Low prices are leading investors to snap up foreclosed homes in Detroit, Las Vegas, Miami, Phoenix and Tampa. Those cut-rate sales are reducing prices in the short run. Yet they're also thinning the supply of homes -- clearing the way for higher prices in the long run.
For some buyers, the deals are now too good to pass up. A studio apartment on the Las Vegas strip that cost $500,000 at the height of the housing boom is now selling for roughly one-third that price. Half the homes listed in the Tampa Bay area are selling for less than $100,000, not far from some of Florida's top Gulf Coast beaches.
Such sales have helped shrink the combined supply of unsold homes in those five cities by 13 percent over the past year, according to local listing data analyzed by The Associated Press. Home prices in each of those markets are at or below 2002 levels, according to the latest reading of the Standard & Poor's/Case Shiller 20-city home price index.
"If we were to see several consecutive months of supply getting smaller, it would point to an improving housing market," said Celia Chen, the senior director at Moody's Analytics. "Even if it is investors buying them, they are renting them out in hopes that prices in the next several years will rise."
Economists caution that a second wave of foreclosures, those that have been delayed by banks and backlogged courts, could throw the housing market back into turmoil. And few see home prices rebounding before the end of this year.
Home prices fell from January to February in 19 of the 20 metro markets tracked by the Case-Shiller index. At least 10 major metro areas are at their lowest point since the housing bubble burst. The index, released Tuesday, is slightly above the level reached in April 2009, the lowest point since the downturn began.
Getting rid of foreclosures and other risky properties is necessary for the market to turn around. When foreclosures and distressed properties are sold, home prices fall.
But as the supply of cheap homes shrinks, prices stabilize. Homeowners who had put off moving because they didn't want to sell during the downturn grow confident they can fetch a decent price. That prompts more buying and selling. Prices rise more.