NEW YORK (Reuters) - U.S. home buyers are less willing to buy foreclosed properties than they were six months ago, citing risks like hidden costs, but demand could grow because of the government's expanded tax credit, a survey showed on Tuesday.
A continued drop in demand for the glut of foreclosed properties would add a fresh layer of pain to a housing market just emerging from a three-year nosedive.
The percentage of Americans at least somewhat likely to consider buying a foreclosed home fell to 43 percent in November, sharply below May's 55 percent, according to a survey by Harris Interactive.
The survey was conducted November 5-9 on behalf of Trulia.com, a real estate search engine, and RealtyTrac, which tracks foreclosures.
Buyer expectations are becoming more realistic, Trulia Chief Executive Pete Flint said on a conference call.
Next year "government interventions will start to disappear, shadow inventory will hit the market and mortgage rates will start to rise" to around 6 percent from under 5 percent, he said. "We're in a false state of stability."
Shadow inventory includes houses that banks now hold but have yet to put up for sale.
Double-digit unemployment will push more owners into foreclosure, further destabilizing the housing market and pressing prices down another 5 to 10 percent, said Flint.
Some closely watched measures show prices have toppled by about 30 percent on average from 2006 peaks. Although prices are rising in some areas, the survey found lingering concern about buying now, when prices could fall still further.
Demand for foreclosed properties, which are often deeply discounted compared with other homes on the market, is of particular concern. RealtyTrac expects over 3 million properties will receive at least one foreclosure notice this year, up from a record 2.3 million last year.
About half of those properties will ultimately go back to banks, RealtyTrac said last week.
The company reported that November was the fourth straight month of declines in foreclosure actions, thanks to various loan modification efforts. But it said many of those problem mortgages would fail anyway.
Foreclosures could escalate to 4 million in 2010, RealtyTrac Senior Vice president Rick Sharga said.
"Unemployment, negative equity are driving factors, as is credit availability," he said. "We don't believe we will get back to normal levels of foreclosure activity on a month-to-month basis until probably the end of 2012, and we will still be going through the shadow inventory well into 2013."
Banks will place the unsold homes on the market at a measured pace to thwart prices on all homes from falling off a cliff anew, he said.
AGE, MARITAL STATUS MATTER
Real estate investors, renters and homeowners looking to "trade up" to a larger house still show strong interest in foreclosed properties, the survey found. Although overall demand dropped, a large share of current homeowners looking to trade up are willing to consider such a purchase.
About 24 percent of homeowners are at least somewhat likely to trade up to a larger home. Of these, 88 percent are at least somewhat likely to consider a foreclosure, the survey found.
Demand from those buyers could rise due to the government's new $6,500 tax credit for current homeowners who buy a new home. These are the "trade-up" or "move-up" buyers.
Buyers looking to lock in that incentive, as well as buyers wanting to take advantage of the $8,000 first-time homebuyer credit, need to sign contracts by the end of April and close on mortgage loans by the end of June.
Fifty-seven percent of renters are at least somewhat likely to buy a distressed home. Demand from renters, as well as all adults, fades as ages rise.
Marital status also impacts demand, with more never-married adults willing to consider a foreclosed property than those who are married, divorced or widowed.
Two-thirds of buyers expect to get a discount of at least 30 percent for a foreclosure.
The survey found that 95 percent of foreclosure buyers are willing to invest in renovations, with more than half expecting to spend 20 percent or more of the purchase price to improve the property. Such spending can help stimulate the economy.
(Editing by Dan Grebler)