A wave of foreclosures is forcing down home prices in most major U.S. cities. But economists and real estate agents are noticing what they call a key first step for any housing recovery: a drop in the glut of homes for sale in markets hit hardest by foreclosures.
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, 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 that they can fetch a decent price. That prompts more buying and selling. Prices rise more.
Most of the current foreclosure sales involve investors: Private equity firms; foreign and out-of-state buyers seeking vacation houses; individual investors hoping to rent out or quickly sell properties for a profit.
Many are scooping up cheap homes with cash, said Andrew Duncan, a Realtor who runs a Keller Williams franchise in Tampa. In March, 35 percent of previously occupied homes sold were bought entirely in cash, according to the National Association of Realtors.
"When the bargains do hit, there's more than one buyer looking for that bargain," Duncan said. "Buyers are losing out left and right when they bid because it's just so competitive."
Foreclosures have flooded the market in Miami. Three out of five homes sold there are foreclosures or short sales. (Short sales occur when lenders allow homes to be sold for less than what's owed on the mortgage.) Such sales have helped lower the median home price by 19 percent in the past year, to $159,800 in March.
At the same time, the supply of Miami-area homes for sale has dropped nearly 24 percent. It would take just seven months to clear those homes at the current sales pace. That's down from a 17-month supply just six months ago.
In Tampa, it would take just six months to clear the supply of unsold homes off the market. That's down from about eight months a year ago and 25 months in January 2008. Detroit's inventory of homes for sale has fallen 17 percent in the last year.
In Phoenix, the number of homes for sale has dropped nearly 10 percent over the past year. The median sales price of a single-family home sold last month was $118,500 _ down more than 12 percent from a year ago.
The supply of homes in Las Vegas could be cleared in less than seven months at the current sales pace. That's down from a 26-month supply in December 2007.
"It's like a feeding frenzy when a home goes on the market now," said Mike Shannon, a Detroit real estate agent who specializes in foreclosures. "We're getting a few dozen offers on some homes in a matter of days."
The thinning supply is due, in part, to a lull in foreclosures. They've dropped more than 56 percent in Tampa and nearly 64 percent in Miami. In those areas, the number of homes receiving an initial foreclosure notice has plummeted.
That could change quickly. Many banks are revisiting thousands of foreclosure cases. They've been spurred into action by federal regulators who have ordered reviews of how foreclosures were carried out over the past two years.
The logjam has been compounded in states such as Florida, New York and New Jersey, where foreclosures must be approved by a judge.
There are 1.2 million foreclosures expected this year nationally, according to foreclosure tracker RealtyTrac Inc., and the decline in foreclosure filings is only temporary, said Mark Vitner, senior economist at Wells Fargo.
"The problems are still there," Vitner said. "There are fewer early-stage delinquencies, so we are moving in the right direction. But the slowdown in foreclosures is just drawing the process out."