By 2006, it was clear the Phoenix real estate bubble had burst. That's when both tract homes in the exurbs of Maricopa County and high-end condos in Paradise Valley began falling into foreclosure. And as prices dropped, homeowners panicked and unloaded their properties.
Yet those who jumped back in during 2007 badly mistimed the bottom. Phoenix prices are down 20 percent this year, according to the National Association of Realtors (NAR). The result? That second wave of speculation has resulted in scads of newly trapped homeowners.
"The same speculators that were partly responsible for the housing bubble and its subsequent popping are the same ones that are trying to replicate the 2003 [through] 2006 period," says Anthony Sanders, a professor of finance at Arizona State University. "As the housing market seeks a bottom, speculators and some well-funded hedge funds are jumping in the market but finding that the bottom hasn't been hit yet. Hence, they jump back out again."
This type of scenario is playing out nationwide. Homeowners selling their properties after less than a year now represent 17.3 percent of total sales in the U.S., reports Zillow.com. This is higher than at any point during the housing boom, back when many people were avidly flipping homes for profit.
But some cities are better than others for trapped homeowners seeking sales. Las Vegas and Yuba City, Ariz., are leading the way for these sellers who mistimed the bottom. Respectively, 34.1 percent and 34 percent of these homeowners sold their homes in the third quarter of 2008, despite having owned the homes for less than a year.
Even though those homes might be sold at a loss, sellers should take heart they're not in Florida, where it's almost impossible to find a buyer. Based on transaction volume over the last year, Sunshine State markets like Orlando, Miami and Tampa rank lowest nationally, according to Radar Logic, a New York-based research firm.
And even as prices are in free fall, many buyers don't think the bottom is in sight, and are staying away as a result, says Doug Duncan, chief economist at Fannie Mae.
In fact, the country's sluggish sales rate has the NAR lobbying Congress for $50 billion in subsidies for lower mortgage rates in order to stimulate transactions, despite the fact that 30-year fixed mortgage rates average 5.76 percent, according to Bankrate.com--that's almost a 30-year low.
Behind the Numbers
To find the cities best for the distressed homeowner of less than a year, Forbes.com examined the country's 165 largest real estate markets. Using data from Zillow.com, pulled from multiple listing services and local property records, we ranked each city by the number of homes sold by owners after less than one year of occupancy. We then eliminated cities where more than 50 percent of sales were the result of foreclosure. What remained were cities where homeowners who bought at the peak could make a deal to sell their homes--a small consolation, but an important one.
Homeowners looking to bail on speculative purchases in Tennessee have been able to find buyers at a rate that's better than most in this situation. In Memphis, 31.6 percent of homes sold had less than one year's occupancy; in Jackson, the rate was 27.5 percent. Overburdened residents' ability to get out of mortgages quickly--even at a loss--means fewer foreclosures, and is a sign that there are buyers out there.
"Every market is a little bit different," says Jonathan Miller, president of Miller Samuel, a Manhattan-based real estate appraisal firm. "But while faster sales don't necessarily mean a bottom is around the corner, it is a significant reversal."
But California cities dominate the list, accounting for five of the 10 spots ranked. Buyers searching for steals have returned to that state's markets with force. In Sacramento, San Diego, Los Angeles and San Jose, transactions have exploded by 100 percent, 90 percent, 87 percent and 55 percent, respectively, in year-over-year terms, according to Radar Logic. Unfortunately for sellers, buyers are nabbing properties at rock-bottom prices, which often result in homeowner loss.
This is a double-edged sword for both homeowners and lenders. Those scrambling to unload a speculative property for a loss need their lender to sign off on the short sale. If more is owed on the house than it's worth--what's known as negative equity--banks lose more money by letting the transaction occur.
"If the equity in the house is sufficiently negative, there may be an incentive for the household to engage in a short sale," says Sanders. "But the more negative the equity, the less likely the lender or servicer will be willing to agree, since it increases the loss."
Though with the number of foreclosures most lenders are rolling up, forgiving some debt from a trapped flipper is fast looking like a better alternative than going through with foreclosure and being stuck with the property.
Best to leave that for a short-sale buyer trying to time the market's bottom.