Foreclosures are down: what that means for you

April Dykman | Improvement Center Columnist | April 18, 2014

Foreclosures are down. You may be reading that all the time lately - after all, foreclosures have been down for 28 consecutive months. But if you're a buyer, what does that mean for you? Here's what's going on in the market and what it means for you if you're planning to buy a home this spring.

Current foreclosure market conditions

According to Trulia.com, "completed foreclosures decreased from January by 13.1 percent, as well as falling year over year by 15 percent. Foreclosure inventory also declined, posting a monthly decrease of 3.3 percent for a total of 752,000 homes in some stage of the foreclosure process."

Why are there fewer foreclosures? The slowdown is partially due to investor activity. "Investor purchase activity at foreclosure auctions…is one of the reasons that there are fewer bank-owned homes on the market: investors are buying them before the banks repossess them," according to HousingWire.

The bad news

Fewer foreclosures may seem like good news, but if you're a buyer, there are a couple of reasons to prepare for disappointment.

1. You're less likely to find a home for a bargain basement price.

If you were planning to buy a foreclosure or a short sale property for a super low price, that's going to be a lot harder now that there are fewer distressed properties on the market. (A short sale is when a seller's mortgage lender agrees to let the seller sell the property for less than what's owed on the mortgage, usually because the property is worth less than the balance of the mortgage and the borrower can't make the monthly loan payment or pay back the full balance of the loan.)

2. It's not just foreclosure inventory that's low. New home inventory is also down, according to The Wall Street Journal: "Construction of new homes also remains near its lowest level in 50 years. Builders completed fewer than 570,000 new single-family homes last year, down from an average of 1.1 million from 1990 through 2003." And a lot of the new homes that are available are the more expensive houses that people move up to after owning a starter home.

Plus, a lot of homeowners can't sell right now. Some are underwater or lack equity, so they simply can't afford to sell their homes. Others need to find a new home in order to sell their current home, but the lack of inventory means that they can't find a home to buy, so therefore they can't sell.

All of this means that there's just not a lot out there to choose from, especially if you're a first-time buyer looking for a starter home.

How to find a home when inventory is low

If you're going home shopping this spring, here are a few tips to help you find a home despite low inventory.

First, don't dismiss overpriced listings. "Many sellers won't list their home at a lower price but will sell it at a lower price," writes Brendon Desimone for Zillow. "Go in with an offer before the first price reduction, if possible. Once they do drop the price, other buyers will take notice again, and you may have competition."

Second, look for homes that are for sale by owner, or FSBO. Those houses typically aren't listed in the MLS system that your agent uses to find newly listed properties. Check out sites like ForSalebyOwner.com, iGoFSBO.com and Craigslist to search for FSBO homes by ZIP code.

Finally, be flexible. If the right single-family home isn't available, consider a townhome. If a house needs some cosmetic upgrades, think about the possibilities instead of focusing too much on the old carpet.

The good news

There is some good news for homebuyers this spring, especially if you've been pre-qualified for a mortgage: You won't have much competition.

Lack of jobs, debt, and inability to get credit means a lot of would-be first time home buyers simply can't afford to buy right now. And because there's not much demand, especially for starter houses, prices should inch down. This is especially true in areas where home prices increased last year due to investor activity.

Finally, more sellers tend to list their homes in spring than in winter, so although inventory is low, it should increase slightly as the season gets underway.

About the Author

April Dykman is a writer who specializes in real estate, personal finance, and entrepreneurship. Her work has been featured on MSNBC, Fox Business, Forbes MoneyBuilder, Inc. Magazine, and Yahoo! Finance.