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Is The Mini-Boom In Housing All About Investors?

If you follow real estate at all, you have probably been reading about the rebound in the lower end of the market in some of the hardest hit areas of the country. Foreclosed homes in California, Florida, Nevada andArizona are being snapped up. I've been asking and wondering what's behind it and now have at least a tiny data point to report.

The Arizona Republic reported yesterday that in Phoenix, the percentage of investor purchases was somewhere between 50% and 70% of sales. That far exceeds the percentage seen during the most frothy parts of the bubble. Before I start casting stones, let's admit to a couple of things.

First, at least abandoned homes are getting pulled off the market instead of rotting in subdivisions. Second, most investors are either buying for cash or using low leverage -- there just isn't much available financing -- and are paying pretty low prices. That means the properties cash flow or should cash flow if you can rent them so the likelihood of a lot of these going back to lenders should be pretty small.

Having said that, there is no way that you can call this a normal, healthy real estate market. If at current market prices and current interest rates there isn't sufficient demand to absorb the existing inventory without this kind of investor participation then realistically there has been no appreciable turn in the housing market. The owner-occupant buyer is not as big a factor as press reports have indicated. That may be due to the economy or their may be and probably are other factors that enter in as well, but the simple fact is that the heart of a good real estate market is absent.

Those investor units also represent a large shadow market. Many investors truly did "steal" some houses and with any rebound or for that matter stability in the market are going to take their profits. Those that didn't are, as the article points out, running into a rude reality. There simply may be too many rental units now in Phoenix. Competition with apartments is fierce and certainly some who didn't make the best deals will sooner or late throw in the towel and unload their property. I suspect that this just pushes any meaningful new home construction a little farther into the future.

I'm just going on intuition here, but I suspect that Phoenix is not the only city seeing this type of real estate activity. To some degree it's probably operating in the other mega-bubble areas and maybe to some extent in the regions that weren't so overheated. If I'm right then a lot of talk about the real estate market showing signs of stability are overdone. It's stability in the sense that inventories are coming down but it's not a return to normalcy. Paradoxically, it contains the seeds of further instability.

It may be that this is a path to recovery, though it is not the sort of path that's historically has led the country out of real estate busts. That this one was so severe, we may just have to take whatever we can get. Somehow, this turn of events strikes me as more of a band-aid than the beginning of a cure.