Oh my, how things have changed - part 2

Yesterday we looked at the changes that have solidified this past year in the makeup of home sellers, which unfortunately just served to document what we already know from reading stories in the papers and listening to the news – The huge majority of homes being sold are being sold by distressed homeowners, those behind in their payments or already in foreclosure.

Today we look at who is buying. We know what they’re buying but who are they and what can we learn from knowing who they are.

First we need to establish a historic context. For decades before the current market meltdown the distribution of buyers was as shown in the chart below.


The biggest group in the “normal” market were move-up buyers. These were people who had been in their first or maybe second or third homes for a while and now wanted something a little bigger, a little better, a little more expensive. Maybe they just got a raise at work or a promotion that meant more money or maybe this was a buy in conjunction with a move to a new job. In any case, they fueled the home sales above what could be called started homes – generally above $200,000 in price. They were the engine behind the growth of the market sweet spot of the 70’s, 80’s and 90’s – those homes priced between $200-400,000 that were the stock of most upscale subs of those eras. At the upper end of that band, and certainly above it. one was into the “luxury” homes market.

Next came the first time buyers and then tenant leases and finally investors, who were a very small part of the overall market. First-time buyers were those generally younger buyers who were coming out of apartments or maybe even right out of college. Some first-time buyers had stayed with mom and dad after school until they saved enough for a down payment. They bought both condos and smaller, “starter homes.” Many of the first time buyers contributed to the success of trendy older communities (Royal Oak comes to mind in this area) where they bought up and fixed up the older bungalows of those communities. They bought the homes that the move-up buyers needed to sell in order to move up. There were also always a few owners who decided to lease rather than sell, and a few investors who bought in order to have lease properties, but both of those groups were very small.

Now look at the current distribution of buyers. Indeed things have changed.


First time buyers dominate the market, with most out looking for a foreclosure bargain and they are finding them, as the sales numbers verified. These are still the same people who have been living with mom and dad or in an apartment or condo (leased) and now see the golden opportunity to buy more house than they though they could afford on their first purchase. Some are even joining the ranks of investors and buying up 2-3 houses as investments for their future.
Move-up buyers are still a good sized group but way down from their historic position. Many would-be move-up buyers are no longer looking at promotions, but rather fearing downsizings and plant closings and companies going out of business. This group has been literally paralyzed by the economic downturn and indeed a large number of what would have been move-up buyers are contributing their current houses to the foreclosure inventory because they got in over their heads or lost their jobs.

Tenant leasers and investors make up 34% of the current buyers. Many of the leasers are those who have lost their homes to foreclosure and now need to lease for a few years while they try to rebuild their credit. The rise in investors is also to be expected when there are such great bargains. A few of these are the flipper who buy up distressed homes, put a little money into fixing them up and then resell them. The key to success in that game is to be disciplined about what you put into the house and to make your money on the buy – that is to make sure that you get a good enough price up front to allow you top put money into the place and still be able to put it on the market at a good price.

Some agents have shifted their attention to the investors and are doing quite well helping them find and flip houses. Many agents are doing lots of leases and many agents have refocused their client prospecting to concentrate on first-time buyers. Agents who have resisted changing the traditional way that they do business find themselves squeezed into ever smaller portions of the business on both the buy and sell sides.

So now you have the picture from both the buyer and seller sides of the business. I’ll take a year-end look at the impact that these changes have had on property values and the whole real estate sales cycle in a future blog.