Housing: Signs of Life

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Monroy had been sitting nervously on the fence for more than a year as friend after friend faced foreclosure in Southern California. In March the married mother of three bought a four-bedroom home in a new development in Fontana, part of the once-bustling Inland Empire. Her monthly payment, including taxes and insurance: $2,100, only $600 more than the rent on her three-bedroom apartment in Placentia. Monroy figured her kids would hate moving but says they're excited to get into their new home: "They're counting down the days on the calendar."

Real estate investors are sensing their moment, too. Speculators get a bad name during boom times for driving prices into the stratosphere. But in the depths of a bust, they're needed to help clear out inventory and stabilize prices. John Hoehl has trekked down from Vermont to scope out investment properties in Cape Coral—where some foreclosure properties are selling for just $30,000. So far, he's bid on three properties, scooping up a three-bedroom house on the water for $150,000. "At this rate we're going to see a big shortage of inventory by summer, and that will trigger prices to rise," says Paula Hellenbrand, president of the Cape Coral Association of Realtors. Local agent Marc Joseph of Foreclosure- ToursRUs.com has bought two boats to take prospects in search of waterfront properties on "foreclosure cruises."

The buying would be brisker still were it not for the banks. Financing remains a wet blanket both for first-timers and speculators. With banks toughening their lending standards, it helps for first-time buyers to come with as much cash as possible. Dean Brittingham and her partner, Nancy Rocks, put a solid 20% down on a $350,000, Mediterranean-style home in Santa Rosa, Calif.—and they still had problems. An investor had bought the three-bedroom house just a few months before for $187,000. The quick flip on the distressed property raised red flags for their mortgage lender, which insisted on a second appraisal. As the couple jumped through that hoop, they missed a deadline and decided to start the process all over at a different bank. The two finally closed on the property in March. "Our agent said it's a brand-new time," says Brittingham. "Everything's different."

Speculators, too, are dealing with tight financing—sometimes by looking beyond banks. During the boom, Robert Close made a tidy profit building homes that cost as much as $640,000 in the Inland Empire. Now he's focused on working with a small group of investors to buy and fix up foreclosed properties. Because many banks won't lend money for homes that need major repairs, Close pays cash—or turns to what's known as "hard money," independent financiers who charge interest rates as high as 12%.

But Close says he can make money even with such high interest rates—a sign that prices may be too low. He typically shells out $75,000 for each house, plus $20,000 for repairs. He then rents it out for up to $1,500 a month, producing double-digit returns on his investment. In the past seven months Close has picked up 34 properties, taking care to avoid the homes he built. "I guess I'm superstitious," he says. "I don't want to press my luck." That kind of cautious speculation is a far cry from the go-go days. But after a three-year bust, it's a sign that some markets might be moving in the right direction.

Business Exchange related topics:
Foreclosure Crisis
US Economy
Recession Spending and Investing

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Der Hovanesian is Banking editor for BusinessWeek in New York. Gopal writes about real estate for BusinessWeek in New York.

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