Bloomberg - No recovery for RE as speculators dominate sales

No Recovery for Real Estate as Speculators Dominate Sales By Kathleen M. Howley Jan. 8 (Bloomberg) -- As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales. While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise... [more]

No Recovery for Real Estate as Speculators Dominate Sales By Kathleen M. Howley Jan. 8 (Bloomberg) -- As the U.S. housing recession enters its fourth year, there’s no sign of a recovery because speculators account for most of the rise in sales. While the purchases are trimming the inventory of unsold properties, most of those bought by speculators will likely return to the market when prices rise again, hampering any recovery, said Nobel laureate economist Joseph Stiglitz and Yale University Professor Robert Shiller in interviews. “We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve,” said Stiglitz, a Columbia University professor of economics. “We could see a double-dip in the housing recession if that happens.” Banks owned a record $11.5 billion of repossessed homes in the U.S. at the end of the third quarter, according to the Federal Deposit Insurance Corp. Foreclosures accounted for almost half of all U.S. purchases in November and homes in default helped increase sales 83 percent in California . There were an average 3,100 foreclosures per day in the U.S. in November, according to RealtyTrac Inc., an Irvine, California real estate data company. That’s triple the 1,000 per day average in 1933, the worst year of the Great Depression , according to the Federal Reserve Bank of St. Louis. The repossessed properties offer opportunities for investors, who typically buy homes at auction and rent them out until prices increase and they can sell. ‘Flippers’ Rule “You don’t have it in strong hands, you have flippers,” said Shiller, who helped create the S&P/Case Shiller real estate price indexes . “These speculators are preventing the market from crashing now, and when they get out it could fall again.” U.S. real estate prices and sales may begin to stabilize in 2010, said Stiglitz. A worsening economy and growing speculation will delay the recovery further, he said. “Assuming we don’t overshoot, we could be back at equilibrium in 12 to 18 months, but there are reasons to believe we might overshoot,” Stiglitz said. In November there were 4.2 million homes on the market, falling from an all-time high of 4.6 million in July, the National Association of Realtors said in a Dec. 23 report. The U.S. median home price plunged 13 percent from a year ago, the fastest pace since the 1930s, the trade group said. Resale Planned Dario Moscoso of San Diego tracks notices of default and negotiates directly with banks if a home doesn’t sell at auction. He bought a three-bedroom foreclosed house in San Diego three weeks ago for $490,000, half of what it would have fetched a year ago. He’s renting it for $2,500 a month and plans to sell when prices rebound. “We hope to put it back on the market in about a year,” Moscoso, 52, said in an interview. “We’ll gauge the market and see how it goes.” The “speculative fervor” blamed by former Federal Reserve Chairman Alan Greenspan in July, 2005, for causing a price bubble is returning at the bottom of the property market in part because investors have the edge in buying foreclosures , said Dean Baker , co-director of the Center for Economic and Policy Research. Baker said he considered buying a Washington home at a foreclosure auction last year until he learned the terms of the sale. Winning bidders had to complete the deal within 30 days, half the time of a standard home purchase , or lose their deposits. It was a risk he didn’t want to take. No Competition “Regular homebuyers are excluded from the foreclosure market because the rules favor professional investors and that lack of competition is driving down prices ,” Baker said. “This is a place where the government could step in and stop housing’s downward spiral by encouraging a more user-friendly process.” Banks that have received federal bailout funds should be forced to sell foreclosures in a way that gives homebuyers a fair chance, said Stiglitz. Lenders repossessed about 850,000 properties in 2008, according to RealtyTrac. “In past housing recessions, we didn’t see as many mortgages under water, so it didn’t matter if the focus was on speed and not on maximizing value,” Stiglitz said. “Now, the same banks that created the problems by mismanaging their risk are mismanaging the disposal of their assets.” Foreclosures typically are sold “as is” and the properties sometimes aren’t available for viewing before bidding, said Ralph Stewart , of Paul E. Saperstein Co. Auctioneers & Appraisers in Holbrook, Massachusetts. No Viewing “If you’re a first-time buyer with a young family, do you really want to buy a home sight unseen and risk losing your down payment?” Stewart said, minutes before starting a foreclosure auction in Boston. “Investors know how to close a deal quickly and they don’t care what it looks like -- they’re either going to rent it or flip it.” Speculators may soon see some competition as state and local governments start receiving the $3.9 billion allocated by Congress in July to buy and renovate foreclosed properties and sell to families who intend to live in them. Communities have 18 months to spend the federal money or lose it, according to the Housing and Economic Recovery Act of 2008 that authorized the program. Florida will get $541.4 million from the federal government for the so-called Neighborhood Stabilization Program, which allows the states to direct the funds to local housing groups. California will receive $529.6 million, Michigan is getting $263.6 million, Ohio is slated for $258.1 million and Nevada for $143.9 million. ‘Tipping Point’ “Neighborhoods devastated by foreclosures are at a tipping point,” said Mark McDermott , of Columbia, Maryland-based Enterprise Community Partners. “Getting these properties into the hands of community groups, instead of speculators, will go a long way toward stopping the downward spiral .” The $11.5 billion of homes held by U.S. banks at the end of the third quarter, the highest on record, was more than double the $5.3 billion of the year-earlier period, according to the Federal Deposit Insurance Corp. in Washington. Robert Arnold, a real estate investor who rents out a dozen homes near Orlando, Florida, says he’s ready to sell when demand rebounds. Arnold bought an Orlando foreclosure in June for $60,000, about a third of its appraised value, and spent $20,000 repairing it. Four months ago he rented it for $950 a month. In November he bought a three-bedroom house for $25,000 in Longwood, Florida, and hopes to rent it for $900 a month, about six times his $150 mortgage payment. “Most of the houses I buy are junkers, but with a little work they become cash cows,” Arnold said. To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net . Last Updated: January 8, 2009 00:01 EST Go To Full Site Feedback | Terms of Service | Privacy Policy | Trademarks [less]