Greg Swann should be happy with what he is seeing in the Phoenix housing market.
Mr. Swann is a real estate agent and, after years of plunging prices and soaring foreclosures, the market is suddenly taking off. Bidding wars have broken out, prices are climbing and buyers are pouring in from all over, including many from Canada.
But Mr. Swann isn't smiling. He's worried. The current buying frenzy "is absurd," he says.
"I really don't like to be a bear because obviously it's not good for my income, but there is no shortage of homes in Phoenix," he said. "We have a false perception of a shortage. … There is going to be another surge of foreclosed homes on the market, because they are out there."
What's playing out in Phoenix is happening across much of the United States. Eager investors have started snapping up distressed properties, convinced the market has bottomed out and the deals will soon be harder to find.
Those buyers may regret rushing in. There are signs that the problems in the housing sector are far from over, especially as the economy continues to struggle and unemployment rises. At the same time, mortgage rates are climbing, government programs designed to help stop the tide of foreclosures aren't able to keep up and there's a huge number of houses that have yet to hit the market.
At the current pace of sales, it would take 10 months to move all the houses now for sale in the United States. That's about twice as long as it would take in a normal market, said Stan Humphries, vice-president of analytics at Zillow.com, a Seattle-based company that tracks U.S. housing prices.
The problem is, that only counts the houses on the market now. Based on a survey that asked homeowners whether they would sell once the market begins to stabilize, Mr. Humphries said there could be as many as 20 million properties up for sale once prices bottom out. That's a five-year supply.
"We're in for an L-shaped recovery in the housing market, which means we're going to hit a bottom and we're going to stay there, bouncing around, for a while," he said.
That will affect more than just homeowners. Much of the U.S. economy hinges on a recovery in the housing market, where most of the current financial troubles first emerged. Without a rebound in housing, economists fear a lag in consumer confidence and spending, which powers two-thirds of the U.S. economy.
Phoenix offers the most dramatic example of the decline and fall of the housing market. Earlier this year, it became the first U.S. city to see median house prices plunge more than 50 per cent since the peak in 2006. Last month, the median price hit $130,000 (U.S.) - down 42 per cent from a year earlier. In far-flung suburbs such as Buckeye, a newly built, 1,700-square-foot house can be had for $40,000.
Foreclosed properties dominate the market; not that long ago, they accounted for as much as two-thirds of all sales. Many neighbourhoods are lined with vacant houses. In Gilbert, an entire subdivision with 100 lots was recently being sold through foreclosure by the builder.
"Our prices are so low that it's hard to believe," said Diane Olson, a former Winnipegger who sells houses in Phoenix to Canadian clients. "It's the most incredible market I have ever seen."
Those clearance prices have started to attract buyers. Last month, nearly 10,000 houses were sold across Phoenix, up almost 10 per cent from the previous month. Prices also climbed 4 per cent between April and May, the first monthly increase is more than a year.
Buyers now often face bidding wars as soon as a property is listed for sale. Ms. Olson said she recently bid on a house listed at $88,000. She put down an all-cash offer of $110,000 with a two-week closing. "We didn't get it," she said.
Other agents are just as busy. "We have seen a huge increase in buyers," said Tom Caldwell, co-founder of Brewer-Caldwell Property Management Inc. "We're selling 25 to 35 homes a month to all different investors."
One of Mr. Caldwell's biggest clients is Calgary-based CBI Group, which has created two investment funds and plans to buy about 300 houses in Phoenix. Mr. Swann said he has clients from Canada, California, Oregon and elsewhere snapping up dozens of houses at a time. One investor from Chicago hired another Brewer-Caldwell agent to buy 20 properties.
As demand has surged, the number of foreclosed houses listed for sale has dropped significantly in recent months. Many say that is what has prompted investors to falsely believe the market has hit bottom.
The drop is misleading and temporary, argues Jay Butler, director of realty studies in the Morrison School of Management and Agribusiness at Arizona State University.
Foreclosures were put on hold earlier this year while lenders waited to see the impact of various government-mandated loan-modification and financing programs. Prof. Butler said that hiatus is ending, and most homeowners in Phoenix don't qualify for these programs anyway because the market has sunk too far for banks to bother with loan modifications.
Mr. Swann pointed out that thousands of homeowners will likely walk away from their houses because they owe far more on their mortgages than the properties are worth.
"Say you bought at $260,000 in November, 2005, and you now see homes in your area worth far less. Why pay that mortgage?" he said. "Why not go and rent for a couple of years and then go buy the same house for $140,000?"
Interest rates are another problem. Mortgage rates plunged to record lows in early 2009, helping to make buying more attractive. But now rates are rising because of the resurgent confidence in the global economy.
The rock-bottom mortgage rates of early 2009 were a side effect of the global financial crisis that the plunge in housing started in the first place. In those dark days, with stocks plunging and fear of economic meltdown everywhere, investors flocked to government bonds, driving interest rates to record lows. Mortgage rates - which are based on government bonds - went down in tandem.
Now, with confidence improving, investors are moving money out of the safe havens of government bonds and interest rates are going up. As a result, so are mortgage rates - and fast. The average rate on a 30-year, fixed-rate loan shot up in early June to the highest since November, 5.5 per cent.
The result has been a plunge in the number of mortgage applications to the lowest since November, as fewer Americans asked for loans to refinance their existing houses or buy new ones. On top of that, there are few signs that the U.S. government's measures to stop the tide of foreclosures are doing enough.
About four million mortgages - representing almost 10 per cent of all the U.S. home loans currently outstanding - were delinquent at the end of March, according to the Mortgage Bankers Association. Many of those homeowners ran into problems in the first two waves of the housing crisis, when house prices began to fall and mortgage "teaser" rates were reset higher, making payments unaffordable.
Now, a third wave of defaults is beginning, as even careful borrowers who had been diligent in making payments are falling behind because they've lost their jobs.
The government incentives designed to kick-start the housing market have been unable to keep up. A $75-billion program unveiled in February by U.S. President Barack Obama to help homeowners modify mortgages to lower payments and avoid foreclosures is off to a slow start, with only about 500,000 mortgages modified as of April, or about one in 10 underwater loans. That's well short of the five million the administration targeted.
While the money is there, the modification process can take months, the paperwork is extensive and many homeowners, like those in Phoenix, just don't qualify.
Anyone who owes much more than their house is worth isn't eligible, ruling out hundreds of thousands of homeowners who put down little or nothing in the way of a down payment during the boom and have seen their houses plunge in value since the bust.
About 20 per cent of American homeowners now owe more than their house is worth, according to Zillow.com, and the number is growing fast. Just six months ago, the percentage stood at 14.3.
Some incentives are also coming to an end. The current $8,000 U.S. federal tax credit for first-time home buyers is working - 40 per cent of sales are now to first-time buyers - but it is due to expire Dec. 1.
"When people are nervous and concerned about losing their jobs, they are not going to go out and buy homes," said Mr. Humphries of Zillow.com. "These federal programs are well intentioned and, in many cases, I think they are doing some good - they are definitely stimulating demand - but there is a limit to what these kinds of programs can do to overcome a general economic climate that is uncertain."
And if it's all about the economy, it doesn't bode well for Phoenix. About 130,000 jobs have disappeared in the past year in a region with a population of 4.3 million, almost doubling the unemployment rate to 6.8 per cent in April.
With that, there are signs that after decades of surging population growth, the number of people in Phoenix is stagnating, if not dropping, according to an analysis done recently by a local newspaper.
That makes it hard to get excited about the real estate market's supposed signs of life, Prof. Butler said. "I'm not convinced it's worthy of the hype. We're hearing the same verbiage as we did when we were in the hypermarket. They are banking the area will grow again. And a lot people have serious issues with that."