Investors drove home sales up 3.7 pct. in March

Investors lifted U.S. home sales last month, plunking down cash to grab cheap homes at risk of foreclosure. But purchases made by first-time homebuyers fell, a troubling sign for the weak housing market.

Sales of previously occupied homes rose in March to a seasonally adjusted annual rate of 5.1 million, the National Association of Realtors said Wednesday. That's a 3.7 percent increase from the February pace, but far below the 6 million homes a year that economists say represents a healthy market.

Foreclosures or short sales - when the lender agrees to accept less than what is owed on the mortgage - rose to make up 40 percent of all purchases. And deals paid for entirely in cash accounted for 35 percent of all resold homes. The Realtors group says that's the biggest percentage since it has been tracking all-cash sales.

Many of those purchases are being made by investors, who are targeting cheap properties in areas hit hardest by foreclosures: Phoenix, Las Vegas and Tampa. The trade group's data only takes into account individual investors. It does not include homes sold in bulk at auction or on courthouse steps. Many of the foreclosure sales are likely being picked up en masse by private equity firms.

Another sign of investor activity is that sales of homes priced under $100,000 have risen 10 percent from a year ago. In that same period, sales of mid-priced homes, between $100,000 and $500,000, have fallen more than 14 percent.

Fewer first-time homebuyers are entering the market. Sales among these buyers, who typically set down roots and raise families, fell to 33 percent in March. The trade group and economists say a healthier makeup is 40 percent.

The median sales price rose in March to $159,600, but it is still down 5.9 percent from a year ago.

Foreclosures are dragging down home prices. A record 1 million homes were lost to foreclosure last year and foreclosure tracker RealtyTrac Inc. said it expects 1.2 million more will be lost this year.

Homes at risk of foreclosure usually sell at 20 percent discounts compared to their original listing price. So when sales of distressed properties rise, prices fall.

Joshua Shapiro, chief U.S. economist with MFR Inc., said that "part of the market-clearing process is that distressed properties must be sold, so the fact that this is occurring is good."

Many would-be buyers are holding off, worried that home prices haven't bottomed out. Others are having trouble getting mortgages because banks have tightened lending requirements. The average credit score for Freddie Mac and Fannie Mae-backed mortgages is now 760, up from 720 in 2007.

A major obstacle to a housing recovery is the glut of unsold homes. There were 3.55 million unsold homes on the market in March. It would take 8.4 months to clear them at today's sales pace. Analysts say a healthy supply can be cleared in six months.

The situation is much worse when taking into account the "shadow inventory" of homes, economists say. These are homes that are in the early stages of the foreclosure process but have not been put on the market yet for resale.

"It is unlikely that home prices can recover on a sustained basis until the inventory-to-sales balance improves further and the number of distressed properties is significantly reduced," said Steven A. Wood, chief economist at Insight Economics.

For March, sales rose 8.2 percent in the South, 3.9 percent in the Northeast and 1 percent in the Midwest. Sales fell 0.8 percent in the West.

Sales of single-family homes rose 4 percent to an annual rate of 4.45 million units. Sales of condominiums rose 1.6 percent to a rate of 650,000 units.