Housing Markets On Fire: Can Anyone Tell Me What It Means

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 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.

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

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.

Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out.

The low end of the real estate market here — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.

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 large 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.

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