Housing Speculation Says Bottom Is Not Yet Nigh

A story in today’s New York Times, “Buyers Pounce as Homes Go on the Block.” shows that true belief in housing as an investment is far from dead. And the belief that auction = bargain quickens the pulse.

While some local markets will have shallow (if any) price declines and fast rebounds, and Minnesota, the focus of this story, may fit that pattern, real estate analysts are pushing the timetable for a recovery back into 2009, and that could be premature. The last big housing recession, in the early 1990s, took nearly four years to work off the excess housing inventory, and this downturn’s overhang looks even worse.

We have further confirmation of the poor prospects for recovery in the form of a chart courtesy Menzie Chin of Econbrowser, which comes originally from the IMF September Global Stability Report. It should dispel any belief that the housing recession will soon be behind us.

But like second marriages, real estate speculation is the triumph of hope over experience. And in this case, over available data.

From the New York Times:

By 10 a.m. Saturday, more than 700 people filled a hall in the convention center here for what real estate agents say is the largest auction of foreclosed properties ever in Minnesota, with more than 300 houses or apartments for sale in two days. Opening bids ranged from $1,000 — for a three-bedroom house — to $729,000, for a five-bedroom house on 11.9 acres. The crowd was standing-room only, with more waiting to enter. Some were looking for homes, others for investments.

“It’s a symptom of the foreclosure crisis,” said Jim Davnie, a Democratic state representative in Minnesota…..

The auction, like others that have proliferated around the country this year, tapped the contradictory forces of the current real estate market, in which mass foreclosures and sinking home values, along with predictions of more pain to come, still stoke the urgency to buy right now, before it is too late.

“The market’s really low right now, so you can get a good price,” said Lori Crook, a food server at Keys Cafe who said she was looking for a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”

The auction involved a tiny fraction of foreclosures in the state. Julie Gugin, executive director of the nonprofit Minnesota Homeownership Center, projected statewide foreclosures at 20,000 this year, up from 11,000 last year, based on data from sheriffs’ sales.

Representatives from two big lenders that have been hit hard by the collapse of the subprime mortgage market, Countrywide Financial and Bear Stearns, were on hand to provide mortgages — fixed, adjustable, jumbo or interest-only. Both have been criticized for giving loans too freely, leading to a wave of delinquencies and a rush to sell debt securities backed by those loans.

Countrywide and an affiliate of Bear Stearns were also among the lenders selling properties at the auction. Both have been hurt by defaults on mortgages.

“This is such a stark and dramatic illustration of how serious the problem is,” said Ron Elwood, a lawyer at the Legal Services Advocacy Project, which lobbies in the interest of low-income residents. “The reality is, half the reason 300 homes are being auctioned off is that speculators tried to make a killing and failed to do so.” In Minneapolis, 55 percent of foreclosures this year involved houses not occupied by their owners, according to county records.

But instead of alarming buyers about the risks, the auction of so many foreclosures at once was an invitation to speculators, small and large. Some, including Bryan Kihle and Jim Casha, who bought a four-bedroom house for $145,000, bid without seeing the properties. “I just looked at the picture and thought if we got it cheap enough, we could rent it for a year, then sell it when the market goes back up,” said Mr. Kihle, a building contractor. One public interest housing group bought eight properties to restore for low-cost housing.

Others just saw a chance to enter the housing market. “It won’t always be low,” said Pearl Dobbins, who said she was willing to spend up to $50,000. “This is our chance to buy a home and start our financial future.”

What they all found was a mad scene. As men in tuxedos raced around, waving their hands at bidders and goading them to bid higher, Mr. Buleziuk delivered a nearly indecipherable sales pitch, amplified to exhausting levels….

Paul Schoenecker, owner of a local franchise of HomeVestors, the people who post the “We Buy Ugly Houses” billboards, said a minority of the sales were true bargains.

Even so, Mr. Schoenecker bid on some properties. Buyers were required to provide a $5,000 bank check, along with a personal check to bring their contribution up to 5 percent of the purchase price. Upon placing a winning bid, they proceeded to financing tables in the back — with no opportunity to further inspect the property or negotiate repairs.

The bidding for most houses took less than three minutes. Over two days, 85 percent of 340 properties were sold.

Nathan Harris, 23, bought lot 8A, a four-bedroom house near the University of Minnesota, for $80,000. He had been willing to bid as high as $150,000.

Since he is still a part-time student, Mr. Harris chose an interest-only mortgage, which will convert to a 25-year adjustable rate mortgage after five years, the type of exotic mortgage many critics and lawmakers blame for the foreclosure crisis. But he said he was not worried: in five years, when his mortgage adjusts, it will still be on a principal of only $80,000…..

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  1. EEngineer

    Yves, don’t mistake the sparse comments on your blog for disinterest. It’s simply that your stunningly concise assessment of this unfold catastrophe leaves little room for improvement by the rest of us.

    I quickly scan several dozen sites every day. Your’s is one of only two where I read every word. I doubt I’m unique in that respect.

  2. Yves Smith


    Thanks so much for the compliment Please note I added a chart to the beginning of the post after you read it. It makes for an interesting contrast.

  3. Jojo

    I also read you posts religiously.

    I think these auction hounds will ultimately wind up regretting any purchases they make now. They are the “crowd” and the “crowd” is usually wrong.

    As Buffet and others have said, the time to buy is when no one wants an asset, when they believe that recovery will never happen. We are far from that point yet.

  4. CDN Trader

    In “Reminiscences of a Stock Operator”, the protagnist explains how the smart money buys as the price goes up, and the public buys as the price goes down, always hoping that it will recover. If it was once at $500k, it must be a bargain at $350, right? Right?

  5. "Cassandra"

    FRom this weekend’s FT Property Section comparing weatherboard props around the globe:

    – Chester Nova Scotia probable 4 or 5 br overlooking harbour (USD900,000)
    – Layer Marney Essex (UK) 5br renovated farmhouse USD1,550,000
    – Margaret River, Australia 3br nothing sp;ecial USD450,000
    – Ohakune, NZ 4br north island USD225,000
    – Westover MD (US) Eastern shore substantial 4br nice condition & details USD 259,000.

    Very coarse, of course, and ever-so-anecdotal, but the median US is not Tokyo 1989, nor London 2007.

    Yes there’s been lots of stupidity around, and there remains pockets of excess in the US in places. And, indeed other markets (e.g. UK) are silly-stupid. And of course things CAN get a whole lot cheaper as most of rural France still sells for less than cost of replacement construction after doubling and perhaps tripling, but much of that can be blamed on demographics, taxes, immigration, and price discovery from common currency and the low pointof departure from which prices rose folllowing the last bear-market. But the relative value in the US is emerging in many places. This may of course mean other market prices elsewhere converge down to US levels, the USD rises from current levels amongst other convergance scenarios. With due respect to CDN TRADER, it is never as simple as mere price movement sans context.

  6. CDN Trader

    Cassandra, I do not disagree (excuse the double-negative) with anything you said. My point was that market bottoms in property are typically not characterised by the level of activity outlined in the news article. But I do not know the local situation in Minnesota, and you are right, it is probably nothing like London today.

  7. Anonymous

    People who look at FT Property Section, and certainly anyone who buys via…. are certifiably bubblicious

  8. "Cassandra"

    People who limit their sources of information are likely to miss important vectors of information that ultimately help one better ascertain something resembling an objective reality.

    And in any event, even with (an admittedly) biased sample set, the ordering and positioning of relative value relationships are likely to be preserved.

  9. Periodista Miguel

    eengineer’s comment [‘don’t mistake the sparse comments on your blog for disinterest’] offers a good excuse to repeat that this is a very valuable blog. Like eengineer, I only hit a relatively small group of econ-centric sites each day. This is one of them. Many thanks…

    Periodista Miguel

  10. Anonymous

    what eengineer said… since I cannot improve on the original post, I will just continue to lurk :)

    I’m a faithful daily reader however!

  11. Boom2Bust.com

    Something for the current crop of foreclosure investors to think about:

    A recent BusinessWeek analysis of the past three decades shows that if history repeats itself, it’s likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.

    If you look at housing other than a place to live, there will come a time when it will be a true investment bargain. Just not right now…

  12. ProblemWithCaring

    Cassandra: for someone who “abhors dishonesty,” you seem to be pretty “O-KAY!” with the truithiness of Realtor speak, where there is often no way to gauge the truth of a statement that could mean almost anything.

    In your post about “Westover MD (US) Eastern shore substantial 4br nice condition & details USD 259,000” – Did you mean something like
    THIS?? (which, BTW, cost about $80,000 in 2005 and the description clearly says HOME NEEDS LOTS OF TLC…OR BUILD YOU DREAM HOME!)

    So this overpriced teardown Victorian, located mid-stream ofthe disgusting drainage and subtropical humidity of the Chesapeake, and in the “dead zone”-laden waters of Westover lends itself to the claim that “the median US is not Tokyo 1989?”

    Talk about “objective reality”!

    Want to live on the Chesapeake in nice weather, i.e. in a vacation home? That will still cost you about three quarters of a million dollars.

    Want to live close to the water, but still commute to a viable commercial region for employment? Better hightail it away from Westover, which is figuratively and literally miles and miles away from employment and cultural centers.

    US housing is overpriced in most desirable places – this is still an honest assessment, in spite of those brave advertisments in the Real Estate Section of the Financial Times.

    Like Cassandra, the true heroes of objectivity.

  13. "Cassandra"

    PwC – Your hostility is mis-directed, and for the sake of actually understanding my point, I would suggest you at least review the original article to which I was anecdotally highlighting, since it was not private classified, but a comparative “style” piece written by an FT staff-writer (not that this prevents it from having infomercial possibilities) despite Pearson’s best efforts at editorial integrity.

    I certainly won’t argue as to the desirability of Westover for I know it not, though in terms of climate, Nova Scotia hardly fares better though with different idiosyncratic extremes. Nor is Ohakune or Margaret River much less remote (though both are apparently pleasant). Indeed the Westover weatherboard prop (had you viewed the article) was NOT the one your link depicted, was neat enough to have survivved a D.A.R. smell-test in Dorset VT, and good sight more colonial twee than the arts-n-crafts jumble that best describes the North Island offering. I’ll leave the judgment of whether that makes the out-house you linked to a hugely over-valued POS (highly likely), or the one pictured in the FT article “a bargain”.

    Whatever the case, my point was that prices have risen dramatically the world over, and the USA (whether one wishes to believe it or not), hasn’t been bitten (in price space) all that bad (though though it must be said has responded robustly in terms of supply). And while I agree with Shiller that “real” prices in the USA have Lots of room on the downside, how that is realized (whether through generalized inflation, rising incomes, a combination thereof, OR further nominal destruction in home prices) remains rather uncertain in the face of continued global liquidity growth, deteriorating USD, and no apparent meaningful change from the Asian mercantilists and other official accumulators of dollar reserves.

  14. ProblemWithCaring

    Not hostile. It just appears hostile through your haze of obfuscation.

    Actually, I think you need ONE more parenthetical statement. I only counted 8.

    You know what the “Words words words” of your beloved FT “style piece,” your own misguided blog comment, these Realtor listings – all amount to?

    Stick to the fundamentals — housing is NOTABLY overpriced in US.

    That’s it – that’s all. Pockets of overpriced homes in Novia Scotia compared to pockets of modestly priced homes in rural Maryland will not change that.

    Neither will more parentheses.

    [story end]

  15. Dr Housing Bubble


    Excellent and thoughtful analysis. I’d like to echo that this is an excellent article and site. This chart from Credit Suisse will start making the rounds like the previous chart that was ushered out in January. What this shows is that we have first, a subprime bomb in Q1 of 2008 followed by an eye of the storm mish-mash of subprime, option ARMs, and other mortgage concoctions followed by an amazing Option ARM fiasco that may be worse than the subprime burst since many folks are negatively amortizing their loans by paying the minimum. Keep up the great work.

    Dr. Housing Bubble

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