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Cover Story April 2, 2009, 5:00PM EST

Housing: Signs of Life

Housing sales are picking up in some of the hardest-hit markets. Will confidence spread?

By Christopher Palmeri, Mara Der Hovanesian and Prashant Gopal

Last year the Cape Coral area of Florida had the highest foreclosure rate in the country. Banks moved to seize more than 1 in 10 residential properties in the Gulf Coast community of 165,000. The reverberations are still being felt. Newly built McMansions sit vacant, dusty monuments to the great real estate boom. Smaller homes have been ransacked. Apartment buildings have been boarded up. Former owners are stripping whatever items they can from their homes before the locks get changed, says Kirsten Prizzi, a local real estate agent at AC Global Realty. "Knobs, appliances. Someone was selling windows."

But a curious thing is happening in this blighted former boomtown: Buyers are swooping in. First-time home-owners are suddenly entering bidding wars with real estate speculators from as far away as Spain and Germany. Sales in February outpaced those at the peak of the boom, with some houses getting more than 50 offers and selling above their asking price. "I look for markets that are downtrodden," says Rich Lehrer, a retiree and self-proclaimed "emerging-market investor" from Wilmington, N.C., who wants to buy several properties in the area. "I'm expecting to get better yields than I would get on my cash."

Cape Coral isn't the only bright spot in housing land. Some of the very regions that led the U.S. housing market into the abyss are beginning to show signs of life. Sales on the Gulf Coast of Florida, California's Inland Empire near Los Angeles, and the Las Vegas metropolitan area surged by more than 80% in February vs. the same month last year.

So what's going on? In all of these markets, banks are dumping foreclosed properties, attracting cash-rich speculators looking for cut-rate bargains. "Why wait [for a bottom] if it's the right deal?" says Brent McAlee, a 31-year-old Las Vegas resident who recently paid $140,000 for a three-bedroom home that fetched around $350,000 a few years ago. He hopes to rent it out for $1,300 a month.

What's more, first-time buyers are finally rushing in, lured not only by plunging prices but also government incentives like ultralow interest rates and hefty tax breaks. Such sweeteners are just too tasty for some to pass up, at least in markets that have already plunged by 50% or more.

Frenetic buying in a few depressed areas doesn't mean the national bust is over—far from it. But it does herald the start of a new phase in the boom-and-bust recovery cycle. Economists might call it equilibrium: Prices have fallen so much in some areas that shoppers are getting interested again, improving the balance between buyers and sellers. That doesn't mean prices will surge anytime soon. But heavy buying should at least begin to put a floor under prices. "Are we at the bottom?" asks Christopher Thornberg, an economist with Beacon Economics. "We are getting close."

If Thornberg is right, one might expect other markets to begin the bottoming out process in the coming months. Just as California, Florida, and Las Vegas led the nation into the housing bust, those areas could provide the template for a national recovery. "One of the big problems we have across the nation is a lack of confidence," says Adam York, an economist with Wachovia (WFC) in Charlotte, N.C. "As these former bubble markets bounce off the bottom in terms of sales, it could give some hope to [other markets] that the declines are going to end."

Plenty of caveats are in order, because there are peculiar bear-market factors at work. The fact that inventories are falling precipitously in California—to just 6.5 months' supply from 15.3 months a year earlier—would seem to augur well. Historically, "prices respond very dramatically to inventory," says William C. Wheaton, director of research at the Massachusetts Institute of Technology's Center for Real Estate.

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