You really had to be in Phoenix in 2005 to understand how out of control the housing market was. Homes were flipping several times in a month, open houses were mobbed, agents would go door to door asking people if they were even thinking about selling. Prices skyrocketed by the week.
Phoenix is now paying the price for its "irrational exhuberance". Home values have been plummeting, foreclosures have been escalating, and tumbleweeds now fill many of the subdivisions instead of houses. After seeing how many people were financially devastated by the mania, people are bound to be more cautious today, right? Wrong. The frenzy continues: [Hat tip to John and L!]
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.
One real estate agent was showing a foreclosed house to a prospective client when a passer-by saw the open door, came in and snapped up the property. Another agent says she was having the lock changed on a bank-owned home when a man happened by, found out from the locksmith that it was available, and immediately bought it. Bidding wars are routine.
Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.
Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses.
While sales are rivaling their heights in 2005, there are some substantial differences. During the boom you could sell nearly anything with four walls and a roof, even in the upper price brackets. Homes were being built in droves and new home sales were booming.
The current boom is in the lower price brackets, mainly foreclosures. Those "routine" bidding wars are not preventing home prices from dropping. Construction is dead.
While there are those who believe that this will be a "bottom up" recovery, there is no reason to believe that a similar frenzy will happen with more expensive properties. With credit tight, it is difficult to qualify for more expensive homes and financing remains expensive. Massive supply continues to make potential investors nervous. What Phoenix is experiencing is not recovery but a "vulture boom"- a feeding frenzy of investors who plan to make their fortune picking the bones of the housing market.
The prices of upper end homes will decline until they are attractive to buyers. These newly minted lower end properties [Or should I say lower higher end properties?] will continue to put downward pressure on prices. Rentals are also in oversupply, which can drive down rents and making it difficult for investors to have a positive cash flow.
Vultures should beware in this market. They could end up as carrion for the wiser and more patient birds of prey.
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off topic: but a good laugh.
http://www.youtube.com/watch?v=0YM9Ereg2Zo
Similar problems have gone global:
Hutch-
I have a lot of connections to Asia and I was about to feel outraged- then I couldn’t stop laughing. That was too funny.
Where’s Henry Higgins when you need him?
I am an inactive broker in Phoenix. I know many sales people and brokers involved in the current mania. They tell me these are cash transactions but when I dig further I find out that the cash comes from credit lines and borrowing from 401Ks. The mania buying is also happening in very marginal neighborhoods where many of the prospective renters are unskilled laborers, those affected most in this downturn. Also many are undocumented workers. What kind of an investment is that?
stevec:
I think I agree with your skepticism…. these folks are the kind of ‘investors’ that we saw back in 2005. Salt of the Earth, working class types, innocent, unquestioning, unsophisticated. You know…. morons.
Steve and Yossarian,
We have a different breed of morons here in Southern California.
I just heard from a coworker that he may be back in business on an offer that was rejected.
He was outbid on a 1.5M house that was “all cash”… except that the deal seems to be falling through because the other buyer was expecting to refinance 10 other investment properties so raise the cash. Unfortunately for that buyer, the banks have been unwilling to go 100% financing once again on non-owner occupied housing. They themselves are trying to raise cash.
This spring mania is destined to be much shorter than the last one. You can take that to the bank.
But they won’t let you deposit it. Or borrow against it.
Margin bets and bottom feeders.
401k money to buy a house? are they paying the penalty? if it’s an investment setup that’s really dumb. speculators are going to keep this economy in shambles for years and the group in washington will keep stealing our money. Igor is irate
Permit me to add my incredulity to freemonster’s. Recall that stevec said that the cash for the deals he’s researched has come from credit lines and borrowing from 401Ks.
I’d like to know what financial institution is stupid enough to let these bozos get credit lines for buying houses. I mean, borrowing from the 401k is stupid enough, but do we have to drag credit lines into this too?
Like Igor, I am furious
Now now, guys, you can’t argue with cold hard factoids …
“U.S. Existing Home Sales Rise to 4.68 Million Rate”, by Bob Willis, Bloomberg, May 27, 2009.
while i agree with the 401k comments…i’ll play devil’s advocate for a bit (i have MANY clients that did this). you have 100K in your 401k (a year ago it was 200k). you’re tired of watching the stocks/mutual funds drop or you already sold everything and it’s now sitting in a money market earning 1 or 2%. let’s say you can rent the house for $750/mo. even if the 100K drops 10-20% more you have a home worth 80-90K and cash (rent income)of $9000 a year from now. while that’s not a great investment….i’m sure many 401k’s are doing worse? if you borrow the money from your 401k and personally buy the investment home then you have to pay the 401k back or it will be considered a taxable distribution (possibly subject to penalties). “theoretically” you should be able to make payments to the 401k with the rent income. again….i wouldn’t do it, but i can see the rationale (sort of).
“let’s say you can rent the house for $750/mo. even if the 100K drops 10-20% more you have a home worth 80-90K and cash (rent income)of $9000 a year from now. while that’s not a great investment….”
That nine grand starts looking much smaller when vacancies, repairs, management fees, et cetera are taken into account. The vacancy rates are high in the overbuilt exurbs where most of these deals are playing out.
from the NY Times article:
“In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.”
Let me tell you about Brewer Caldwell. One of the outfits that really can be given credit for taking the Arizona housing bubble to a true mania-type level. If you had a house listed for sale in 2005 in the Phoenix area, chances are high that you received an “offer” contract from them. Their focus seemed to be 3/2s under $300K. They would write up the contracts with “Brewer Caldwell and/or assignee” as the buyer and just shoot out many contracts to whatever was listed on the MLS. They included an extended 15-day “inspection” addenda which presumably allowed them to unload what they could on some gullible Californians (sorry Golden Staters, but that was it how it was) at a premium (plus commission) and then pass on whatever was left. When my personal residence was for sale in Summmer 2005, I once received two offers from two Brewer Caldwell people in one day, and four total from them that same week. These were from different agents. I pictured some sort of boiler room, and rejected all of these attempts at taking the house off the market for 15 days while they marketed them to their assignees.
So the same company is now pushing “REO rental house deals” on more absentee buyers. I know that these Canadians et alii are grown-ups, but it really strikes me as unjust that this business makes a dime on a situation that they helped create. Odds are high that they represent absentee buyers purchasing REOs where they facilitated the original 2005-2006 transactions that led to the defaults.