The Home Buying Frenzy – The Good, The Bad

There’s a good post today at the Calculated Risk blog about the current and upcoming buyer frenzy that we’re seeing in the market. Campbell Communications did a study that showed that 43% of home buyers in Q2 were first-timers. Obviously, this is a result of the $8,000 first time home buyer’s credit that ends in November.

While it’s good for sellers right now – and of course the NAR is trumpeting the end of the bad market – bear in mind that the tax credit program is an artificial stimulus and the resulting buying spree is just as artificial.

From the Chicago Tribune:

Real estate agents say they’re seeing a surge of first-timers who want to close on a property by Nov. 30, the deadline for the credit. The rush has set off bidding wars and stirred up a normally quiet August market.

So as an investor, this is an excellent time if you can get a short sale negotiated and flip that property to a hungry first-time buyer – but any smart investor knows that “the fat lady” will be singing come November.

Calculated Risk makes some very good points:

• This has boosted existing home sales, and will continue to boost existing home sales (reported at close of escrow) through November.
• This will put upward price pressure on low-to-mid level homes during this period. This is the also the target price range for most cash-flow investors.
• At the same time, the foreclosure moratoriums and modification programs have limited supply – especially in the low-to-mid priced areas.
• This level of first-time buyers is completely unsustainable – even if another tax credit is enacted. There was significant pent up demand from potential first-time buyers who were priced out of the market in 2004-2006, and then were afraid to buy as prices fell. But demand from these buyers will wane.
• This doesn’t help the mid-to-high priced market because a large percentage of sales are distressed (REOs or short sales), and there is no seller to move up.
• Expect a surge in existing home sales (and some new home sales) over the next few months. Expect prices at the low end to rise (simple supply and demand). Expect all kinds of reports that the bottom has been reached.

Expect the frenzy to end …