”These price declines are related to decreased homebuyer demand surrounding the end of the tax credit,” noted Thomas Popik, research director for Campbell Surveys. “Some housing market analysts had expected demand to remain strong through the end of June, but in retrospect it’s clear that the peak of first-time homebuyer activity occurred three months earlier, in March.”

 The first-time homebuyer share of home purchase transactions was 42 percent in June, well below the 48 percent level in March. The first-timers declined with the end of the federal tax incentive of up to $8,000 on April 30.

 However, investors buying damaged homes and fixing them up for sale or rent did not qualify for the credit.  Prices on damaged foreclosures rose even as all other categories fell.  Short sales in June fell an average 6.3 percent.  All non-distressed properties fell 4.6 percent.

“Buyers just plan on deducting the $8,000 off what they are going to offer now. So, now prices are dropping to compensate for the credit not being available,” stated an agent located in Ohio who participated in the survey. “(With) the homebuyer tax credit coming to an end, I’ve noticed many of the homes reducing their list prices by $5,000 to $10,000 for prices in the over $150,000 range,” added an agent located in Pennsylvania.

Survey results suggest that home prices are likely to continue their decline in the months of July and August. Real estate agents were asked in the June survey, “With the end of the homebuyer tax credit, do you notice prices for contracts signed in June going up, down, or staying flat?” Agents responding “down” outnumbered those responding “up” by a ratio of 10 to 1.

The Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions surveys more than 3,000 real estate agents nationwide each month and provides up-to-date intelligence on home sales and mortgage usage patterns.

The number of American homes bought by foreign nationals has nearly doubled in the past year as falling property values and record numbers of distress sales encouraged immigrants and foreign investors to take advantage of affordable prices.  With home purchases by US citizens plummeting in the wake of the tax credit, foreigners are now poised to gain an even larger ownership share of the US residential market.

Foreign purchases accounted for about four and a half percent of all USA sales between April 2009 and April 2010, according to a new study by the National Association of Realtors.  For the twelve months ending April 2010, foreign purchases of U.S. residences totaled $64 billion. This is almost twice the $36 billion in foreign transactions that took place during the twelve months ending April 2009. The percent of dollar volume represented by foreign transactions increased from 4.3% in 2009 to 7.1% in 2010.

About half of foreign bought properties were purchased as primary residences, and the rest as vacation homes and investment properties.  Most bought properties in suburban locales and cities.  Only 14 percent of foreign buyers bought in resort areas.  Two factors important to international clients when purchasing property in the U.S. are proximity to their home country and the convenience of air transportation. Florida typically attracts European, Canadian and South American buyers while the East Coast draws Europeans. The West Coast brings Asian buyers and the Southwest attracts Mexicans.

Most of the foreign purchases were located in four states - Arizona, California, Florida and Texas. These four states accounted for 54 percent of all international transactions in the twelve months ending April 2010. This compares to only 38% of all foreign transactions in the twelve 13 months ending April 2007.  States with a large number of distressed properties in vacation areas such as Florida and Arizona exhibited the biggest increases in foreign purchases. Foreign purchases in Florida and Arizona increased from 10 percent to 22 percent and 5 percent to 11 percent of all foreign transactions in the U.S. respectively 2007 and 2010.

Canadians and Mexicans accounted for a third of all foreign purchases. Purchases by British nationals and South Americans have been declining.  The fourth largest source of foreign real estate buyers is now China, accounting for about 8 percent of foreign buyers in the first quarter of 2010.  Most foreign buyers, 55 percent, paid all cash for their real estate.

Realtors participating in the study said that in addition to the decline in property prices, the declining value of the dollar has helped to make American real estate attractive to foreign buyers over the past year.  The dollar has declined 16 percent against the Canadian Dollar, 11 percent against the Mexican Peso, and 8 percent against U.K. Pound between the first quarter of 2009 and the first quarter of 2010.

In a short sale, the seller arranges with their mortgage lender to accept a price that’s less than the amount they owe on the property.  Under pressure to move distressed properties off the books quickly and cheaply, lenders are increasingly using valuations from real estate brokers, called “broker price opinions,” which cost hundreds of dollars less than an appraisal and can be completed quickly. 

BPOs are considered more accurate than automatic valuation models like those on Web sites.  They provide a baseline for the lender to use to determine if a short sale offer is acceptable.  However, brokers are not licensed appraisers and often assumptions are made regarding upgrades, location, valid comps, and whether or not the fact that the property is distressed reduces the value of the property.

Unknown to many lenders, unscrupulous investors and home buyers are hiring brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit.

The Federal Bureau of Investigation, the California Department of Real Estate and Freddie Mac have warned that such schemes may be spreading.

In Connecticut last week, a real estate agent pled guilty to supplying fraudulent price opinions and faces a maximum of 30 years in jail and a fine of up to $1 million.

Suspected property-valuation fraud almost doubled from the end of 2007 through the first quarter of this year, according to a June 8 report by Interthinx Inc., an Agoura Hills, California- based company that sells mortgage fraud detection software.  Interthinx found that the five top markets for property valuation fraud risk are Modesto, Vallejo-Fairfield, Stockton, Riverside-San Bernardino-Ontario, and Phoenix-Mesa-Scottsdale. 

The Appraisal Institute recently announced that appraisals are the only acceptable model for short sales.  However the Treasury allows BPOs for short sales under the Home Affordable Foreclosure Alternatives program, claiming it has put reasonable protections in place to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days.

Neil Barofsky, special inspector general for the Troubled Asset Relief Program, said recently, “It appears that the (HAFA) program may lack necessary antifraud protections.”

Investors make no secret of their intent to “influence” BPOs to get the property valued as low as possible.  In fact a mini-industry of investment consultants sell books and videos telling them how to do it.  In “4 Tips to Influencing the BPO (Broker Price Opinion) on Your Short Sale,” the Web site biggerpockets.com advises investors to work directly with brokers or agents as they inspect the property. 

“You want the house to accurately reflect the condition it is in. This isn’t an open house…If there is damage, point it out… When the broker finishes their walk through, you should compare your notes. Ask them if they have an initial ballpark estimate. Many BPO agents will give high values - if these aren’t reasonable, now is the time to speak up.” biggerpockets.com advises. 

Another site, MagicBulletsinRealEstae.com, advises: “Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent.”

‘The Broker’s Price Opinion (BPO) is the single most important aspects (sic) of the short sale process and one you must understand and appreciate because the BPO will determine the difference between a $10K profit or a $50K profit,” concludes BPOCashGeneratorBlog.

Healthier rents are completing the financial picture for investors who want to buy, fix up and rent out residential properties. Rents rose nationally in the first quarter for the first time in five quarters, according to Reis.  At the same time, the vacancy rate stayed flat at 8 percent.

Reis, Inc tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York-all cities that have experienced big rental declines in the past year.

Nationally, effective rents, which include concessions such as one month of free rent, rose 0.3% during the quarter compared with a 0.7% decline in the fourth quarter of last year and a 1.1% drop in the first quarter of 2009. Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn.

A Move, Inc. survey released earlier this month found that interest in real estate as an investment has more than tripled in the past year with consumers as 17.2 percent of all survey respondents plan to purchase a home in the near future as an investment property compared to just 5.6 percent a year ago.  Nearly half of these potential home buyers plan to own the property for six or more years, 16 percent expect to hold the property for between two and five years, no doubt to rent it out. 

Another measure of investor presence in the marketplace is cash purchases.  As first-buyers competing against investors in foreclosure auctions have learned the hard way, a lot of investors like to pay cash.  The Move survey found that just over ten percent of those planning to purchase investment property in the near future expect to pay 100 percent with cash.  Even more telling was this factoid from today’s Existing Home Sales release: all-cash sales in February and March reached 27 percent of all home sales. That’s a huge swing from the past year, when 92 percent of buyers financed their home purchase.

Behind rising rents is the fact that many potential buyers still can’t scrape together a down payment or qualify for affordable monthly payments despite the decline in property prices over the past three years, interest rates below 5 percent, distress sale bargains and a tax credit to top it off.

 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.

The number of consumers interested in investing in real estate has doubled since March 2009, according to a new Move.com Homeownership Survey released. One out of eight (12.1 percent) homebuyers plans to purchase a home as an investment property, compared to 5.6 percent seven months ago.

Low prices coupled with high expectations for short-term appreciation are motivating most investors to buy foreclosures.  Most foreclosure buyers (58.2 percent) expect to pay 20 percent or less than market price for a foreclosure, while 38.5 percent expect a 25 percent or greater discount. 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.

Foreclosure buyers, accounting for 25.3 percent of consumers interested in purchasing a home, are a major source of potential investment activity for today’s housing market. Forty-two percent (42%) of potential foreclosure buyers regard their purchases as investments, while 57.6 percent plan to live in the foreclosed home themselves. Foreclosure investors, according to the Move.com survey, intend to convert their foreclosures into rentals (13.2 percent), fix them up for re-sale (11.3 percent), or house a family member until the home can be sold at a profit (17.4 percent). Of the forty-two percent interested in purchasing a foreclosure as an investment, survey respondents ages 35 to 49 (52.6 percent) were by far the largest demographic.

“This latest Homeownership Survey validates what many had hoped to see in the housing markets — affordable prices and ample inventories are restoring the appeal of real estate to investors while providing opportunities for first time home buyers to enter the market,” said Move, Inc. Chief Revenue Officer Errol Samuelson.

The Move.com survey also found that while perceptions related to affordability have improved in four months, most Americans are still unaware of how affordable homes are today. In June 2009, more than three-quarters (76.4 percent) of Americans said they thought a family earning the national median income of $52,029 could afford 50 percent or fewer of the homes for sale in their area. Today only half (50.4 percent) of all Americans say a median income family can afford 50 percent or fewer of the homes for sale in their neighborhood, a 26 percentage point improvement in just three months. In fact, a median income family today can afford approximately 70 percent of the homes listed for sale on the Move Network of real estate Web sites.

“In the past year, affordability has improved significantly, especially for first time home buyers, and is higher now than at any time the past two decades,” said Samuelson. “Even more encouraging is that 34.1 percent of survey respondents said they expect median income families will be able to afford more than 50 percent of the homes in their neighborhood a year from now. This sentiment is especially true with people ages 18 to 34, the nation’s next group of first time homebuyers.”

With the government sponsored enterprises’ stocks worth less than a dollar since the government took them over nearly a year ago, it took only a newspaper report about a leaked memo to send the two penny stocks through the roof.  Unfortunately, investor interest had less to do with the housing economy than Wall Street’s misreading of Washington ways.

The craziness started around noon Wednesday, August 5 after the Washington Post reported that morning that the reported that it had intercepted a White House e-mail by “an administration official” that the government was considering establishing a government-backed “bad bank” to take hundreds of billions of dollars in troubled loans off the books of Fannie and Freddie.

Shares soared for two days until Fannie reported after the bell on Thursday that its net loss increased sharply in the second quarter due to declining housing-market conditions. It also said announced it was asking for an additional $10.7 billion in aid.

To make sure investors returned to reality, Friday the Wall Street Journal  pooh-poohed the GSE mini-rally. “Don’t bet on a revival of Fannie Mae and Freddie Mac,” wrote the Journal’s Peter Eavis. “Since penny stocks like these often move wildly, the rally could mean little. After all, both companies are showing huge losses and have, between them, required $85 billion of taxpayer assistance to stay solvent.”

Then, just as its stock started to return to earth, after the closing Friday Freddie announced a second-quarter profit and, unlike its big sister, wouldn’t need any more government aid, thank you very much.  At one point Monday morning, Freddie’s stock rose 100 percent in pre-market trading and Fannie’s was up 40 percent.

Next month Congress will begin deciding what to do with the GSEs in the context of the Administration’s far reaching reform of financial services regulation.  With key players like Barney Frank and Jim Lockhart talking about turning them into a sort of mortgage finance utility under strict Federal control, quick profits on the stock swings during the August silly season may very well be the last hurrah for Fannie and Freddie’s fans on Wall Street.

Until recently, the general market consensus was that apartment operators could benefit from the nation’s housing slump. The U.S. Census Bureau puts the nation’s fourth-quarter homeownership rate at 67.5 percent, the lowest level since early 2001.

An excess supply of new construction in recent years has pushed housing inventories to record levels. And, as existing home sales slow, many of these houses went up for rent, providing fresh competition for apartments. Despite the recent slowdown in new housing starts, the Census Bureau estimates the overall homeowner vacancy rate (the proportion of the homeowner inventory which is vacant for sale) in the fourth quarter of 2008 was 2.9 percent, matching the highest level in over 50 years.

S&P believes the excess supply of housing inventories is hurting the apartment sector. The impact is more severe in overbuilt markets and particularly in Sunbelt metropolitan regions such as Phoenix and South Florida.

Moreover, as the U.S. job outlook becomes bleaker, potential renters are seeking alternatives. Although the evidence is largely anecdotal, younger renters in particular are pursuing alternatives such as doubling up and moving back in with their parents.

The average fourth-quarter occupancy is still high at about 94.7 percent, but down about 20 basis points from a year ago and a steeper 60 basis points from the third-quarter 2008 average. Rental rates increased a meager 1.3 percent, on average, during the final period last year and as landlords struggle for pricing power. S&P expects these trends to worsen as 2009 progresses.

Investment in com­mercial real estate has dried due to the ongo­ing credit crisis. In addi­tion large job losses and deteriorating consumer confidence have severe­ly impacted the demand for commercial space. Commercial property prices fell in 2008 and are projected to fall fur­ther in 2009. Each sec­tor in commercial real estate has been hard hit by these factors.

Office Sector

The office sector has been one of the hardest hit com­mercial sectors due to the recession. Rents are expected to decline in 2009 because of decreased demand for office space. Vacancy rates are projected to rise sig­nificantly throughout the year. Detroit and Phoenix are expected to have the highest vacancy rates while New York and Honolulu are expected to maintain the lowest vacancy rates.

Retail Sector

Plummeting consumer confidence and severe job loss­es has led to a serious drop off in consumer spending, negatively impacting the retail sector. Retail vacancy rates are rising dramatically in this sector and it will get worse during the first half of this year with the economy dropping deeper in recession. Retail rents are also ex­pected to decline throughout the year for the same rea­sons as rising vacancy rates. San Francisco and Hono­lulu are expected to have the lowest vacancy rates while Detroit and Colum­bus, Ohio are expected to have the highest vacancy rates.

Industrial Sector

The industrial sector is expected to slow consid­erably during the first half of this year due to a con­tracting manufacturing sector. Relatively healthy export growth during last year kept the industrial sector from caving in to the recession, but they will not be the case this year with a global recession on the way. Industrial vacancy rates are expected to rise throughout the year. The markets with the lowest vacancy rates are expected to be Los Angeles and Salt Lake City while the markets with the highest vacancy rates are expected to be Detroit and Phoenix. Industrial rents are also ex­pected to drop throughout the year.

Multifamily Sector

The other side of the residential housing coin is the multifamily sector. If households do not purchase homes, they still have to live somewhere, so they rent. Thus, the multifamily sector usually benefits from fall­ing home sales. That has certainly been the case for the apartment marketplace. Vacancy rates are projected to remain relatively low throughout the year, hovering around 6 percent. Similarly, rents are expected to grow around 2.5 percent this year. San Diego and Boston are expected to have the lowest vacancy rates while Or­lando and Phoenix are expected to have the highest va­cancies during the year.

The reversal of fortune in the commercial real estate in­dustry has led some of the nation’s biggest commercial real estate companies to ask the government for help. Trade association executives for the industry with some of their largest members have met with President-elect Obama’s transition team, Congressional leaders, and Treasury and Federal Reserve officials to make their case for assistance. The industry claims that in the next three years, an estimated $530 billion of commercial mortgages will come due for refinancing (with about $160 billion due this year). They claim that with the credit markets virtually collapsed, many of those prop­erties could go into foreclosure or bankruptcy if own­ers are unable to get new loans. Sounds like a familiar problem. The commercial sector will have to stand on line with cup in hand like so many other industries.