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…..