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Buyer agents crowd around seated auctioneers at a foreclosure auction in front of the Maricopa County Courthouse in Phoenix, Ariz. (AARON J. LATHAM/AARON J. LATHAM/AP)
Buyer agents crowd around seated auctioneers at a foreclosure auction in front of the Maricopa County Courthouse in Phoenix, Ariz. (AARON J. LATHAM/AARON J. LATHAM/AP)

Cracks seen in foundation of U.S. housing recovery Add to ...

Greg Swann should be happy with what he is seeing in the Phoenix housing market.

Mr. Swann is a real estate agent and, after years of plunging prices and soaring foreclosures, the market is suddenly taking off. Bidding wars have broken out, prices are climbing and buyers are pouring in from all over, including many from Canada.

But Mr. Swann isn't smiling. He's worried. The current buying frenzy "is absurd," he says.

"I really don't like to be a bear because obviously it's not good for my income, but there is no shortage of homes in Phoenix," he said. "We have a false perception of a shortage. … There is going to be another surge of foreclosed homes on the market, because they are out there."

What's playing out in Phoenix is happening across much of the United States. Eager investors have started snapping up distressed properties, convinced the market has bottomed out and the deals will soon be harder to find.

Those buyers may regret rushing in. There are signs that the problems in the housing sector are far from over, especially as the economy continues to struggle and unemployment rises. At the same time, mortgage rates are climbing, government programs designed to help stop the tide of foreclosures aren't able to keep up and there's a huge number of houses that have yet to hit the market.

At the current pace of sales, it would take 10 months to move all the houses now for sale in the United States. That's about twice as long as it would take in a normal market, said Stan Humphries, vice-president of analytics at Zillow.com, a Seattle-based company that tracks U.S. housing prices.

The problem is, that only counts the houses on the market now. Based on a survey that asked homeowners whether they would sell once the market begins to stabilize, Mr. Humphries said there could be as many as 20 million properties up for sale once prices bottom out. That's a five-year supply.

"We're in for an L-shaped recovery in the housing market, which means we're going to hit a bottom and we're going to stay there, bouncing around, for a while," he said.

That will affect more than just homeowners. Much of the U.S. economy hinges on a recovery in the housing market, where most of the current financial troubles first emerged. Without a rebound in housing, economists fear a lag in consumer confidence and spending, which powers two-thirds of the U.S. economy.

Phoenix offers the most dramatic example of the decline and fall of the housing market. Earlier this year, it became the first U.S. city to see median house prices plunge more than 50 per cent since the peak in 2006. Last month, the median price hit $130,000 (U.S.) - down 42 per cent from a year earlier. In far-flung suburbs such as Buckeye, a newly built, 1,700-square-foot house can be had for $40,000.

Foreclosed properties dominate the market; not that long ago, they accounted for as much as two-thirds of all sales. Many neighbourhoods are lined with vacant houses. In Gilbert, an entire subdivision with 100 lots was recently being sold through foreclosure by the builder.

"Our prices are so low that it's hard to believe," said Diane Olson, a former Winnipegger who sells houses in Phoenix to Canadian clients. "It's the most incredible market I have ever seen."

Those clearance prices have started to attract buyers. Last month, nearly 10,000 houses were sold across Phoenix, up almost 10 per cent from the previous month. Prices also climbed 4 per cent between April and May, the first monthly increase is more than a year.

Buyers now often face bidding wars as soon as a property is listed for sale. Ms. Olson said she recently bid on a house listed at $88,000. She put down an all-cash offer of $110,000 with a two-week closing. "We didn't get it," she said.

Other agents are just as busy. "We have seen a huge increase in buyers," said Tom Caldwell, co-founder of Brewer-Caldwell Property Management Inc. "We're selling 25 to 35 homes a month to all different investors."

One of Mr. Caldwell's biggest clients is Calgary-based CBI Group, which has created two investment funds and plans to buy about 300 houses in Phoenix. Mr. Swann said he has clients from Canada, California, Oregon and elsewhere snapping up dozens of houses at a time. One investor from Chicago hired another Brewer-Caldwell agent to buy 20 properties.

As demand has surged, the number of foreclosed houses listed for sale has dropped significantly in recent months. Many say that is what has prompted investors to falsely believe the market has hit bottom.

The drop is misleading and temporary, argues Jay Butler, director of realty studies in the Morrison School of Management and Agribusiness at Arizona State University.

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