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Home inventory: Why so scarce?

Michele Lerner | Improvement Center Columnist | April 22, 2013

The big story in the real estate market in 2012 and early 2013 has been the lack of homes for sale. Foreclosures and short sales have been purchased in many markets and as home prices rise, fewer of those bargain-basement homes are being listed for sale. Competition has heated up for homes in many locations, particularly those in a lower price range that have equal appeal to first-time buyers and investors.

Investors and inventory

Home buyers this year, already frustrated in some areas because few homes are available for sale, are competing with investors, who purchased 24 percent of all homes bought in 2012, according to the National Association of Realtors' (NAR) 2013 Investment and Vacation Home Buyers Survey. It's the second highest market share since 2005.

But while individual real estate investors are a big part of the market, 39 percent of them purchased more than one property in 2012. And Institutional investors also jumped into the market, including a widely publicized move by The Blackstone Group to buy as many as 16,000 homes in the past year, with plans to purchase as many as 2,500 per month in the coming year.

"Investors have been very active in the market over the past two years, attracted mostly by discounted foreclosures that could be quickly turned into profitable rentals," said Lawrence Yun, NAR's chief economist, in a press release. "With rising prices and limited inventory, notably in the low price ranges, investors are likely to step back in coming years."

Investors, like many other homeowners, are holding back homes from the market because of the sense that home prices could rise further in the next few years. The NAR survey says investors plan to hold their property for a median of eight years, up from five years in 2011.

Investors and rental property

One reason for the choice to hold onto property longer is that rents have risen in many markets, creating positive cash flow. The NAR survey showed that 55 percent of investors purchased their homes for rental income.

Nicholas Lagos, broker/owner of Century 21 Gawen Realty in Arlington, Va., purchased several investment properties in recent years and financed them with low-interest, 15-year mortgages. He intends to keep those properties for rental income to fund his retirement after the mortgages have been paid.

Investors and home improvements

Landlords have different goals than homeowners when it comes to making home improvements. In general, landlords want to make improvements that allow them to attract renters, increase the rent and improve their cash flow by reducing costs. For example, adding energy efficient windows and similar features can lower utility bills and make a home more comfortable for residents.

Lagos, who also has a property management company, says the home improvements he has made on individual properties range from something as simple as a thorough professional cleaning for homes that are already in good condition to a complete kitchen replacement for a property that looks dated. Sometimes he opts to update just the appliances, update the bathrooms, refinish the floors or paint two-tone colors on the walls for a custom look.

"Our office philosophy is to get an investment in as good of condition as possible," says Lagos. "Ultimately, this cultivates tenants that show a pride of living in their home and a tenant that may stay longer. The majority of our properties have updated lighting and show in near model condition. In the long run, the value of the property is increased and we tend to get top dollar for rent."

Investors vs. traditional home buyers

The NAR survey showed that half of investment buyers in 2012 paid cash for their properties, which makes it difficult for buyers who need financing to compete. Even when investors financed their property, they made a median down payment of 27 percent in 2012.

Traditional buyers need to have their financing preapproved and be ready to move quickly with a strong offer if they want to beat out investors on the purchase of a home that appeals to them both.

Investors in the housing market may be a sign of strength in real estate, but traditional buyers who can't compete may be finding themselves tenants longer than they expected.

About the Author

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time," has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.