Blogs & Comment

U.S. real estate and rubber: tales of a two-tier recovery

Buying homes and renting-to-own tires.

Five years after the sub-prime-crisis sent millions into foreclosure and devastated housing prices, some of the boom-years madness appears to be back. The New York Times ran a big A1 story Sunday about the increasingly fevered housing market in some upscale American neighbourhoods. In Southern California, home prices hit a post-bust high last month.

And while Los Angeles may be a center of the frenzy, it is not an anomaly. Buyers in Boston are offering $100,000 more than the asking price or placing offers on homes they have spent only minutes in. In San Francisco, Miami and Phoenix, sellers are looking at dozens of offers within days of putting their home on the market, often accompanied by letters from would-be buyers professing their love for the property. New York City has seen similar drops in inventory, and prices have been rising steadily since 2009.

The new boom may be somewhat illusory. Millions of houses across the U.S. remain unoccupied or underwater. Some are locked in foreclosure limbo, others are in the hands of big Wall Street investors, who have been scooping them up by the thousands, counting on big payoffs when prices rise. (The New York Times story highlighted the number of all-cash deals, a sure sign speculators and house-flippers are involved).

But there are real signs the market is recovering. Sales of bank-owned homes in the U.S. hit a five-year low in the first quarter of this year, while the number of new foreclosures slowed significantly. Many states are also now pushing through legislation that would speed up the foreclosure process, which could help clear the backlog of available stock and take some of the remaining uncertainty out of the market.

The recovery, though, remains tilted toward those at the top end of the income scale. For all the talk of low mortgage rates, credit markets remain tight, especially for those near the bottom. On the weekend, the L.A. Times reported on a story that showed just how precarious that makes it for some.

Socked by soaring tire prices and short on funds, growing numbers of Americans are renting the rubber to keep their cars rolling.

Rent-to-own tire shops are among the newest arrivals to a sprawling alternative financial sector focused on the nation’s economic underclass. Like payday lenders, pawn shops and Buy Here Pay Here used-car lots, tire rental businesses provide ready credit to consumers who can’t get a loan anywhere else. But that access doesn’t come cheap.

Customers pay huge premiums for their tires, sometimes four times above retail. Those who miss payments may find their car on cinder blocks, stripped of their tires by dealers who aggressively repossess. Tire rental contracts are so ironclad that even a bankruptcy filing can’t make them go away.

The Rent-to-own business isn’t new. But it has thrived since 2009 as access to mainstream credit has dried up for many borrowers. It’s a a bit of weird cycle, really. Banks and brokers handed out inflated housing loans to anyone who could sign an X before the  crash. Afterward, many wouldn’t lend out even small amounts to many customers at reasonable rates. That meant more and more turned to the world of alternative credit. As a result, today, in Los Angeles, you have one part of the city engaged in bidding wars for million-dollar bungalows while, across town, others—with no savings and no chance at mainstream loans—are renting tires at predatory rates just to keep their minivans rolling.