increase in households receiving foreclosure notices this year. And the field will remain fertile for investors.