"Blood In The Streets" Of Phoenix

Phoenix, Arizona is trying to live up to its name as far as the housing market is concerned.

Every weekday morning, Lou Jarvis drives the sun-baked suburban streets looking for investment gold: a family that will lose its house in a foreclosure auction within a few hours.

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own.

There's three major problems with this.

1) It does nothing to stop the glut of unsold homes on the market in places like Phoenix. Turning homeowners into home renters like this means these individual homeowners aren't getting equity. It's good for the investors, but bad for the renters. It's better than being out on the streets, but should these homes continue to lose equity, both the owner-investor and the renting family are going to have to make tough decisions. This plan only works if there's a bottom to the housing market and prices go back up. If prices go back down, the investor may have to sell the place, and then there's an even bigger problem. Only when new buyers are buying these houses do prices go up. Right now, this plan is just treading water at best.

2) Potential new homeowners still can't get credit from lenders. This remains a problem. Banks are more than willing to refinance existing homeowners with good credit. Refinancing to the new lower rates does lower payments and helps keep people in their homes. But that's again a "treading water" step. Originating new mortgages is not happening. Not in this market. Until new mortgages and new buyers get into places like Phoenix to snap up unsold and new homes, home prices will continue to fall.

Banks and mortgage lenders face the "Paradox of lending." If all the lenders servicing the housing market originate new mortgages, then all the lenders win because new buyers will start stabilizing prices. If only a few originate new mortgages, it won't be enough to stabilize the market and home prices will fall, and the lender loses money and may have to pull out of the market or even go under themselves. If nobody originates new loans, then all the lenders lose.

If you choose to originate new loans, you only win if everybody else does so. If you choose to not do that, you only lose if nobody does so, and there's always somebody willing to take the risk to lend or the government will...ergo you can't lose if you don't originate new mortgages, ergo lenders aren't originating new mortgages. Solid business sense individually, terrible collectively.

3) There's nobody trading up to bigger and better homes. This is still the key to stabilizing the market. Foreclosed entry level homes are one thing, but foreclosed mid-sized and high-end homes are still going unsold. There's a lot more to lose should prices fall, and that end of the housing market already had the biggest bubble built into it. As the old real estate joke goes, "What's the difference between a half-a-million dollar home and a million dollar home? $500,000." That's a lot of money to anyone in this market, and people are trading DOWN, not UP, if only for the relative stability in payments and equity. Losing 20% on a $150,000 home is bad. Losing 20% on a million dollar home is devastating.

Needless to say, this end of the market will continue to see falling home prices even if the low-end of the market stabilizes somewhat, and that's going to continue to be bad.

Mr. Jarvis, 47, the former co-owner of a wood moulding company that thrived in the boom and faltered in the crunch, also made some mistakes. Last spring, he contracted for three new homes in the distant suburb of Copper Basin, convinced that real estate was bottoming.

He was wrong. He managed to get out of two of the contracts but had to buy one of the houses, which is now substantially under water.

“You need to buy when there’s blood in the streets,” he said with a shrug. “Even if it’s your own blood.”

Ahh, but then again if there's that much blood in the streets and it IS your blood...you just end up dead, figuratively speaking. And not many people have the taste for their own blood. The market will continue to get worse.