Speculators Keep the Housing Market Humming

If a recent WSJ piece is any indication, then it looks like speculators are diving back into the housing market. According to the article, investors comprise a growing percentage of buyers in Phoenix foreclosure auctions, with the goal of buying properties on the cheap and flipping them quickly to “legitimate” homebuyers. Shockingly, in some cases, the turnaround time was a matter of weeks, and yielding profits in excess of $50K per property.

Of course, it’s impossible to know whether we can extrapolate from this onto a nationwide scale. Still, anecdotal evidence suggests that it’s the case. Bidding wars have become commonplace at foreclosure auctions, with investors competing to outbid other investors and homebuyers being largely shut out of the process. Stories abound of homebuyers excited to snatch up homes at bargain basement prices, only to be over-matched by investors, who tend to be more experienced and better capitalized.

Speculators tend to have the upper hand in this aspect, since foreclosure sales are often conducted with cash only. There aren’t many real homebuyers that can afford – nor are willing – to pay $500,000 cash for a house at auction. To echo the advice of Charlie Rose, then, “Don’t try this at home kids. It’s still a risky business.” Not only must the homes be purchased with cash, but the decision to purchase must be made immediately, often without first having the opportunity to survey the property. This is an awful drawback, not only because it makes it difficult to know how much to pay, but also because many of the homes have been deliberately vandalized by the evicted homeowners, sometimes requiring tens of thousands of Dollars in repairs. Not to mention that there might also be other liens on the homes which are assumed automatically by the new owner and must be repaid before the home can be sold.

It’s hard to say how who this phenomenon is benefiting. Some would argue that speculators are yet another (useless) layer separating homesellers from homebuyers, collecting a fee merely for finding the property and underpaying for it. Given that many of these properties are “flipped” in a matter of weeks, there is certainly a shred of truth to this argument. At the same time, the system appears to benefiting all parties involved. Lenders are happy because they get paid cash for properties that they can then clear off their balance sheets and stop worrying about. Homebuyers are happy, because the houses being sold by investors are necessarily in livable condition, whereas the same cannot be said for homes purchased at foreclosure auctions. Speculators are naturally happy because they can earn a tidy profit in the process. The previous (evicted) homeowner probably isn’t happy, but they can’t rightfully blame speculators for their plight.

I always try to conclude all of my posts by underscoring how readers will potentially be affected by whatever phenomenon is being examined. In this case, it’s hard to say definitively. If you are considering jumping into this business, it goes without saying that you need to have done your homework first. From the standpoint of the housing market, it makes me nervous that speculation is picking up just as housing prices appear to be stabilizing. The demand created by speculation is temporary/artificial/illusory, and isn’t consistent with a real housing recovery.