Signs of life emerging in housing sector

By Christopher Palmeri, Mara Der Hovanesian and Prashant Gopal

updated 7:43 a.m. ET April 7, 2009

Last year the Cape Coral area of Florida had the highest foreclosure rate in the country. Banks moved to seize more than 1 in 10 residential properties in the Gulf Coast community of 165,000. The reverberations are still being felt. Newly built McMansions sit vacant, dusty monuments to the great real estate boom. Smaller homes have been ransacked. Apartment buildings have been boarded up. Former owners are stripping whatever items they can from their homes before the locks get changed, says Kirsten Prizzi, a local real estate agent at AC Global Realty. "Knobs, appliances. Someone was selling windows."

But a curious thing is happening in this blighted former boomtown: Buyers are swooping in. First-time home-owners are suddenly entering bidding wars with real estate speculators from as far away as Spain and Germany. Sales in February outpaced those at the peak of the boom, with some houses getting more than 50 offers and selling above their asking price. "I look for markets that are downtrodden," says Rich Lehrer, a retiree and self-proclaimed "emerging-market investor" from Wilmington, N.C., who wants to buy several properties in the area. "I'm expecting to get better yields than I would get on my cash."

Cape Coral isn't the only bright spot in housing land. Some of the very regions that led the U.S. housing market into the abyss are beginning to show signs of life. Sales on the Gulf Coast of Florida, California's Inland Empire near Los Angeles, and the Las Vegas metropolitan area surged by more than 80 percent in February vs. the same month last year.

So what's going on? In all of these markets, banks are dumping foreclosed properties, attracting cash-rich speculators looking for cut-rate bargains. "Why wait [for a bottom] if it's the right deal?" says Brent McAlee, a 31-year-old Las Vegas resident who recently paid $140,000 for a three-bedroom home that fetched around $350,000 a few years ago. He hopes to rent it out for $1,300 a month.

What's more, first-time buyers are finally rushing in, lured not only by plunging prices but also government incentives like ultralow interest rates and hefty tax breaks. Such sweeteners are just too tasty for some to pass up, at least in markets that have already plunged by 50 percent or more.

Frenetic buying in a few depressed areas doesn't mean the national bust is over — far from it. But it does herald the start of a new phase in the boom-and-bust recovery cycle. Economists might call it equilibrium: Prices have fallen so much in some areas that shoppers are getting interested again, improving the balance between buyers and sellers. That doesn't mean prices will surge anytime soon. But heavy buying should at least begin to put a floor under prices. "Are we at the bottom?" asks Christopher Thornberg, an economist with Beacon Economics. "We are getting close."

If Thornberg is right, one might expect other markets to begin the bottoming out process in the coming months. Just as California, Florida, and Las Vegas led the nation into the housing bust, those areas could provide the template for a national recovery. "One of the big problems we have across the nation is a lack of confidence," says Adam York, an economist with Wachovia (WFC) in Charlotte, N.C. "As these former bubble markets bounce off the bottom in terms of sales, it could give some hope to [other markets] that the declines are going to end."

Plenty of caveats are in order, because there are peculiar bear-market factors at work. The fact that inventories are falling precipitously in California — to just 6.5 months' supply from 15.3 months a year earlier — would seem to augur well. Historically, "prices respond very dramatically to inventory," says William C. Wheaton, director of research at the Massachusetts Institute of Technology's Center for Real Estate.

But inventories are falling fastest in markets where speculators and first-time buyers are driving the action. Those parties don't have to put their own homes on the market to make a deal. It remains vexingly difficult for home-owners who have bought in the past five or so years to sell one property and buy another.

On top of that, government incentives of up to $8,000 in tax credits for first-time buyers and low mortgage rates engineered by the Federal Reserve are luring shoppers who otherwise would be sitting out. If the government were to take away the punch bowl, markets that seem to be bottoming could well turn down again.

Hard-hit markets
What's more, banks have tightened their lending standards so much that only the most qualified buyers are finding it easy to get loans. Until financing loosens up, the housing market can't possibly take off.

It's best to view the brisk sales in some markets as glimmers of hope in a national market that seems likely to remain weak for a while. Sales continue to fall in many areas, especially those that didn't get hit until recently. In Charlotte, where home prices were rising until a few months ago, sales dropped 38 percent in February over the previous year. Nationally, the S&P/Case-Shiller index that tracks home prices in the top 20 metro areas was down 19 percent in January from a year earlier and 29 percent from its 2006 peak. "The market is still doing badly," cautions Robert J. Shiller, a professor of economics at Yale University and a creator of the index. But, he adds, "there's always light at the end of the tunnel."

That light could be growing brighter in Las Vegas. Home sales began to drop in Sin City before they fell in most other parts of the country. Now Vegas is deeply mired in recession. Unemployment has risen to 10.1 percent, far above the national average. More than 80 percent of the homes for sale are distressed properties, either those where the owner faces foreclosure or those already owned by a bank. Median prices have fallen from $315,000 in June 2006 to $155,603 today, roughly the same level as in 2002.

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