RealEstateEconomyWatch.com

 Desperate sellers, huge discounts, substantial inventories and the promise of a profit better than Wall Street can deliver brought droves of investors back to the residential real estate markets over the past two years, buying up foreclosures that most homeowners wouldn’t touch.

 Those heady days may be ending in many markets if the homebuyer tax credit continues to motivate buyers as it did this fall, creating tough competition  for investors?at least for now.

 Recent industry studies suggest factors are at work that will make bargains harder to find and profit margins slimmer.

 A study released last month by Realtor.com found that foreclosure buyers expect to profit from the combination of deeply discounted purchase prices and healthy appreciation rates over five years.  Most foreclosure buyers expect to pay twenty percent or less than market price for a foreclosure, while 38.5 percent expect a 25 percent or greater discount.  While, seventy-three percent expect their properties to appreciate ten percent or more in five years, 28 percent expect their purchases to appreciate 20 percent or more during that same investment horizon.  According to the Federal Housing Finance Administration’s Purchase Index, homes have appreciated an average of 15 percent nationally since 2004.

 A study by Trulia and RealtyTrac released yesterday also found nearly two out of three buyers expect a discount of 30 percent or more when buying a foreclosed property. However, much of their profit evaporates because more than half are willing to spend 20 percent or more of the purchase price to make improvements on a distressed property.

The profit picture darkened  last fall when deep discounts and frantic buyers disappear.  First-time buyers drove up prices up in foreclosure-rich markets like Las Vegas and Southern California, especially on lower end starter homes that investors love to fix and flip or rent. 

 Armed with 3.5 percent down FHA financing, record low rates and at $8,000 tax credit, first-timers have been giving investors a run for their money.  The results are changing the   Case-Shiller reported sustained improvement in prices through the third quarter and markets like  Miami, San Diego, Los Angeles and San Francisco saw the first quarterly increases they have experienced in years.

Look ahead, three out of four Realtors, 72 percent, believe home prices will either stay the same or increase over the next six months, according to HomeGain’s Fourth Quarter Home Prices Survey of Realtors.  Nearly half, 48 percent, expect prices to stay the same through May and 24 percent expect them to improve.

Realtors’ price expectations improved have improved steadily over the year.  Only 47 percent of those surveyed in the first quarter believed home prices would either stay the same or increase.  Expectations were highest in the Midwest (73 percent) and lowest in the West (65 percent), where 56 percent of Realtors expect prices to decrease.

 Why?  First-time homebuyers taking advantage of the tax credit dominated Realtors’ business during the third quarter, accounting for more than half the transactions of 21 percent of Realtors.  Only 11 percent said that none of their transactions last quarter involved a first-time buyer,

 Sellers are smiling at investors’ predicament and they are bargaining harder.  In a separate study, Trulia found that 22 percent of homes on the market as of December 1 have experienced at least one price cut?but it’s the lowest level of price cutting this year. The total amount slashed from home prices dropped from $28.1 billion in November to $24.7 billion in December, representing a 12 percent decrease.

With four more months of life and move-up buyers included, the squeeze on investors may continue, ad least for the near future.  The odds are good that those who took a risk when real estate industry was on its knees will look back at this year as a time of opportunity that may never come again.