Housing on Fire - Can Someone Please Explain?

Does this mean the housing market has bottomed, the recession is over, we’re reverting to the status quo ante and there will be no “new” normal.

The New York Times has an article today (Sunday) on the real estate frenzy that, were it not for the use of the word foreclosure, reads as if it were written in 2004.

Every weekday morning, Lou Jarvis drives the sun-baked suburban streets looking for investment gold: a family that will lose its house in a foreclosure auction within a few hours.

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own.

As the article notes, investors accounted for over 40% of the purchases of single family homes in April and they aren’t all homegrown. CBI Group, a real estate fund based in Calgary, is in the process of buying 175 homes and has a new fund that targets another 160 houses.

Most of the investors seem to be buying the homes to rent rather than an immediate flip. The low prices do allow for positive cash flow, but the Canadian investment group is already thinking about how it eventually gets rid of the houses.

As CBI continues to buy, it is planning investing seminars for its tenants. “Our goal is to be able to sell them their house back,” Mr. Zielinski [a CBI executive] said. “Wouldn’t that complete the circle?”

Well, yes, it would. Someone buys a house for $200,000; loses it through foreclosure; sees the bank sell it for $50,000; rents it from the new owner for $1000 a month and two years later buys it back from them for $125,000. It’s an interesting business model. I will leave it to you to complete the metaphysical circle.

I can’t figure it out. Maybe it’s housing’s version of a bear market rally. I suspect that, as usual, the early buyers got deals and those in the middle of the frenzy are buying stupid. History tells us that after bubbles it usually takes years for the affected asset class to rebound but the housing investor seems to believe that doesn’t apply.

Mr. Jarvis, the real estate buyer’s agent, seems aware of at least one risk. Noting that you need people to fill up all of these new rentals, he said, “If Phoenix loses population,” Mr. Jarvis says, “then buying houses here is a bad bet.”

Currently, Phoenix is the worst employment market in the United States. That’s right, dead last, even worse than Detroit. But Phoenix has always been a boom town, it always grows. History is on the side of the buyers, isn’t it? Well, one version of history will play out. It just remains to be seen which one.

Comments

[Richard K:]

"Someone buys a house for $200,000; loses it through foreclosure; sees the bank sell it for $50,000; rents it from the new owner for $1000 a month and two years later buys it back from them for $125,000."

One might ask, why doesn't the bank just reduce the outstanding balance (which is probably still close to 200k if not more) to 125k and adjust the loan so the original owner can afford it? Yes it loses $75k but that's better than a 150k writedown via the forclosure route.

Of course they can't do this for several reasons: (1) it would set a precedent resulting in a stampede of deliberate defaults from owners looking for a similar gift, and (2) if the loan has been sold or securitized, the bank no longer has the to negotiate, only to forclose.

The market is indeed in a metaphysical state when only absurd solutions seem to make any practical sense.

May 24 02:27 PM

[Roger Knights:]

"Does this mean the housing market has bottomed ...?"

In Phoenix, apparently. Nationally, there won't be similarly eager buyers until prices have fallen further, to Phoenix's level.

May 24 03:31 PM

[rm:]

[Someone buys a house for $200,000; loses it through foreclosure; sees the bank sell it for $50,000; rents it from the new owner for $1000 a month and two years later buys it back from them for $125,000.]

Ahhh... such an elegant business model. However, even in the days of easy money, lease-purchase transactions were only successful 20% of the time, at best. Granted, if you buy low enough, and the renters are plentiful, you can replace them. But after the 2nd, 3rd, or 4th renter, the place begins to look less like a home and more like a rental, the credit quality of the subsequent tenant/"buyers" begins to decline, and at a certain point, the asset begins to lose its luster.

A few additional assumptions are also being made: 1- prices will not fall further, 2- Interest rates will remain low, 3- FHA will continue to make poor lending decisions, 4- The "buyers" will actually do what they're told at the seminars.

That last point is a bit tricky. Towards the end of the bubble and the beginning of the crash, a lot of ARM-owners were not able to qualify for lower long-term rates because they didn't take the steps necessary to EARN those kinds of loans. People are often willing to do "whatever it takes" at the outset, but very few deliver.

May 25 08:59 AM

[Delta Don:]

JUST REMEMER WHAT MOM TOLD YOU! IF IT SOUNDS TO GOOD TO BE TRUE THEN ?

May 25 09:21 AM

[Phil Mills:]

"Currently, Phoenix is the worst employment market in the United States. That’s right, dead last, even worse than Detroit. But Phoenix has always been a boom town, it always grows."

Where in the world did you get this information? Phoenix has 7.2% unemployment & had a net increase of 1600 jobs last month, I don't think that sounds like Detroit.

Phoenix does grow and California's failing system is sending people to live hear in droves. With them comes economic stimulas. Many pay cash for a home and bring or create jobs.

I also want to point out that many readers think of a hundred thousand dollar home and asssume it is old or in a bad part of town. In Phoenix metro those homes are selling for 25-40k. The value in Phoenix is amazing right now. You can find 1-3 year old homes, loaded with upgrades in great master planned communities with pools, waterparks, hiking trails in the low 100's. On the high end you can find an absolute mansion that used to sell for over 1,000,000 scottsdale address for 400 - 500K.

The mediun home price in phoenix is at 1991 levels, that's 13 years before the "boom". So it might be safe to call it an oversold bear market. The bulls are certainly rushing in.

The big wild card is with values off over 50% how many more foreclosures are lurking in the shadows, will there be enough buyers. My guess is yes. Many people are doing short sales on their existing home and then rebuying back into the market within 2 years. Some are buying first and then letting the old home go or short selling it. Becuase of the low home prices I know a lot of people who have paid cash for a new house and then short sold their old one.

May 25 10:36 AM

[Tom Lindmark:]

Phil,
Here is a link to the latest Department of Labor report on job losses by state. www.azcentral.com/memb...
Here is a portion of the report:

For the third month in a row, Arizona is leading the states in the percentage of jobs lost, the U.S. Department of Labor reported today.

The state's 7 percent over-the-year decrease in March was the largest in the country, again surpassing Michigan, which had a 6.4 percent loss.

Arizona and Michigan also were number one and two in February and they tied as the top two in January.

There was also a report in the Arizona Republic that cited the Greater Phoenix Economic Council as remarking that Phoenix was ranked last in the nation. I am still searching for that and will post it when I have time.

The unemployment rate is lower than the national average which continues to perplex me. I think it might be due to a lot of workers leaving the state and a lot of self-employed or 1099 employees who aren't eligible for unemployment benefits and hence don't get picked up in the statistics.

The median price of homes has indeed declined but you are overstating the amount. Due to the mix of sales in Phoenix right now, the median is artificially lower than it would be. Comparing it at this point to historical data is misleading. For an explanation of this phenomenon go to this link. www.calculatedriskblog...


On May 25 10:36 AM Phil Mills wrote:

> "Currently, Phoenix is the worst employment market in the United
> States. That’s right, dead last, even worse than Detroit. But Phoenix
> has always been a boom town, it always grows."
>
> Where in the world did you get this information? Phoenix has 7.2%
> unemployment & had a net increase of 1600 jobs last month, I
> don't think that sounds like Detroit.
>
> Phoenix does grow and California's failing system is sending people
> to live hear in droves. With them comes economic stimulas. Many pay
> cash for a home and bring or create jobs.
>
> I also want to point out that many readers think of a hundred thousand
> dollar home and asssume it is old or in a bad part of town. In Phoenix
> metro those homes are selling for 25-40k. The value in Phoenix is
> amazing right now. You can find 1-3 year old homes, loaded with upgrades
> in great master planned communities with pools, waterparks, hiking
> trails in the low 100's. On the high end you can find an absolute
> mansion that used to sell for over 1,000,000 scottsdale address for
> 400 - 500K.
>
> The mediun home price in phoenix is at 1991 levels, that's 13 years
> before the "boom". So it might be safe to call it an oversold bear
> market. The bulls are certainly rushing in.
>
> The big wild card is with values off over 50% how many more foreclosures
> are lurking in the shadows, will there be enough buyers. My guess
> is yes. Many people are doing short sales on their existing home
> and then rebuying back into the market within 2 years. Some are buying
> first and then letting the old home go or short selling it. Becuase
> of the low home prices I know a lot of people who have paid cash
> for a new house and then short sold their old one.

May 25 12:16 PM

[John Wake:]

Tom wrote, "Currently, Phoenix is the worst employment market in the United States. That’s right, dead last, even worse than Detroit."

Misleading. From your comment it's apparent Phoenix had the highest amount of job loses in the country but elsewhere I've read that the Phoenix unemployment rate is still only 7.3 percent while the national average is 8.9 percent.

Next year construction employment will pick up from an extremely low 2009 and even though construction employment will still be way below "normal" everyone will say what wonderful employment gains Phoenix has made in 2010.

May 25 02:09 PM

[TinyTim:]

I'm glad all that injected liquidity is having an effect. Otherwise, the banks would never be letting them go this low.
If the property cash flows, a landlord can afford to take a risk and sit on it and wait for appreciation.
I wonder how many of these homes are bought by snow-birds and will remain empty each summer.

May 25 04:22 PM