Vultures in the desert

If it’s old hat for Silvester, it’s not for many of the investors considering CBI and Optimus. Nor do they have the aspirations or deep pockets of Jim Balsillie, co-chief executive of BlackBerry-maker Research In Motion, who recently moved to purchase the Phoenix Coyotes out of bankruptcy. No, Optimus and CBI are seeking mom and pop small-timers for whom RRSP-eligibility in an investment scheme appears to be a significant plus.

CBI and Optimus are attractive in part because they provide these small investors a chance to flirt with the contrarian élan of a Warren Buffett or Prem Watsa. “How come we buy high and sell low?” Bacon asks, goading the Calgary audience. The crowd shouts answers. “Fear,” says one. “The media!” another. “We don’t listen to opinion,” says Bacon. “We listen to facts.” Those facts, as CBI and others have them, lead the savvy to one conclusion: wading into the subprime quicksands of the Sunbelt is a good idea. Quoting Buffett, Bacon counsels her audience to “be fearful when others are greedy, and greedy when others are fearful.”

Yet democratizing a vulture fund like this is eerily similar to the wildly endemic speculation, fuelled by easy credit, that led to the subprime mortgage crisis in the first place. Prior to the 2006 peak, recalls Karl Guntermann, a real estate prof at the W.P. Carey School of Business at Arizona State University, new Phoenix subdivisions unleashed a circus of buying. “People would camp out, day and night in the desert’s 110-degree heat, sometimes for days, to be first in line,” he says. “You had people getting off tour buses buying five and six houses,” says Greg Swann, a Phoenix real estate agent. Speculators left many vacant, banking on endlessly rocketing values to make them rich.

So it’s perhaps appropriate that the subsequent crash has now sparked yet more speculation—a healthy portion of it Canadian. So topsy turvy have the markets become that, despite its dismal numbers, Phoenix is seeing a fresh frenzy of buying. “It’s getting crazy again; we’re running into properties with 10, 12 offers on them,” says Chris Keith, a Phoenix realtor who specializes in Canadian buyers. “You have to jump on them or otherwise they’re gone. I don’t understand why the banks aren’t raising their prices—because they need to.”

Others aren’t sure. “I call it a fool’s gold rush,” says Swann, attributing it to a recently ended moratorium on foreclosures implemented by mortgage titans Fannie Mae and Freddie Mac and honoured by many banks. The halt fooled some into believing the number of lender-owned homes had fallen into swift decline, fuelling a rebound. It was one of many recent false bottoms for Phoenix, he says: “If you read the news, we find the bottom twice a month.” Still, the speed of the city’s decline does appear to have slowed. “In the last three months, the market has dramatically changed,” says Boyle, the Calgary investor who has put up money for the Arizona Acquisition Fund. “Investors like the CBI Group and others are moving in and buying up houses.”

The fact that foreign speculators are helping to stabilize the market doesn’t worry Boyle, who points to the city’s strong historical in-migration numbers as the fundamental driver. Observers see no hiccup to that growth on the horizon, in part because the recession may permanently cripple the Rust Belt, creating a vast reservoir of people with no option but to flow into the milk and honey West.

But whatever CBI’s sales pitch, it’s not clear that investors like Buffett or Watsa, contrarian or no, are rushing to buy Sunbelt homes. “There’s a reason there are foreclosures, people: it’s because there was too much housing,” says Don Campbell, author of Real Estate Investing in Canada, who points to a February U.S. Census Bureau report that puts the number of vacant homes in the U.S. at a massive 19 million. “There are only 19 million properties in Canada,” he says. “The equivalent of all of Canada is sitting empty in the U.S.—that’s why everything seems so cheap.”

Still, Boyle thrills to his own contrarian boldness. That evening after the CBI pitch, he did meet some who remained skeptical of the proposal. “Some of them said, ‘Yeah, but what if it never recovers?’ ” recalls Boyle. “Canadians are very cautious people. And they need to be kind of pushed into something. Someone has to tell them, tap them on the shoulder and say, ‘You know, this is a really good thing to do.’ ”

Swann, the rare sort of realtor who can quote Kipling and Maugham in conversation, believes in the indubitable power of the sun’s draw on the American masses—to a point. Acknowledging that in-migration has driven the Phoenix real estate market in the past, he wonders about the future. “We just went through an unprecedented boom and an unprecedented bust, and what happens after two unprecedented circumstances? The answer is: I don’t know—and anybody who tells you they do know is talking through their hat.”