Foreclosed homes have become considerably less attractive to consumers, according to a Trulia and RealtyTrac survey released Tuesday, Dec. 15.

Only 43% of adults surveyed in November by Harris Interactive said they were somewhat likely to consider buying a foreclosed property. That compares to 55% last May and 69% in May 2008. Buyers continue to be worried that there may be hidden costs when buying a foreclosed home (69%), that the process is risky (48%), and that the home will continue to fall in value (35%).

Since two of those worries are mostly put to rest when buying a new home, the survey brought good news for home builders who find themselves competing against foreclosures.

But it brought some bad news as well, specifically that the people who are most likely to consider buying foreclosed homes are the same people who currently constitute many builders’ best market: young people looking for a first home.

Among adults between 18 and 34 surveyed and renters surveyed, 57% of each said they would be interested in buying a distressed home in the future. Some 61% of renters between 18 and 34 and 65% between 35 and 44 said they were likely to consider buying a foreclosure. Only 40% of renters 50 and older said that.

Buyers looking to move up to a larger home also were interested in foreclosures, with 88% saying they were somewhat likely to consider a foreclosed property.

Nearly one-fourth of those surveyed said they were likely to buy second homes or investment properties and 92 percent of them said they were somewhat likely to buy a foreclosed property.

Unfortunately for builders, foreclosures will continue to compete against new homes for some time to come.

“The real story is the number of foreclosures continues to grow and spread,” said Pete Flint, CEO of Trulia, the real estate search company that supported the survey with RealtyTrac. More than 3.2 million households received mortgage delinquency notices this year and that number is expected to grow to nearly 4 million next year, said Rick Sharga, senior vice president of RealtyTrac.

Roughly 650,000 homeowners are in the early phases of the government’s loan modification program, and only half or so are expected to succeed with getting their mortgages permanently modified. The government had hoped to help four million Americans who were at risk of losing their homes.

To make matters worse, high unemployment is forcing even more homeowners into default, Flint noted.

Along with the states that have traditionally had high rates of foreclosures--Florida, California, Arizona, and Nevada--foreclosure numbers are now climbing in areas where there has been chronic job loss. Those include places such as Provo, Utah; Joliet, Ill.; Boise, Idaho; Portland, Ore.; Fayetteville, Ark.; and Charleston, S.C., according to Sharga.

He predicted that 2011 will only be marginally better. “We won't reach normal levels until 2012, and even then there will still be a shadow inventory well into 2013.”

The survey did hold some good news for remodeling contractors: 95% of those respondents who said they would consider buying a foreclosed property also said they were willing to invest in renovations, with 55% saying they would spend 20% or more of the purchase price for the improvements.

Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines. 

Learn more about markets featured in this article: Charleston, SC.