Wednesday, September 29, 2004

An almighty crash or a soft landing?

RICS Business
Never has opinion been so divided. Anna Minton presents an overview of the key factors causing the clash of consensus.

When "Dr Doom" predicted stock market meltdown in 2001 he was proved right. The question now is whether his latest intervention prophesying a housing crash will be similarly accurate, or not.

"Dr Doom" is otherwise known as Tony Dye, the economist who correctly predicted the collapse of the stock market in 2001, hence the moniker. This April his widely reported comments that house prices were set to fall by 30 per cent fuelled the fire of an already overheated debate on the future of the housing market, dominated by bears and bulls and the softer landing theorists in between.

That the booming housing market is a key problem for government was reflected by the Treasury-commissioned Barker Review into housing supply, which concluded that the main problem is affordability. The paradox for government is that while exponential house price growth prevents the less affluent from gaining a foot on the housing ladder, it is also the motor for the UK’s healthy economic growth.

Defying the predictions of the bears, so far house prices have continued to rise, despite increases in interest rates, but the bears have, if anything, increased in number. In early 2003 Andrew Oswald, professor of economics at Warwick University, argued in The Times that a housing crash should be expected between 2003 and late 2005. Then came Tony Dye’s remarks. Roger Bootle, the former Monetary Policy Committee (MPC) member and director of Capital Economics, is another bear who estimates falls of around 20 per cent. Oxford University academics John Muelbauer and Gavin Cameron, who run a website called Housing Outlook, also believe the UK is witnessing a classic economic bubble and compare the present boom with that of the late 1980s.

However, if the consensus among academics is that sharp falls at the very least are on the way, prominent bulls argue that it is they who have called the market more accurately so far. John Wrigglesworth, housing economist at Hometrack, the online property specialist, has consistently predicted gains and opposed the notion of either a crash or a soft landing. He now believes the market will level out.

However, these bullish views are in the minority. Lenders ranging from The Halifax to Nationwide are warning that the market is beginning to slow, a view shared by RICS.

"The market is overstretched to such a degree that when it does eventually level out, prices will be vulnerable to a sharp reversal because buyers, sellers and lenders are all aware of the over-valuation," says RICS economist Ryan Emmet.

With experts commenting on the same indicators and market conditions, why are there such differences in opinion?

Professor Oswald believes that as most of the statistical information about the UK’s housing market is still produced by building societies they, of course, have a direct interest in high prices. "It is not good for the public that we are short on independent commentators about the market for homes," he says. Certainly the housing boom has been accompanied by a marked growth in house price indices, ranging from Hometrack’s own index to the FT’s new house price index, not to mention the new index from the Office of the Deputy Prime Minister.

Even so, despite his cynicism, even Oswald would no doubt agree that there is a genuine difference of opinion based on differing inter-pretations of market fundamentals.

For the bears, their argument rests on the critical importance of the ratio of house prices to average incomes, which has always served as a warning indicator of previous housing busts. The cost of an average house is now between five and six times average income, a ratio that is as high as, or even higher, than before the last crash. Overall household debt is also currently at an all-time high.

During the late 1980s, similar ratios of house prices to average incomes combined with a surge in interest rates to produce the consequent crash. For those with a more bullish attitude to the market, the low inflationary climate and relatively positive economic outlook mean that those sky-high interest rates are unlikely today. While they acknowledge that debt levels are growing, they feel that so long as the cost of servicing that debt is manageable then households can stay on an even keel.

As ever, the key question with regard to property prices remains what will happen to interest rates? Giving some indication of their future direction, Bank of England chief economist Charlie Bean has said interest rates policy is designed to cool the economy without "clobbering" the consumer. The general consensus appears to be that interest rates will continue to rise, peaking at around 5.25 per cent at the end of the year, after which they will level off.

This would indicate that an all-out crash is unlikely. Even so, for those with mortgages of five or six times income, it would not take a crash to push overstretched households over the brink. Sabina Kalyan, property economist at Capital Economics, does not believe the 20 per cent downturn she predicts will spark off a recession, although it is likely to cause varying levels of difficulty for indebted consumers. "We call it a correction, not a crash," she says.

"I don’t think it will be as widespread as the early 1990s or affect the wider economy in the same way in terms of negative equity. We won’t see a slowdown spread to a widespread recession."

But both Kalyan and Emmet at RICS point out that there are new factors at play in today’s boom that were not present last time round. Chief among these is the upsurge in the buy-to-let market, sparking particular worries that unprecedented rises at the bottom end of the market are unsustainable. The dramatic price increases in previously low-value terraced housing in towns across the north of England have led to surprising figures from the Halifax showing that towns like Hartlepool, Darlington, Bolton and Crewe are topping the list of UK property hot spots with rises of between 50 and 60 per cent.

"The clincher for crash theorists is buy-to-let," says Emmet. "It could come from the bottom end of the market, which is being driven by amateur investors acting specul-atively. Serious signs of a slowdown could trigger the selling of buy-to-let properties."

"It’s hot money, not a personal home," warns Kalyan. "Investors can liquidate it just like that. As fast as the money flows in it can flow out." But, keen not to set her stall out on this particular aspect of the debate, she adds: "There is evidence that yields are falling and investors are not making so much money, but it’s not clear that there’s anything else for them to switch to. They may not be too worried by a small running loss."

The other great unknown is the possibility of an external shock that could trigger a crash, ranging from a terrorist attack to oil price rises. The most speculated outcome is that US interest rates will rise, ensuring increases in the UK will be higher than predicted.

Given the overstretched borrowing levels of UK consumers, in the context of an over-valued market, that would almost certainly lead to a sharp fall in prices. But, as Kalyan says: "I wouldn’t stake my pension on whether it’s going to be 15 per cent rather than 20 per cent or 25 per cent."

Tuesday, September 28, 2004

Industry Experts Debate The Future of Real Estate

The nationwide boom in housing over the past few years has fueled a run-up in prices that can't last. Or can it?

It depends on whom you ask.

The pessimists argue, essentially, that the lowest interest rates in almost a half-century have ignited an unsustainable level of sales activity that will subside as rates creep inexorably up again, as they started doing the past few months.

But the optimists say so many baby boomers have hit their full earnings stride that demand for homes is going to remain strong for the foreseeable future, with run-ups continuing in pricey locales like San Francisco where severe housing shortages persist. The San Francisco Bay area is one of the most expensive markets in the country, in large part because there is little available land to build on.

To hear both sides of the argument in more detail, we invited a noted housing bear and housing bull to participate in a debate on the health of the U.S. housing market. The bear, John Talbott, 49 years old, is a former investment banker at Goldman Sachs Group Inc. in New York and author of "The Coming Crash of the Housing Market: 10 Things You Can Do Now." The bull, David Lereah, 50, is chief economist of the National Association of Realtors, the industry trade group based in Chicago.

Here are excerpts from their exchange:

The Outlook

The Wall Street Journal: Do you think housing prices will continue to rise nationwide, and why or why not?

Mr. Talbott: Many so-called housing experts believe that because the housing market is so big, it must act like a true economic market. They therefore conclude, wrongly, that the high prices we see for homes today are market-determined and, as such, are very good indicators of their true worth. If true, this would make them very unlikely to ever crash, as irrational bubbles rarely happen in efficiently priced markets. Thus they spend much of their time analyzing supply and demand for housing as if it were a perfect market, not subject to possible manipulation, corruption and collapse.

But housing, and specifically home mortgages, do not act at all like perfect markets, and so the public should not gain any comfort that these prices being paid for homes today are sustainable. First, home buyers are not that sensitive to high prices because they are financing most of the purchase price. Lenders don't care about the price paid or the amount of leverage on the home because they sell most of their mortgages to Fannie Mae and Freddie Mac. And Fannie Mae and Freddie Mac aren't concerned that much with credit quality because they have an implied guarantee from you, the American taxpayer.

So, we find ourselves in a period of very loose mortgage credit, with home purchases being completed at very high prices and with very aggressive borrowing terms, and interest rates beginning to rise from a 40-year low. How long can prices continue to rise? According to the National Association of Realtors, prices have already peaked and have begun to fall from their peaks in much of the country. Nationally, NAR reports that prices are off some 4% [seasonally adjusted] since July of 2003, and the Southern states are off approximately 10%. A portion of this decline may be due to seasonal factors, but realize that this decline is beginning after housing prices have increased some 35 years in a row. And this is for data reported as of March of this year, and so does not include any effect of the recent rise in interest rates.

Where are prices headed from here? Further down. The best case: Housing prices nationally will drop approximately 10% to 15% from their peaks. Worst case: They will fall between 15% and 25%. Changes of this magnitude are large enough to wipe out many people's entire equity in their homes. Under this scenario, major players in the mortgage business -- such as the primary mortgage bankers, providers [of private mortgage insurance], second-mortgage issuers and even Fannie Mae and Freddie Mac -- will run into financial trouble due to credit problems on their loans.

Mr. Lereah: Yes, housing prices are expected to continue to rise nationwide. Why? Because housing demand will continue to exceed housing supply, exerting upward pressure on prices. The real problem in the nation's housing sector is supply, not demand. The inventory of homes, as measured by [the amount of time a house is on the market], has hovered in the 4.3- to 4.8-month range for the past year, tight by any historical standard. In fact, in the fourth quarter of last year there were 19 major metropolitan areas in which the months' supply was less than four [months]. It is not a coincidence that most of these metro [areas] also experienced double-digit price appreciation.

Looking forward, I expect a growing economy [with job gains to] exert upward pressure on mortgage rates. Modestly higher mortgage rates are expected to slow the pace of home sales from last year's record pace.... The concern some housing analysts have that house-price growth in some areas of the nation has risen considerably faster than income growth is justified, but exaggerated. It is true that if demand falls off sharply in these areas, there could be some price softening -- maybe even a correction in some cases. However, large price corrections are unlikely. Sharp price declines are usually driven by a substantial loss of jobs in a local area. Thus, it is very unlikely that prices would drop on a national scale. Price corrections are a local phenomenon, not national.

WSJ: How much longer will the U.S. remain in this low-interest-rate environment? And how much of a spike in rates would it take to slow down housing sales?

Mr. Talbott: While no one can predict interest rates accurately, it is true that measured by historical norms interest rates are at relatively low levels. Do they have to rise? Not necessarily. The world economy could stumble if China continues to have problems with managing its growth, or oil prices remain high.

But home buyers, especially those utilizing adjustable-rate mortgages to finance their purchase, should do the appropriate planning to allow if, indeed, rates do continue to rise in the future. The use of ARMs is increasing and now accounts for 31% of all mortgages [being originated.] Short-term interest rates used to reprice adjustable-rate mortgages are much more volatile and much more subject to increasing as the [Federal Reserve] raises rates.

Homeowners who have fixed their interest-rate exposure by borrowing long term are not completely out of the woods. Home prices could begin to decline as rates increase, and homeowners who thought they had removed their exposure to interest rates may be forced to sell into a down market due to unforeseen circumstances -- a divorce, job loss or medical emergency in the family.

If the 10-year Treasury rate gets to 6%, watch out! And this is still quite low by historical standards. To get there, we don't have to have a booming recovery and rising demand for investment funds. With annual government deficits of more than $500 billion and no effective plan to provide for the retirement of the baby boom [generation], it would be rational for bond investors to demand higher returns if they expect inflation to creep back into the picture as the government faces greater pressure to inflate its currency rather than borrow in the future.

Mr. Lereah: As the U.S. economy continues to gain momentum, the Federal Reserve is expected to be less accommodative, creating an environment for interest rates to rise a bit. According to the Labor Department, the economy added 308,000 jobs in March, which bodes well for future economic activity. I now expect 30-year mortgage rates to rise to 6.4% by the fourth quarter of this year, damping the demand for home buying. Home sales will slow to a 5.8 million annualized pace in the fourth quarter, from the record 6.1 million-unit pace set in 2003. However, for the year, existing home sales are expected to register 5.9 million, which would be the second-highest number of sales on record.

Mortgage rates would have to spike a great deal higher for there to be a meaningful slowing of home sales. My best guess is that the 30-year mortgage rate would have to climb above 7% for sales to fall a bit more. But remember, the reason rates would be climbing is that the economy is growing and adding jobs, a positive for housing demand. Further, if long-term mortgage rates are rising, some home buyers will turn to adjustable-rate mortgages to keep their mortgage costs relatively low.

From a larger perspective, I believe the U.S. economy will remain in a low-interest-rate environment for the remainder of this decade. Inflationary pressures remain low, and there is little indication of any serious future inflation. The only potential time bomb for the interest-rate outlook is the nation's swelling budget-deficit problem. If the federal government does not address the deficit problem in the near future, interest-rate pressures will rise.

Economic Impact

WSJ: If the economy slows down again, would that burst the bubble in the housing market? Why or why not?

Mr. Talbott: Economic slowdowns are what usually cause problems in the housing market. The reason is that until people have real difficulty making their mortgage payment, they are unlikely to be willing to part with their family's home. Loss of a job in an economic downturn is an event that might lead to foreclosure and possible personal bankruptcy. If there were an economic slowdown, the associated job losses would be catastrophic to the housing market and the bubble would most definitely burst.

Instead of a weak economy causing a retraction in housing prices, which is the typical phenomena, here a collapsing housing market nationally...would dramatically lower house prices. This would increase foreclosures, cause greater bank losses and threaten major industry players. [This would be followed by] a general decline in the economy as banks retrenched in all areas of lending and labor mobility shrunk as workers were unable to sell their homes in order to move to new jobs.... The bill, in essence, would come due for all the carefree spending due to the home-refinancing wave that occurred when housing prices were booming, rates were low and credit was easy.

Typically, economic slowdowns are regional in nature, so Houston has a housing-price decline when oil prices contract and San Francisco and Boston have problems when the high-tech market stumbles. For there to be a truly national housing-price crash, there would have to be factors that are national, not regional, in scope. Higher interest rates, a corrupt mortgage system and our increasing reliance on a shaky global economy are all exactly those type of national factors, any one of which could cause a serious decline in housing prices.

Mr. Lereah: I truly believe that if the economy slows down again, the housing sector would be the beneficiary. A weak economy means an accommodative Fed and falling interest rates. Mortgage rates would drop back toward their 45-year lows, reducing homeownership costs and stimulating the demand for home buying.

Supply and Demand

WSJ: Is housing construction running ahead of demand, setting up the potential for an oversupply of homes in the market? If so, how close are we to an oversupply situation?

Mr. Talbott: People mistakenly point to the boom in house construction as a sign that the housing market is healthy and that prices are reasonable. Just the opposite is true.

Home builders are arbitrageurs. They see that home prices are overvalued in a particular area, and they quickly turn fairly priced wood and nails into overpriced homes to sell. Home builders need not be bullish on home prices. Home builders are sellers, not buyers, of homes. They depend on you to purchase the home, many times before construction has even started, and to bear the risk going forward [in regard to whether] the housing market is overvalued. Secondly, the amount of homes that can be built in any one year is a small percentage of the total supply outstanding. So the overall impact of the supply of new homes is greatly overexaggerated.

There is no oversupply of homes in the market, but there very well may be if everyone decides to sell at the same time. Thinking of the housing markets only in terms of supply and demand ignores the fundamental concerns about the mortgage business that makes a correction inevitable.

Mr. Lereah: Housing construction is behind, not ahead of, demand, creating a tight supply of homes in the market. There are government-imposed growth restrictions in many areas across the nation that have inhibited housing construction. Home builders got caught with their financial pants down in the last housing contraction, in 1990 and 1991, and have been a bit more conservative this time around. For example, the supply of unsold homes in 1990-91 was about nine months, or double the months' supply today.

WSJ: What are the riskiest regions of the country, in terms of a pricing bubble bursting? And do you think there is a high likelihood the markets there will experience actual price declines anytime soon? If so, what would it take for that to happen?

Mr. Talbott: At first blush, it appears that the highest-priced areas of the country face the greatest risk if the bubble bursts. The wealthier communities, especially in the Northeast and West, have much higher average prices for homes, even relative to family incomes, and they have had the biggest percentage price appreciation over the past five years. This makes them very susceptible to a downturn.

But housing-price declines will not be limited to the frothy, highly priced communities. The economy will suffer due to labor mobility declining if home prices decline and to bank-lending retrenchment. This means that the more moderate-income neighborhoods will begin to experience abnormal job losses, and foreclosures in those areas will grow, leading to home-price declines. The South is experiencing the greatest price declines in percentage terms right now, even though [that region] and the Midwest already have much lower-priced homes than the Western and Northeastern regions.

What will the trigger be? It could be higher rates. It could be that problems are exposed in the highly leveraged private-mortgage-insurance business. Or Fannie or Freddie may have problems. You can be certain in this kind of incestuous manic market, when it happens, everybody will claim complete surprise.

Unfortunately, unlike other housing downturns, this will be truly national in scope, affecting all regions of the countries and all neighborhoods, both moderate and expensive. The decline has already started in the Midwest and the South, and as rates continue to rise, the [coastal regions] will also begin to decline. Housing markets don't typically realize their losses all at once as homeowners are slow to sell into weak markets. But the decline that has already begun will increase as rates increase and housing prices will fall nationally for three or four years before they stabilize again.

Mr. Lereah: The great thing about mortgage rates is that they don't discriminate. If 30-year mortgage rates are 5.8% in the Northeast region, they are also 5.8% in the South, Midwest and West. Since mortgage rates are projected to stay relatively low -- below 6.4% -- for the remainder of the year, most regions and metropolitan areas of the nation will be spared any price bubbles bursting.

Regions are at risk when there is a concentrated loss of jobs, resulting in a sharp drop-off in home sales. Predicting local economic conditions is difficult from a national perspective. Local areas such as Nassau and Suffolk [counties in New York]; Orange County, Calif., and the Washington, D.C., metropolitan area have experienced several years of double-digit price appreciation. If these areas were to experience concentrated job losses, they could be vulnerable to price corrections. However, since the housing inventories in these areas are very tight, a sharp price decline would be unlikely at this time.

Looking Long Term

WSJ: Long term, do you think housing will remain a safe investment in the U.S.?

Mr. Talbott: Housing will always be a much less volatile asset than other more speculative investments like high-tech stocks or options. But given the enormous amount of leverage in the housing sector, the equity held by the homeowner is a much more volatile asset than the underlying home.

Many people moved into home buying as an investment alternative after having gotten burned in the high-tech boom of the late '90s. They correctly reasoned that homes were built of bricks and mortar and so were much less likely to evaporate in the future than some their Internet investments had. Unfortunately, these home buyers are not asking the fundamental question necessary for intelligent, productive investment: Yes, the home they are buying is beautiful, but what price are they paying for those bricks and mortar?

Housing will not be a safe investment looking forward. Price declines will erode investments and cause a dramatic increase in foreclosures and personal bankruptcies. It never makes economic sense to buy at the peak of a cycle. People who overpay, even for nice properties, end up kicking themselves for having been so stupid when times change -- and, oh, they always do.

Mr. Lereah: During this past decade, real estate has surfaced as a relatively safe, wealth-building asset. The so-called real-estate boom has jumped over many obstacles and is still standing. It had to absorb the international financial crisis of 1998, a recession in 2001 and significant job losses in the 2002 to 2003 period. While many real-estate watchers like to attribute today's real-estate boom to low mortgage rates, that is only part of the story.

Technological advances in how houses are bought and sold, product innovation, and a continued high level of demand for homes by baby boomers, their children and new immigrants are just some of the reasons that the boom will continue into the next decade. Return on home investment will not fade away. Price bubbles are not about to burst. The long-term fundamentals for housing remain excellent into the foreseeable future.

How to Protect Yourself From a Housing Crash

By JOHN R. TALBOTT, Wall Street Journal

Editor's note: Mr. Talbott's book, "The Coming Crash of the Housing Market" (McGraw-Hill, 2003), examines the dangers homeowners face in the current climate of overpriced housing and overextended credit and analyzes the economic perils of owning or purchasing a home today. Following are steps you can take to protect your home investment, adapted from his book.

Soaring home prices, combined with low interest rates, have lulled U.S. home buyers into a false sense of security. But current economic conditions, combined with the actions of overly aggressive lenders, leave the housing market ripe for a major crash. If one occurs, you could end up owing more to lenders than your house is worth, which is what's known as an "underwater" mortgage.

You might conclude that if home prices decline precipitously, the only thing you can do to avoid losing money is sell your home immediately. If you aren't currently a homeowner, but are looking to buy, you might decide to stay on the sidelines, even as rising prices make you worry that if you don't buy right now, you might be priced out of the market forever.

While withdrawing from real estate might make sense for those who fear a housing crash is imminent, such drastic action isn't your only recourse for reducing your exposure to a possible decline in housing prices. A number of alternatives exist for homeowners and first-time buyers alike, some obviously more difficult to act on than others.

First-Time Buyers

For starters, maybe you don't have to be in such a rush to buy a home. Many young couples worry that they'll be perpetual renters, never fully enjoying the comforts their parents gained from owning their homes or the good feelings of family, friendship and warmth associated with home ownership. If they extrapolate historical housing-growth rates into the future, they may believe that if they don't buy now, they'll never be able to afford a home. Annual housing-price increases for the past 35 years have fueled this belief. As prices accelerated over the past couple of years, the feeling that this was your last chance to buy probably grew.

Housing wouldn't be a risky investment if it wasn't for the extreme amount of leverage we place on our homes. Very few businesses or asset classes can be leveraged as much as a family home. The reason is straightforward. Banks extend enormous amounts of money to homeowners because they know that homeowners will do anything before they let the bank foreclose and take the family home.

Smart borrowers in the business world, if they have to pledge collateral, always try to pledge an asset they view as extraneous and can be abandoned if necessary -- something that isn't essential to run the business. Homeowners do just the opposite. They pledge the most important asset they and their family possess.

Curbing Your Debt Leverage

Prospective homebuyers may acquire too much debt if they pay too high a price for their homes. You might be able to service the debt, but you might have problems repaying it when you sell. Or, you might have paid more than your budget allows. Even if you get a good deal on a house, if its price exceeds what you can afford, you may get into serious trouble with your mortgage payments.

To avoid spending more than your budget allows, don't pay more than three times your household's total annual income. With conventional levels of debt financing, this should give you adequate funds to service your mortgage and have a life outside of your home.

You also can get into trouble with debt by having too much leverage. Radio and television commercials are always advertising mortgage deals requiring only 10%, 5% or no money down. Hundreds of seminars teach investors how to buy real estate with no money down. In the latest sign the housing market is reaching the end of the party, ads are now running for interest-only loans. With these mortgages, your total payment goes to pay interest only; no principal is being repaid.

Buying a home takes a great deal of self-control. An individual or couple shouldn't borrow more than 80% of its value. You should take out a mortgage that allows home prices to decline by at least 20% without the loan going underwater -- or to the point where the mortgage-loan balance exceeds the market value of the home.

For Existing Homeowners

If you are already a homeowner, several options are available to help you minimize your exposure to a real-estate crash, but they all have significant transaction costs associated with them.

You can, of course, move boldly and take the most direct course -- just sell your house. If you choose this route, know that you have several alternatives.

After selling the house, you can live in a rental temporarily in hopes that you time the price collapse correctly and can buy again at the bottom, or you can buy something more modest now. If you rent, you should get a fairly good deal as rents haven't kept up with housing-price increases recently in many metropolitan areas. The Wall Street Journal reported last year that a number of homeowners, convinced that the housing market was a bubble about to pop, decided to cash out and stay out. Instead of buying new homes, they're renting until housing prices decline.

If you decide to sell your home and buy a less expensive one, you'll lessen your exposure to any future price declines and should pocket some mad money to use in case you need to weather other adverse events ahead. Ideally, not only will the price of the new house be lower, but you won't need to take on as much debt to purchase it, meaning your mortgage payments will be lower. Any monthly savings can go into a rainy-day fund.

Still, there are significantly more barriers to selling residential real estate than stocks. It takes more time, requires more paperwork and is a more emotional decision. To reduce your risks in a possible housing-price decline, you may want to consider these less stressful alternatives to selling your home outright.

Managing Your Mortgage Debt

Many homeowners find themselves with too much mortgage debt. Let's define this as more than 80% of the current value of your home, using a conservative estimate adjusted downwards based on how overvalued your particular city might be. If you want to plan for a potential housing crash, you can opt for one of the following alternatives.

First, you could begin to pay more than your scheduled mortgage payment each month. Most lenders allow early prepayment of mortgages, and apply the amount you pay above the scheduled monthly mortgage payment toward lowering your principal balance. You also could make a lump-sum payment on your mortgage to bring it down to a more manageable level.

A second alternative gives you more flexibility, but requires more self-discipline. Rather than prepaying the mortgage with a lump sum or increasing your monthly payments, consider setting funds aside in a savings account earmarked for one purpose only: paying the mortgage in case you experience financial trouble. This way, you control the funds.

Proper debt management isn't limited to just managing the amount of your debt. It's also important to manage interest-rate risk. While waiting for their mortgage to close, new buyers should always lock in the interest rate the lender quoted when they applied for the loan. They also should avoid adjustable-rate mortgage options. And, if you plan to refinance your mortgage, don't take out so much cash that your loan will exceed 80% of the assessed value of your home, adjusting for any current market overvaluation. Also, the money you borrow should be used to repay your existing mortgage, not purchase a new TV.

If you believe, as I do, that today's real-estate market is a house of cards, know that you can prepare for the pending collapse. Consider taking these commonsense steps for protecting your assets if the bottom falls out. Indeed, you can survive and thrive after a housing crash.

Coastal Homeowners Are Now Cashing Out

Coastal Homeowners Are Now Cashing Out

Staff Reporter of The Wall Street Journal
From The Wall Street Journal Online

September 27, 2004 -- Jo Anne Zliczewski cried when her husband proposed uprooting their family from Pompton Plains, N.J., about 30 miles from New York City. But she had to agree that the numbers looked good: By selling their suburban ranch house for a profit of nearly $300,000, they could buy a much larger home in Pennsylvania and live mortgage-free.

So began a debate that is rumbling across many kitchen tables on the East and West Coasts: Is it time to take profits on the real-estate boom? The huge rise in prices in thriving cities on or near the coasts has created an arbitrage opportunity for people who have the flexibility to move: Sell Manhattan, buy Montana.

Over the past five years, raging real-estate markets in some coastal areas have more than doubled housing prices, while farther inland prices have risen more moderately. That has stretched the price gap between the middle of the country and the coasts far beyond the norm. The typical home price for the 10 American metropolitan areas with the highest housing prices has jumped to 230% of the national median from 155% five years ago, according to an analysis by for The Wall Street Journal.

Americans have been arguing for years about whether the surge in home prices on the coasts represents a bubble -- like Internet mania or the 1980s real-estate boom -- or merely an adjustment dictated by supply and demand. But anxiety over the question has been rising lately amid signs that some markets are finally cooling off. Inventories of unsold houses have begun growing in many parts of the nation, including Orange County, Calif., where the median home price has surged to $655,000, up 84% since 2001. Some owners are rushing to sell before it's too late.

Diane Saatchi, a regional vice president for the New York-based Corcoran Group, is advising customers to take their time looking. With war in Iraq, the economy looking wobbly and interest rates expected to rise, "who knows what could happen between now and November?" she says. For those inclined to sell, Ms. Saatchi says, now "seems like a great time."

One reason for caution about the market's long-term prospects: It's getting hard for ordinary people to afford housing near the coasts. The median house price in San Diego has climbed to 4.7 times average annual household income in that city from 2.8 times a decade ago, according to On a national basis, the ratio has risen only modestly, to two times income from 1.8.

For those approaching retirement, the price gap can be too tempting to resist. Jeanne Rowe, 67 years old, had expected to work for several more years as a technical writer for a mortgage company before selling her home in Costa Mesa, Calif., and retiring elsewhere with her husband, Fred, a former manager at a coffee-roasting company.

But Mrs. Rowe says her four decades of working in the mortgage business taught her that there is a cycle in housing: After seven to 10 boom years, she says, "the bottom can drop out." As for the latest boom, she figures, "there has to be an end because people can't afford to buy houses anymore."

So Mrs. Rowe accelerated her retirement plan. In March, the Rowes put a "for sale" sign in front of the four-bedroom house they bought in 1974 for $39,900. On the opening day of the sale, the first couple who viewed the home made an offer, matching the asking price: $672,000. The Rowes accepted rather than waiting for higher bids. "We didn't want to be greedy," Mrs. Rowe says. The profits will help fund their retirement in Tullahoma, Tenn., where they recently paid cash for a $145,000 home.

"They timed it perfectly," says Valerie Torelli, the real-estate broker who handled the Rowes' sale. About a dozen of her clients have made similar moves to cash out and move to cheaper areas inland, she says: "It changes their life. They never have to work again. Isn't that cool?"

The gap between the most expensive housing regions and the rest of the country has widened partly because there is a shortage of land available for home building in the high-cost areas. Those areas already are crowded, and local officials often block residential developments that would add to burdens on roads and schools.

So when the lowest mortgage interest rates in more than four decades spurred demand for housing, builders in many coastal areas couldn't quickly find space to put up more houses. Watching prices shoot up, buyers panicked. In the suburbs of Washington, many dispensed with the usual precaution of making their bids contingent on a professional inspection of the home's soundness.

By contrast, builders can respond much more quickly to increased demand in freely sprawling cities like Atlanta or Dallas, where land is plentiful. Median home prices have risen just 27% in Atlanta and 19% in Dallas over the past five years.

Economists hotly debate whether the housing boom is leading to another bust. "The boom continues," declares David Lereah, chief economist of the National Association of Realtors. While Mr. Lereah forecasts a slowing of price increases, he argues that strong demand from immigrants and the children of baby boomers will keep the market firm over the next decade.

But Robert J. Shiller, an economist at Yale University whose book "Irrational Exuberance" correctly predicted the bursting of the stock-market bubble in 2000, now is increasingly bearish on houses. Noting that prices in Los Angeles fell nearly 30% in the early 1990s, Prof. Shiller says such local or regional busts could happen again in the coastal areas where prices have risen most spectacularly. "These markets are riskier than people realize," he says.

After they had their first child last year, Diana and Bob Pailthorpe knew they would eventually outgrow their 1,250-square-foot home in San Jose, Calif., purchased in 2000 for $415,000. They started to look around in their area. "We realized we'd have to spend at least $800,000 to get a house that was even livable," Ms. Pailthorpe says.

Despite the high costs, they wanted to remain in California a few more years because they both had good jobs at technology companies. But they fretted: What if they bought an expensive new house in San Jose just before prices dipped? They could easily suffer a big loss when it came time to sell in a few years, especially after subtracting 5% or 6% in real-estate commissions. In the end, they unloaded their San Jose house for $593,000 in May and bought a new one, nearly three times as large, for $425,000 in Bozeman, Mont.

Mr. Pailthorpe found a job as a marketing manager for RightNow Technologies Inc., a software supplier based in Bozeman. His wife has found public-relations work there. Their household income has dropped by about a third, and Ms. Pailthorpe has been surprised to find that some things, such as medical and auto insurance, cost more in Montana than they did in California. Even so, the real-estate savings trumped all other financial considerations.

Ben T. Smith IV, chief executive of Spoke Software Inc., Palo Alto, Calif., says he has lost some promising young employees who decided to move to areas with lower housing costs. "When you begin to see young kids -- ones who are the future of the business -- opt out, that definitely has an effect on how you develop the business," Mr. Smith says. He has moved some work to India and allowed one of his software engineers to work from home in Vermont, visiting California just once a month. "For both sides, the economics worked out better," Mr. Smith says.

In Manhattan, Michael Quinn and his partner, John Soroka, decided to cash out on their two-bedroom condo in Manhattan's Hell's Kitchen neighborhood, agreeing to sell it for around $625,000 in mid-September. The proceeds will be enough to let them buy two homes -- one in Bronxville, a 30-minute commute from the gift and clothing shops they own in Manhattan, and another in Fort Lauderdale, Fla. The real-estate windfall makes it possible "to have two places and not be financially strapped," Mr. Quinn says.

Karen Davidson, a 50-year-old graphic designer, recently sold her loft in Manhattan's trendy Tribeca district for more than $1.5 million and bought a cabin and barn on nine acres in Lake Placid, N.Y., for $65,000. She found that she could do her freelance work there as easily as she could back in Manhattan. One of her main motivations was that she didn't want her life savings to be wrapped up in Manhattan real estate. By moving, she has been able to create a retirement fund for the first time.

Some owners of vacation homes also are deciding this is a good time to cash out. The inventory of unsold homes in Great Barrington, Mass., a popular spot for vacation homes in the Berkshires, is up about 40% from a year earlier. Richard Jackson, a real-estate agent at Wheeler & Taylor Realty in Great Barrington, says a local home-listings publication "is getting to be more and more like a telephone book." Dick Krzynowek, president of Isgood Realty in Great Barrington, says many sellers are seeking fancy prices for their homes but some buyers are "digging in their heels."

For the Zliczewskis (pronounced zluh-CHEF-skis) of Pompton Plains, N.J., real-estate profits were a lifeline. John Zliczewski, 51, who holds a bachelor's degree in business administration, last year was laid off from his job as a manager for a software company in New Jersey. It was his third layoff in four years. "Three strikes and you're out," he told his wife.

Jo Anne Zliczewski, 45, a mother of four children age 7 to 13, went to work folding clothes at a discount store so the family would still have medical insurance, but their financial situation looked shaky. Their four-bedroom house, purchased a decade earlier for $175,000, was their major asset. After his layoffs, Mr. Zliczewski wanted to ensure his family would have food and shelter no matter how he fared in the job market.

Friends suggested they consider Pennsylvania, where the typical house price is about half the New Jersey level. Mrs. Zliczewski hated the idea of moving away from family in New York City and doubted the schools there would be as good.

Then Mrs. Zliczewski began looking at Pennsylvania home prices on the Internet. "I was amazed at the size of house you could get for the price you'd pay for the handyman's special in a flood zone in New Jersey," she says.

In March, the Zliczewskis sold their house in New Jersey for $459,000. They used the proceeds to pay $309,000 in cash for a much bigger home overlooking a corn field on the fringes of Lancaster, Pa. Mrs. Zliczewski found the local schools better than she originally expected. Her husband got a job selling trailers for temporary office space. Though his new job pays only about two-thirds of what he made in New Jersey, the family no longer has a mortgage payment and can live comfortably. The neighbors include a doctor and a bank president. "We're like the Beverly Hillbillies here," Mr. Zliczewski says.

At their new church in Lancaster, the Zliczewskis met Jeff Geoghan, who recently moved with his wife and two children to Lancaster from Orange, Calif. The Geoghans sold a 1,200-square-foot bungalow in Orange for $400,000 and bought an 1,800-square-foot home in Lancaster for $175,000. Mr. Geoghan had to give up his job as an Internet sales manager in California, but he quickly found work in Lancaster as a real-estate agent. He expects to help people from the coasts find homes in Pennsylvania.

Tuesday, September 21, 2004

Housing prices hit milestone

The median resale price of a home in Sacramento County reached $300,000 in August.

By Andrew LePage -- Bee Staff Writer

Sacramento Bee
Published 2:15 am PDT Tuesday, September 21, 2004

It took 13 years for Sacramento County's median home price to climb from $100,000 to $200,000 - a milestone reached in August 2002 - but only two more years for it to rocket another $100,000 to a record $300,000 last month.

Such rapid appreciation has been similar across the capital region and California amid one of the longest-running housing booms in U.S. history. The fuel: low mortgage rates that mean monthly house payments don't rise as fast as prices, innovative home financing and, some would argue, growth restrictions that prevent home building from keeping up with demand.

Last month, the capital region and Bay Area resale markets showed virtually no signs of slowing, with prices and sales at or near record levels, according to DataQuick Information Systems, which tracks closed escrows.

In Sacramento County, the 2,752 sales of existing homes were the most for an August, jumping 18 percent over last year. The county's $300,000 median resale price - where half of the homes sold for more and half for less - was up 25 percent from last year.

Which is why Silvia Gutierrez isn't wasting any time looking for a home to buy. As with so many others who've bought their first house this year, she's motivated by the fear of being priced out of the market, because of higher prices or higher mortgage rates, or both.

"I already feel like I missed the boat a long time ago," said Gutierrez, 41, explaining she can't afford to buy a home where she most wants to live, in the Laguna-Elk Grove area. "Friends and family have said, 'You should buy a house,' and I said, 'I can't afford it.' But it's just gotten higher and higher."

Now Gutierrez, who works in accounts receivable for the medical equipment firm Timberlake Corp., hopes to find something for about $280,000 in the Florin area of south Sacramento. Her monthly mortgage payment would be about $1,700, or nearly double the $895 she now pays to rent a house in south Sacramento. A younger brother will help cushion the blow by renting a room.

Many economists and housing experts point to the pervasive "buy now before it's too late" mentality when explaining why home sales have been so strong this year in the absence of job growth here. Sacramento also continues to see a flood of buyers from the Bay Area and beyond, including those who telecommute and supercommute to employers outside the capital region.

Moreover, today's relatively low mortgage rates and a new breed of home loans have opened the door to more first-time buyers. Innovations include zero-down loans, interest-only loans (paying only interest for a period of three to 10 years) and 40-year mortgages.

"All of those things mean lower monthly payments and people willing to pay a higher purchase price," said economist Matthew Newman, director of the California Institute for County Government, based at California State University, Sacramento.

But most experts contend the unusually sharp price appreciation over the past two years can't continue. They say too many people would be priced out or would be overcome by sticker shock, especially if mortgage rates go higher as is widely expected.

There's some evidence of buyers beginning to recoil in Southern California, where most counties saw the number of home sales drop in August compared with a year ago. Only the less-expensive inland markets of Riverside and San Bernardino counties - areas often compared to Sacramento - saw sales continue to climb.

The contrast between the Southern California coast and inland markets was stark: Orange County saw its weakest August sales in eight years, while the Riverside-San Bernardino area saw its strongest.

"I think it may be the beginning of kind of a soft landing, where we get away from the crazy home price appreciation numbers we saw during the first half of this year," said G.U. Krueger, chief economist at Institutional Housing Partners, an Irvine-based real estate investment firm. "If the expectation is, 'I'll buy a home, because tomorrow home prices will be higher,' then that's what a (price) bubble is all about. Home prices would be based on nothing - fluff."

As fast and high as home prices have risen during the past two years, today's mortgage payments have yet to reach the high point of 14 years ago.

Adjusting for inflation and the mortgage rate at the time, the monthly payment on a median-priced home in Sacramento County set a record of $1,577 in July 1990. Last month, the payment on a median-priced home was $1,519, according to a DataQuick analysis.

After peaking in the early 1990s, home prices in the Sacramento region and elsewhere in California fell 20 percent or more in some areas amid huge job losses, especially in aerospace and defense. Prices in Sacramento didn't perk up until 1998. After doubling between 1989 and 2002, the median price has shot up 50 percent.

The price surge is taking a toll on lower-income borrowers, and some are throwing in the towel, says Jennifer Harris, executive director of Sacramento's Home Loan Counseling Center.

"We had a larger push for housing last year, when we were still seeing homes priced between $150,000 to $185,000," Harris said. "Now you're not finding anything under $250,000, even in some of our worst neighborhoods."

She notes that last year a couple buying a $185,000 starter house needed to earn at least $45,000, assuming they used a zero-down loan and didn't put more than one-third of their income toward housing. This year, that couple would have to earn about $65,000 because the home would sell for closer to $250,000.

"You can't afford to live where you want to live, and that's what's frustrating," says first-time buyer Gutierrez.

Related link:

Chart: Capital region home sales

Monday, September 20, 2004

America's Shrinking Home Equity

More money is going out of houses than is going in. That could mean trouble.
By Oliver Ryan

We may live in an ownership society, but it's a highly leveraged one. Goaded by low interest rates, rising home values, and eager lenders, homeowners have gone on a borrowing binge. In the first quarter of 2004, Americans borrowed against their homes at an annualized rate of $840.2 billion, the highest on record. Since 2000, more new mortgage debt has been issued than was issued in all of the 1990s. Total now outstanding: a stunning $6.9 trillion.

As fast as values have been rising, borrowing has grown even faster—thanks to smaller down payments and increasing use of home equity loans. As a result, Americans' equity, as a share of total home value, has been falling. In addition, over the past three years Americans have borrowed more against their homes than they've invested in them (by paying down mortgages and making home improvements), according to a study by the New York Federal Reserve. Since the 1950s that has happened only twice before, and never at this level.

All that debt puts homeowners in a precarious position. For those who put down 10% and finance the rest, it would take only a 10% price decline to wipe out their equity. That could be disastrous for someone who loses his job and is forced to sell.

And mortgage debt has helped push the debt-service ratio—the percentage of income devoted to making all loan payments—to record highs. That leaves less for spending, saving, and investing.

Ian Morris, an economist at HSBC, says that booming prices are lulling consumers into a false sense of security. "They think their houses will take care of their retirements, so they don't have to save," he says. But for highly leveraged homeowners, those "savings" are mostly an illusion.

Housing Boom Threatens American Dream

By William Sluis
Chicago Tribune

RISMedia Sept. 20, 2004 (KRT) - More Americans are becoming house-poor.

It's an ugly downside of the soaring real estate market: Many of those who put a toe in the housing water are finding themselves unable to afford more than the basic necessities, unless they try to survive with a credit card lifestyle.

"Americans are in over their heads when it comes to debt," said economist A. Gary Shilling. "The value of real estate assets has zoomed, but people are borrowing more and more against their homes."

A brief layoff or other job interruption can be enough to push many young home buyers over the financial edge to insolvency.

Huge house payments are a direct reason for sky-high levels of bankruptcy and foreclosures. In some parts of the country, notably in California, the cost of housing can consume 60 percent of a household's budget.

In the Chicago area, a new study by the Fannie Mae Foundation finds that about 11 percent of buyers are "severely cost-burdened," meaning they pay 50 percent or more of their monthly pretax income for housing.

Fifteen percent of black owners in Chicago and 12.4 percent of Latinos were counted as cost-burdened, while the equivalent number for whites was 8.1 percent, according to the Washington-based foundation, sponsored by one of the nation's largest backers of mortgage loans.

Economist Sung Won Sohn says the problem is especially pronounced in San Francisco, where young workers may pay nearly two-thirds of their incomes for buying a home.

"The question is whether such a condition can persist or whether the squeeze on incomes will cause real estate prices in California to peak and head lower," said Sohn, of Wells Fargo & Co. in Minneapolis.

For some people, the problem may not be housing prices, but spending habits. The availability of credit often exceeds their ability to use it wisely.

Chicago financial planner Chris Dill said he counseled one couple with a combined income of less than $80,000 a year who had run up $160,000 in consumer debt, most of it on credit cards.

"It appeared that their only choices would be to declare bankruptcy or sell their home," said Dill, of McTigue Financial Group.

The couple sold the house and moved to an apartment, enabling them to pay off $100,000 in debts, he said. But within months, the credit card cycle repeated; the couple once again was mired in debt and filed for bankruptcy.

Chicago resident Kelli Collins said she looked seriously at buying a house from her parents, but a combination of debts from college and credit cards caused her to give up on the idea.

"I graduated from Eastern Illinois University in 1993 and I still had unpaid debts, plus quite a few credit cards. I was thinking it would take me 15 years to pay off all of it," she said.

Collins, 36, who takes care of a 1 1/2-year-old nephew, said she obtained help from the Consumer Credit Counseling Service of Chicago and was told to avoid a house purchase. She also was able to obtain a lower rate of interest on some of her credit cards.

"At this point it appears I will have everything paid off in two or three years," Collins said. "Until then, I won't consider buying a house."

But the odds are against even some financially responsible home buyers affording their dream home. Real estate costs are outstripping what families are earning, making homes increasingly less affordable.

Yet the boom in prices is unrelenting.

In this year's second quarter, average home prices nationwide rose by the highest percentage since 1979, and at a far faster clip than earlier this year, according to newly released federal statistics. U.S. home prices increased an average 9.36 percent from the second quarter of 2003 to the second quarter of 2004, the Office of Federal Housing Enterprise Oversight said.

As prices rise, so do property taxes, although there may be a time lag.

"Over the long haul, people have to be able to pay their mortgages," said economist Peter Morici, a business professor at the University of Maryland. "House prices can't exceed increases in incomes for very long."

In the four years ended June 30, median home prices rose 33 percent, while per-capita personal income climbed just 10.4 percent, he said.

Nationwide, mortgage delinquencies rose last quarter for the first time in a year. At the same time, foreclosures fell to the lowest level since 2000, according to the Mortgage Bankers Association.

The share of homeowners who paid their mortgages a month or more late rose to a seasonally adjusted 4.43 percent, from 4.33 percent in the first quarter, according to the trade group, based in Washington. The share of loans in foreclosure fell to 1.16 percent from 1.27 percent in the prior quarter.

Analysts said the foreclosure rate is held down by mortgage lenders who counsel borrowers on ways they can avoid losing their homes.

Economist Shilling says that cash-out refinancings and home equity loans have reduced the percentage of equity held in a house by the typical owner.

To keep the housing market rolling, he said, the government is encouraging mortgage loans with zero-percent down payments. In many cases, Americans can buy a home with no money down even if they've filed for bankruptcy or gone through a previous foreclosure.

Critics say loose lending standards by the mortgage industry have contributed to high foreclosure rates nationwide.

They say that if owners have no equity in their homes it is easy to walk away from mortgages if they get into financial difficulty.

For Shilling, those trends point to a danger that "many pins may prick the housing bubble, even if interest rates don't rise. No trend lasts forever."

Sunday, September 19, 2004

Talk of Housing Bubble Has Fears Rising, but in Reality It's a Lot of Hot Air

By James Flanigan, Los Angeles Times

Bubble? Baloney.

Housing sales are slowing in most of Southern California, and home prices, after a ferocious run-up, are beginning to level off. That has prompted some to warn, as Fortune magazine does on the cover of its latest issue, that "the bubble is going to pop."

Yet the facts belie the fears.

Plain and simple, there is no housing bubble — not in Southern California or anywhere else in the United States, for that matter. The market in Los Angeles, Orange and San Diego counties may be throttling back a bit. But that's hardly a cause for alarm.

"Nothing extraordinary will happen in the business of buying and selling houses," says Raphael Bostic of USC's Lusk Center for Real Estate, one of the more sober analysts around. Home sales and prices don't move dramatically — much less pop, Bostic explains — unless a major downdraft occurs in the larger economy.

For example, the aerospace industry collapse of the early 1990s sent Southern California house prices down 25% on average; the dot-com collapse in Silicon Valley of three years ago has pared average home prices in the Bay Area by more than 20%.

Happily, though, no regional or national recession is looming right now. The recovery has been balky and job creation weak, but the economy is still growing at a reasonable pace overall.

Even more important are the market fundamentals, which augur for continued strength in home prices: Demand for new houses continues to grow in the face of tight supply.

Demographics are one big driver.

"Immigrants and their families are avid home buyers," notes Bruce Karatz, chairman of KB Home, the Los Angeles-based home-building giant. "When they've been here a few years, they are in the market."

Newcomers to the U.S. are boosting the nation's population by 1.3 million annually, according to the Census Bureau, bringing the overall increase to 2.8 million. Along with easier credit, the trend helps explain why the housing market saw 7 million new and existing homes sold last year, up from 3 million 25 years ago.

And the numbers are only going to go higher in the next decade. The Harvard Joint Center for Housing Studies projects that the supply of homes in the U.S. will have to rise by 10% annually through 2015 simply to accommodate the number of new households being formed.

Meanwhile, single women also have added to housing demand in the last decade — a phenomenon sure to continue. Over the next 10 years, retiring baby boomers also will swell the market for second homes.

And then there's the supply side of the equation.

Burned too many times before, home builders have been wary of putting up new units on spec. Regulatory restrictions on the development of homes also have contributed to scarcity in many areas. This is true not only in persnickety California but in other parts of the country as well.

"It's as hard to get building permits in Maryland as in Southern California," says R. Chad Dreier, chairman of Ryland Group Inc., a nationwide home builder based in Calabasas.

Another factor: The need for developers to hold costly options on land for years and years has squeezed smaller players out of the market, further cutting into supply. Today, large home-building companies increasingly dominate the scene because they can manage the financing required for lengthy projects. But they also tightly control the number of jobs they take on.

"We pick our spots carefully," says Richard Dugas Jr., president of Pulte Homes Inc., a Bloomfield Hills, Mich.-based builder with $9 billion in annual revenue.

The result has been a dearth of homes in many areas — and, in turn, a surge in prices: up 23% last year in Baltimore, for example; up more than 20% all over Florida; up 52% in Las Vegas; up 25% in Orange County.

Soaring prices, however, don't equate to a bubble, because no sudden rush in new construction is in the offing. Supply and demand are likely to remain out of whack for a long time.

To be sure, the heavy debt load being carried by American consumers also is a cause of bubble talk.

How can buyers afford their mortgages, economists ask, when wage levels are not rising in America? The statistics seem ominous: Residential mortgage debt has ballooned to $8 trillion today from $5.6 trillion in 2000.

But there is an offsetting dynamic: Mortgage rates are at a 28-year low. As a result, the monthly carrying costs of mortgage debt is 18% of household income on average — compared with an average of 22% in the 1990s and 30% in the late 1980s.

Adjustable-rate mortgages may make some owners vulnerable. But even then, USC's Bostic says, "it's a matter of timing more than finance."

Most adjustable-rate mortgages have terms of three to five years, he points out. "So we would have to see what a homeowner's situation is years from now when the mortgage comes up for renewal."

In any event, the outlook for interest rates is for gradual increases, not sudden jumps.

Veteran interest rate predictor Albert M. Wojnilower foresees a rise in long-term rates to a level that suggests mortgage rates of 7% to 7.5% a year from now, a level that might restrain the housing market but wouldn't send it swooning.

So let the experts keep offering up dire predictions about a bubble. They are, well, bound to blow it.

Wednesday, September 15, 2004

More Houses For Sale Soften Price Increases


September 15, 2004 -- The number of houses on the market is finally rising in some parts of the U.S. where shortages have led to soaring prices.

The new supply should help soften price increases, and some economists say it may eventually bring prices down in some places where they have risen at double-digit rates in the past few years.

"There's going to be a day of reckoning," said Edward E. Leamer, an economist at the University of California, Los Angeles. "The question is how that reckoning is going to occur."

Any reckoning probably will be gradual. Unlike stocks, the general level of home prices couldn't plunge 20% or 30% in a few days. Many homeowners would refuse to sell if they couldn't get something near their target price, so it could take years for the market to adjust to a new supply-demand reality. Because local conditions vary, prices may continue to rise in some cities while falling in others.

Rising supplies are particularly notable in California, where the median home price has shot up 21% in the past year to $463,540. The California Association of Realtors says the inventory of previously occupied single-family homes in Orange County was enough to last 7.5 months at the current sales rate in July, up from 1.4 months in April. For the whole state, the supply stood at 3.3 months in July -- the first time since February 2003 that the inventory has topped three months.

Inventories also have risen in some other parts of the country. A survey by Jeffrey G. Otteau, who runs an appraisal firm in East Brunswick, N.J., showed that the inventory of homes in the 18 New Jersey counties he covers was up 14% in July from a year earlier. Inventories are up about 10% from a year earlier in Boston but have fallen more than 50% in Manhattan. In Las Vegas, where the median home price has soared about 50% in the past year, developers are responding with more plans for high-rise housing.

Nationwide, the inventory of newly built homes in July jumped 14% from a year earlier. The National Association of Realtors says the national supply of resale homes remains tight at 4.3 months, down from 4.7 months a year earlier. But Realtors report fewer bidding wars and more overpriced houses that linger for months rather than selling in days. Ben Coleman, owner of Century 21 Hartford Properties in San Francisco, said the market is still strong but no longer "on fire."

Many Realtors and housing-industry executives insist the boom will continue. David Lereah, chief economist for the National Association of Realtors, is so confident that he is finishing a book titled, "Are You Missing the Real Estate Boom?" due for publication early next year. Because interest rates are low, he said, many people can afford "exorbitant" prices. Mortgage payments account for about 18% of home buyers' income, down from more than 30% in the early 1980s when rates were high.

But economists expect interest rates to rise, and some worry that home prices have raced too far ahead of income. Median U.S. home prices rose 33% in the four years ended June 30, while per-capita personal income climbed just 10.4%. "You are pricing a lot of people out of the market," said Sung Won Sohn, chief economist at Wells Fargo & Co.

Another danger signal is that home prices have risen far faster than rents, said UCLA's Mr. Leamer. In the long term, the price of a home shouldn't be too far out of line with the rent it could fetch, he argued.

Realtors note that there hasn't been an annual decline in U.S. median home prices in the past five decades. That is true on a national basis, but prices have fallen brutally in some places, such as Los Angeles, where they sank nearly 30% in the early 1990s. On an inflation-adjusted basis, the national median home price has declined in eight of the past 33 years.

Frank Borges LLosa, a real-estate agent who works in the Virginia suburbs of Washington, said he warns his clients they can't bank on continued price gains. "Do I think it is a bubble? I don't know," he said, "but I'm sick of agents pretending like it is an impossibility." He is giving his customers T-shirts that read, "I bought a house during the '04 bubble and all I got was this lousy T-shirt!"

Monday, September 13, 2004

As Housing Market Cools, Power Shifts to Buyers


September 13, 2004 -- The red-hot housing market is showing its first signs of cooling, and the balance of power between buyers and sellers has begun to shift.

Sales of existing homes fell 2.9% in July from June's record pace, according to the National Association of Realtors, and brokers in many areas report that the number of houses on the market is beginning to rise. The result: Buyers are regaining some of their negotiating power and sellers are being forced to lower their sights after years of hefty price increases.

To be sure, home sales traditionally slow during the summer months as families turn their attention to vacations and the coming school year. But the heated spring selling season may have set the stage for a fall slowdown. "There's some indication we're in a transition period ... from a seller's market to a buyer's market," says Tom Kunz, president of Century 21 Real Estate Corp., a unit of Cendant Corp.

This California house recently sold for nearly $50,000 less than list price.

And some real estate experts say the recent rise in inventories goes beyond the normal summer slowdown, with more sellers trying to cash out with big gains and more buyers nervous about overpaying at a market peak.

The apparent shift in the market's tenor follows a frenzied spring, when anxious buyers -- fearing they would get priced out by rising interest rates -- jumped into the market. The average price of a single-family home rose nearly 9.4% for the 12 months ended June 30, the largest 12-month increase since 1979, according to statistics released last week by the Office of Federal Housing Enterprise Oversight. Now buyers are getting pickier, although many sellers still expect prices to keep rising at this spring's rapid clip, real-estate agents say.

In suburban Boston, inventories of high-end homes have risen roughly 15% during recent months, and many properties are selling for 15% to 20% below their listing price, says Alan Rice, a senior vice president with Carlson GMAC Real Estate. Buyers are increasingly asking sellers to include furniture or other personal property in the deal, says Mr. Rice, or to provide an allowance for new carpeting or a fresh coat of paint.

Across the country, in Orange County, Calif., which has been one of the nation's hottest markets, the change is even more dramatic: The supply of homes on the market rose to 7.5 months in July, based on the current rate of sales, up from 0.6 month in March, according to the California Association of Realtors.

Still, home sales are expected to reach record levels in 2004 for the fourth consecutive year. And with mortgage rates again hovering just below 6%, according to HSH Associates, purchases could spurt again this fall. Indeed, some markets haven't yet seen a shift. While July was slow, "August has been a whirlwind," says Jane Powers, a broker with Ewing & Clark Inc. in Seattle.

And Chicago, where the market never quite reached fever pitch, is continuing to see steady price gains, says Stephen Baird, president of Baird & Warner.

But elsewhere, there are signs the market is changing. One Orange County broker recently offered "a bonus of $2,500, champagne, roses, chocolates, mini vacation" plus the chance to win $10,000 to the agent who sells a penthouse condo in San Clemente priced at $1,225,000. The property has been listed for more than 60 days. "When something is on the market that long, you just take action to try and get it sold," says Marilyn Taylor, a broker-associate with Century 21 O.M.A., which is handling the property.

Linda Schermerhorn listed her two-bedroom townhouse in Irvine, Calif., in early June for $439,000, only to discover within days that two dozen similar properties appeared on the market. After consulting with her broker, Ms. Schermerhorn dropped her price to $419,000 -- slightly below recent comparable sales -- and spruced the home up with new curtains and towels. Within a week, she had two full-priced offers on the townhouse, which she had purchased as an investment.

Vegas Inventory Rises

Even Las Vegas, where prices increased by more than 52% over the past 12 months, is showing signs of cooling. The supply of homes on the market climbed to roughly four months in August, based on the current rate of sales, from a slim 1.7 months in January, says Lee Barrett, president of the Greater Las Vegas Association of Realtors. One reason for the increase in properties on the market: Owners who bought properties as an investment last year are cashing in. "Buyers now have an opportunity to look at a product without it selling in hours, and make an intelligent purchase," says Mr. Barrett.

The recent rise in inventories in some of the hottest markets could be a taste of things to come. Mortgage rates are likely to reach 6.25% by year end, says David Lereah, chief economist of the National Association of Realtors. He expects home sales to fall about 5% next year.

The rise in inventory is good news for home buyers, who face less competition for choice properties. "You still hear of multiple offers, but they are the exception rather than the rule," says Michael Turk, managing broker at Weichert Realtors in Alexandria, Va., where one house attracted a stunning 42 offers in May. Another sign of how things are changing: More buyers are opting for a home inspection. In the spring, many passed up an inspection because it could have reduced the chance of getting their offer accepted, Mr. Turk says.

Improving Odds

Even in markets where bidding wars persist, the odds are improving for buyers. In June, the average buyer in Newport News, Va., had to bid on three or four properties before getting an offer accepted, says Liz Moore, president of Liz Moore & Associates. Now, the typical buyer has to make just two offers.

In other areas, inventories have risen to the point where buyers can drive harder bargains. In Rancho Santa Fe, Calif., many buyers are offering 4% to 7% below the asking price, says Charles Gifford, an associate broker with Coldwell Banker. Others are bidding 10% less on high-end homes "just to see what the seller's position is," he adds.

Russ and Terry Gieselman listed their four-bedroom, two-bath waterfront home in Massapequa, N.Y., for $785,000 in June. Just eight people showed up for the open house, including two neighbors, says their agent Gail Blumenstein, a broker-associate with Re/Max Shores in Massapequa. After several price reductions, the house now lists for $729,900. But so far there haven't been any offers. "I'm thinking ... it has to do with the interest rate on mortgages," says Mr. Gieselman. "They've gone up a little and that's turned people off."

The shifting climate is a plus for buyers on a budget. When Lynn and Bob Merring bid $800,000 for a four-bedroom, three-bath home in Costa Mesa, Calif., priced at $849,000 in May, the seller offered to lower the price by $10,000. A few weeks later, the seller's agent suggested that the couple re-extend the offer, which was ultimately accepted.

Properties are also staying on the market longer. In Colorado Springs, Colo., listing times have climbed to 90 to 120 days "for the first time in a long time," says B.J. Burns, broker-owner of B.J. Burns Re/Max Real Estate Group there. Normally, she says, most properties sell within 60 days.

Judy Blea listed her three-bedroom, 2½-bath home in Colorado Springs with Ms. Burns this spring, with an asking price of $179,000. With no sign of an offer, Ms. Blea debated about cutting the price, then pulled the house off the market last month. "There's a lot of houses for sale here," she says.

The new dynamic is also leading brokers and mortgage companies to alter their strategies. When homes were flying off the market, many sellers and listing agents balked at paying fees to brokers representing home buyers, says Maxine Golden of Re/Max Real Estate Services in Newport Beach, Calif. Now, they are offering higher commissions and even cash bonuses, she says.

Builders, meanwhile, are offering cheaper financing and training their staffs on how to best deal with pickier buyers. "We have to change from managing high demand to educating customers more," says Bill Probert, an executive vice president with builder John Laing Homes. "Buyers have more questions. They are more demanding. Every week it seems like there's more inventory."

Sunday, September 12, 2004

Would You Pay a Million Dollars for This?

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The million-dollar price tag for this two-bedroom Brookline ranch house says a lot about today's real estate market, but the interior screams of yesterday. Still, the fact that the house is surrounded by more expensive homes suggests that rehabbing the place would prove to be a good investment. (Photos / Sam Gray) Photo Gallery See more houses

With everything from modest homes to million-dollar dumps now commanding princely sums, it's no wonder that Boston's hospitals, colleges, and biotech firms are seeing so many job offers rejected. Who can afford to live here?

SO THIS IS WHAT it has come to: a two-bedroom ranch with a shallow backyard, sitting on a well-traveled road in Brookline not far from the hum of Route 9, with white Formica countertops in the kitchen, powder-blue carpeting in the living room, and pink tiles in the bathroom. The musty basement family room, which abuts a two-car garage, has walls decorated with narrow mirrors set alongside some kind of bulletin- board material, and the sunroom has a sliding glass door. That sticks.

It just sold for a million bucks.

Walking around this solid but defiantly outdated house in a nice section of town is like stepping back into your grandmother's house after a long absence. The lemon-yellow draperies in the living room, the wooden TV console in the den, the cafeteria-style linoleum squares in the family room. All that's missing is the clear plastic covering on the sofa.

So, sit up straight, be careful not to spill, and lower your expectations. Dramatically.

This 2,000-square-foot house may evoke warm memories from childhood, but it also reveals the cold realities of the current metro-Boston housing market. At some point when we were all too busy marveling at the rapid appreciation of our own modest homes, we missed the complete erosion of one of the most enduring symbols of real estate: the million-dollar mansion. Forget stately Georgians, forget sweeping staircases, forget rolling grounds. Over the last year, some communities have seen everything from ordinary postwar ranches and Capes to shag-carpet split-levels sneak into the $1 million price range -- and in surprising number. The overheated Boston market is blurring two time-honored iconic images: your grandmother's house -- sturdy, simple, inviting -- and the million-dollar home -- august, luxurious, exclusive. Who knew Grandma could be comfortable in this crowd?

Houses here cost so much because there are too few of them for all the people who have been drawn to Boston because it's such a great place for great minds to do great things. But that reputation, which has kept Boston competitive all these years, is beginning to buckle under the weight of absurd home prices. Even in a recession, Boston's world-renowned hospitals, higher-education institutions, and biotech firms admit they are seeing their job offers turned down like never before, largely because of housing costs. If prices get so high that it becomes less desirable to move here, how long before it becomes less competitive as well?

Home prices in Massachusetts are six times what they were in 1980 -- by far the largest spike in the country. But salaries here are only about three times what they were in 1980, creating an enormous imbalance between what we're earning and what we're paying for our houses. There's no way this can continue. Except if it does.

In the most select ZIP codes, places like Brookline and Weston, real estate agents can talk of million-dollar "starter homes" without needing to stifle a giggle. They don't have to. Although the houses themselves are alarmingly ordinary, they have proven in recent years to be very sound investments -- better than just about any of those symbols gliding across the CNBC ticker every business day. Grandma's two-bedroom ranch sits in Brookline 02445, which has seen a 142 percent jump in home-sale prices over the last five years, according to the MLS Property Information Network. But this is an equal-opportunity boom: The Massachusetts ZIP code that has seen the biggest jump -- 218 percent -- is in Lawrence, a city that hasn't seen this much action since it was relying on child labor to spin out cotton cloth for the country.

Proximity to Boston, lot sizes, and well-regarded school systems are the primary admission requirements for the million-dollar club, which explains why a nondescript, three-bedroom split-level in Newton sold for $950,000. Or why a shopworn contemporary in Lexington featuring a small 1950s kitchen sold for nearly $1.2 million. Or why a snug 1,700-square-foot, three-bedroom ranch in Belmont clocked in near the million mark.

You want a grand, rambling Victorian in a top town for around $1 million? That can be arranged, but be warned it may turn out to be a million-dollar dump. One Brookline Victorian that sold recently had collapsing floorboards, asbestos pipe covering, and a tiny galley kitchen with a bizarre Astro Turf-like material on the floors. It gets better: "One had to go through the bathroom to get into the dining area, and that's not the way to design a house," says Harout Kelian, the architect who mapped out the complete rehab of the house, which is now underway. Kelian counts himself among the many whose initial reaction to the Victorian was shock at just how far from "move-in condition" a million- dollar pad could be. But the house will emerge, after lots of cash, as a great place -- and no doubt a very good investment.

There are plenty of properties on the market like it. After a few heart-sinking open houses, you'll learn how to decode the broker-speak that fills real estate listings, how "period details" usually means "needs serious renovation" or how "Bring your TLC" means "Bring your checkbook and tell your contractor to bring his porta-potty; he's going to be around awhile."

Because no community in Eastern Massachusetts has been immune from the geyser of home-price inflation, we have seen the outright end of humility in the setting of asking prices. Witness the three-bedroom Cape that backs up to the White Hen Pantry parking lot in a scruffy part of Natick on the market for $875,000 or the four-bedroom ranch in Quincy -- whose own real estate listing concedes that the "property is tired" -- sporting a price tag of $899,000.

Nationally, homes worth $1 million or more now make up the fastest-growing segment of the housing market, according to Harvard University's Joint Center for Housing Studies. This phenomenon is so new that it wasn't until 2000 that the US Census Bureau began tracking the million-dollar category; before that, those properties were tossed into the top bracket of "$500,000 or more."

But in much of the country, a million bucks still gets you a house that looks like something close to a million bucks. Think new construction, with maybe 6,000 square feet of living space, a media room, a pool, and a three-car garage. If you have a cousin in Texas or Oklahoma or Kansas, you've no doubt had the what-planet-are-you-on debate. She's convinced that you must be insane to pony up a lottery-sized payout for a split-level that needs a new kitchen and baths. You're convinced that, in terms of real estate, she has more in common with a homeowner in Kazakhstan.

You're both right.

The most insidious effect of the market is its ability to make us numb to the absurdity. Spend some time poring over real estate listings and hanging out at open houses, and you'll overhear observations like "For $925,000, it's not hideous." Spend enough time doing this, as I have in recent months, and these comments actually stop sounding completely warped. The market is changing our conception of what a million dollars means, and, along the way, it might just be changing us as well.

AFTER HE GRADUATED from Harvard's School of Education in 1980, Tod Beaty began dabbling in real estate to make a little cash. With some tutoring from his ninth-grade math students, he created a database on his Apple II that allowed him to keep track of Cambridge home sales.

Today, Beaty is president of the Cambridge office of Hammond Real Estate. He makes a lot more than the $8,000 he took in as a broker in 1981. A trim 51-year-old with a gray mustache, strong chin, and soft voice, he sits in front of his Apple PowerBook G4 and calls up a descendant to that Apple II program, a detailed database of million-dollar home sales in Cambridge.

The Census Bureau says Cambridge is the city with the highest percentage of $1-million- plus single-family homes in the country. But this is a surprisingly recent phenomenon. Beaty has to go back only as far as 1986 to find Cambridge's first million-dollar sale. One of the two properties that broke the barrier was a gorgeous nine-bedroom Colonial Revival on Channing Place that sold for $1.2 million. In some ways, this regal house (with attached town house) tells the story of Cambridge real estate. In 1989, three years after its historic sale, it sold again, for $2 million, and five years after that, it sold for $3.2 million. Once again, it's back on the market, this time for $7.9 million.

This, in the words of Lindsay Allison, one of Beaty's veteran brokers, is what $1 million gets you in "desirable" West Cambridge these days: "A house in a nice neighborhood that needs absolutely everything done to it." Or you can get a peach four-bedroom Cape squeezed into an alley, with two houses in front of it and one behind it. Its most visible feature is a protruding garage.

It's true that $1 million is just a number, and it's foolish to expect it to remain impervious to inflation. Think of Mike Myers's Dr. Evil character from Austin Powers, who, thawed after 30 years, threatens to use a warhead to "hold the world ransomed for" -- dramatic, pinky-nibbling pause -- "one million dollars!" Still, in both psychological and economic terms, it's stunning to see how far such a mighty price point has fallen.

Consider that in 1972, the Vanderbilt family sold the Breakers, its Newport, Rhode Island, mansion that evokes all the opulence of the Gilded Age, to a historic trust for its appraised value of around $300,000. In today's dollars, that would be about $1.3 million. Hmm, let's see: Cape cramped into an alley or 70-room waterfront palazzo?

How did we get here?

Remember that in the 1970s, much of Massachusetts was a deteriorated industrial area of empty mills and depressed old housing stock, says Patrick Lawler, the chief economist with the Office of Federal Housing Enterprise Oversight. (Housing prices were about the same in Boston as in Hartford.) But that all changed with the huge buildup of human capital in the 1980s, thanks in part to the heavy defense spending that benefitted MIT, Draper Laboratory, and all the companies that sprang up around them. Greater Boston became a hot place to live and to locate a business, and all those tired three-bedroom Colonials didn't look so tired anymore.

ASIDE FROM A DROP in the late 1980s and early 1990s, real estate values have been surging here ever since. That's because while demand has been in overdrive, supply here is far more limited than in most of the country. There's not much land left, and much of what is left is off-limits to builders because of conservation and zoning restrictions.

Look at the charts Lawler keeps to track the growth in housing prices, state by state, and you see those "two Americas" the Democrats have been talking about so much these days, although it's sometimes hard to tell whose America you'd rather be in. The housing price boom has really hit only about a dozen states. The data explain why you and your cousin in Oklahoma aren't speaking the same language. Since 1980, housing prices in Massachusetts are up 516 percent the next biggest spike was the 399 percent New York saw). Over the same period, home prices in Oklahoma have risen 74 percent.

Drill down even deeper, and you see that this is essentially a Northeast/West Coast -- or "blue state" -- phenomenon. Of the 14 states that have seen the biggest jumps in home prices since 1975, all but one of them (borderline-blue New Hampshire) voted for Al Gore in 2000. Meanwhile, 24 of the bottom 26 states are solidly in the red. People can debate how much the blue and red states diverge in terms of values, but when it comes to housing, there's no question that we live in two profoundly different worlds.

The endless supply of land, and new subdivisions, in places like Texas keeps the lid on housing costs. But Boston and Manhattan (where the average price of an apartment hit $1 million for the first time a few months ago) and San Francisco are landlocked places that long ago blew the lid off.

Costs here have soared especially high over the last five years, as the housing supply has become even tighter, record-low interest rates have expanded buying power, and the stock market tumble persuaded many people to move more of their assets into real estate. Meanwhile, new parents determined to go top-shelf for their kids in everything from Maclaren baby strollers to Britax car seats aren't about to settle for schools with average MCAS scores, so they end up sparking bidding wars for homes in the top districts. That has driven up housing costs in those communities at rates far above the already inflated state average, which in turn has allowed the property there to appreciate almost as fast as Intel stock did during the tech boom.

"If you bought a home five years ago," says Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies, "it was as if you had a second job without working. The appreciation just kept building."

Add to the mix the factors of trade-ups, teardowns, and downsizing, and you get our current million-dollar kind of ordinary.

Trade-ups occur when those people lucky enough to have bought their three-bedroom Colonial in a desirable area five years ago decide they want to move to a bigger house on a quieter street. Their broker tells them what their house is worth, and they are stunned to hear it has doubled in value. But their vision of the fat-cat life ends the moment they venture into the market and realize that just about everything else has also doubled in cost. Still, the hundreds of thousands in profit they make on their first house becomes a hefty down payment for their new house. That, combined with lower interest rates, pushes them into a million-dollar price range that their salaries alone would have never justified. All this demand, fueled by all this profit, changes the landscape.

"It upsets the natural order of things," says Witold Rybczynski, a professor of urbanism at the University of Pennsylvania and author of Home: A Short History of an Idea. "It coarsens people. You can't afford to worry about the building. All your money's in the land."

With an insufficient supply of trade-up homes in these top districts, developers enter the picture. They won't blink at plunking down three-quarters of a million or more for a ratty old ranch in a nice neighborhood, tearing it down, and replacing it with one of those oversized Colonials -- as long as they're reasonably confident they can make at least a 20 percent profit in the end. In recent years, such confidence has seldom been misplaced, particularly in places like Lexington and Newton. Veteran builder Cindy Stumpo just bought a contemporary ranch in Brookline for $1.45 million and plans to tear it down and replace it with a 5,500-square-foot house that she hopes to sell for $3.9 million. When I asked her how many bedrooms the ranch had, she said, "I have no idea. I never even walked inside it."

And then there's downsizing. If you think the family that bought five years ago saw appreciation, consider the older couple who set up camp 40 years ago. In exchange for shouldering ever-escalating property taxes over the years, they can now sell their gracious home in a nice neighborhood for upward of $2 million, and buy a high-end condo or new town house with all the trappings in a development geared toward older affluent people, and still have plenty left over. This, in turn, has dramatically driven up the cost of town houses and condos.

Miceal Chamberlain owns Historic Homes, a Newton brokerage firm specializing in the sale of the finer homes in Brookline and Newton. He says that when he entered the business in 1990, "a million and a half could get you an estate -- a big house on a big lot in the nicest areas of Brookline and Newton." These days? "A two-bedroom condo on Beacon Street goes for $1.5 million. It's astounding."

"I AM OPPOSED TO millionaires," Mark Twain once wrote, "but it would be dangerous to offer me the position." When 401(k)s grew in popularity in the 1980s and 1990s, middle-class workers began following the Dow with the discipline of stockbrokers, turning to the stock tables every morning even before the sports pages.

Today, the housing boom is turning passive homeowners into real estate players. This includes plenty of people whose property has a long way to go before it hits the million mark. In addition to Lawrence, blue-collar cities like Chelsea and Brockton have seen home prices take flight, as low interest rates have driven up demand by flooding the market with buyers determined to leave the renting life.

With 401(k) portfolios losing serious value in recent years, more of us now see our home as the primary insurance policy against having to spend our "retirement" years working harder than ever. Walk into any open house these days, and you may find as many neighbors as prospective buyers. We've become a region of real estate tire-kickers, checking out the neighboring homes to see what it might mean for the value of our own.

Yet many owners of million-dollar homes remain ambivalent about their ascent. One woman, who recently sold her small Cape in Needham for more than double what she paid for it six years ago, was happy to provide me with every detail of her new $1 million home in Newton as long as I didn't divulge one about her: her name.

"I don't think of myself as owning a million-dollar house," she says. "And I guess I don't want others to think of me that way, either."

This distorted market has created plenty of people like her.

They are the antithesis of the nouveau riche of the last generation, those who bought big, fl ashy homes so no one would miss the news that they had arrived. Today, people are more circumspect, partly because they are uncomfortable with the symbolic value of wealth and partly because wealth is different if it is essentially tied up in a house. There are about 2 million Americans with assets of $1 million or more, when the value of a primary residence is not counted. Throw in home wealth, and the number of millionaire households swells to about 8 million, according to Boston College's Center on Wealth and Philanthropy. For many Massachusetts "millionaires," the dough is essentially unreal, since not many of them plan to cash in and move to Oklahoma.

But that doesn't mean they haven't become actively engaged in trying to maximize their investment, as a stroll through the Expo Design Center in Braintree, one of two high-end Home Depots in the Boston area, shows. Instead of the bright-orange aprons and warehouse-high shelving at its sister operations, the Expo Center artfully displays dream kitchens and baths, with custom cabinetry and fixtures available in every flavor. The price tags -- $13,575 for a British stove, $8,439 for a stainless-steel range hood, $4,181 for a crystal chandelier -- scream well-to-do, but the customers are me and you. Even the parking lot tells the story, with a Mercedes E430 flanked by a Chevy Cavalier and a Kia Sephia.

"I used to go to Home Depot to see what I needed," says Paul Schervish, director of BC's Center on Wealth. "Now I go to Expo Design to see what I desire." We now see our homes -- whatever their assessed value -- as active assets that have careers of their own. With home-equity loans more plentiful, there is an almost speculative nature to the whole process. Rather than using the loans for pressing needs, we're investing in designer kitchens with granite countertops, which, in turn, are expected to ratchet up the value of our homes when we finally decide to stick the sign on the front lawn.

BE THANKFUL you're not in Sarah Winig's shoes. She and her husband had been living with their 2-year-old daughter in Plano, Texas, a nice suburb of Dallas with a top-rated school system. But they wanted to move to Boston to be closer to family. Just before her husband got a job at MIT in April, they put their 3,300-square-foot, four-bedroom, 3 1/2-bathroom Texas house on the market for $259,000. It's not selling.

They began looking in Brookline and Newton but quickly learned from their broker, Susan Liberman, that replicating their Texas house here would run them about a million and a half. Determined to stay close to Boston, they lowered their expectations: a smaller house for less than $800,000. They recently found it in Needham and will be able to swing it only by taking out a hefty mortgage. "We've questioned whether we're insane to be doing this," she says. "Had my husband's family not lived here, my guess is we would not have made the plunge."

Now contrast that with the experience of Stephen Bruce. Last fall, the software company manager and his wife sold their four-bedroom, 3,000-square-foot reproduction Colonial in Westborough for about $600,000 and moved to an upscale suburb of Atlanta, where they paid about $400,000 for a five-bedroom, 4,400-square-foot house with 9-foot ceilings in a subdivision that is equipped with tennis courts, a swimming pool, and a water slide, which provide endless fun for their two daughters. Spend $1 million on a house down there, and you can get into the exclusive neighborhood where Whitney Houston and Bobby Brown live.

Well, maybe that's not the best selling point, but you get the idea.

Bruce says his family's quality of life has improved dramatically. No offense to the Bruces, but this is bad news for Massachusetts.

Ever since Massachusetts reinvented itself a quarter-century ago, converting all those empty mills into incubator space for high-tech businesses and lofts for their workers, the state has enjoyed a revived reputation for being an extremely desirable place to live. That, in turn, has helped attract a steady supply of ambitious newcomers and retain so many of those bright college kids who clog Kenmore and Harvard squares every Friday night. All this new blood has replenished local institutions and made the region more competitive, more desirable -- and more expensive.

But the gains are being eroded by the region's runaway real estate costs. "Our housing problem is really an economic development problem now," says Barry Bluestone, director of Northeastern's Center for Urban and Regional Policy. He says that housing costs have become such a drag on faculty recruiting at Northeastern that the campus joke is: "Anyone who recommends a real estate agent to someone we're trying to recruit will immediately be fired by the president."

For years, Boston's top hospitals took it for granted that their world-class reputation and Harvard affiliation made the hiring process no more involved than mailing out offer letters. Who was going to refuse? Those days are gone.

"The real estate crunch is playing a very significant role in recruiting," says Dr. Troyen Brennan, president of the Brigham and Women's Physicians Organization, which oversees recruiting and hiring at the hospital. While there has always been a tradition of academic medical centers elsewhere turning to Boston to fill their most prominent positions, the outflow is much more severe and widespread now. "What we're seeing is a lot more mid-level doctors -- assistant and associate professors -- leaving to go to other parts of the country where housing costs are much less," says Brennan. It's not hard to understand why. "Here, you're living in a small condo or commuting 30 miles to get to a Boston hospital versus elsewhere in the country, where you can afford a nice house right near the hospital."

Brennan, who bought his Brookline home in 1991, says the cachet of Boston's institutions is still strong, "but that can't hold up long term."

Obstetrician Robert Blatman says his seven-doctor group at Massachusetts General Hospital has been down to four doctors for more than a year. "We've had a really hard time recruiting," he says. Asked to describe the impact of home prices on the Boston medical field, he doesn't hold back: "A total disaster."

Blatman and his wife are expecting their first child. He began looking for a house in Brookline in the spring and quickly found himself in the million-dollar price bracket. "A million-dollar house would be a huge stretch for me," says the 44-year-old doctor. "I was hoping to see something that was wonderful. Instead, the best I found was a couple of places that were OK." It was enough to keep him on the sidelines, at least for now. "The crazy thing is, if I can't afford to live in these areas, what about the teachers and the firemen? It really worries me that, at some point, this has to erode the quality of life that made the real estate around here so desirable in the first place."

EVERY SATURDAY MORNING on UPN 38, the TV show gives an up-close-and-personal tour of a distinctive home on the market, bracketed by short ads for more average homes. "We go for the Lifestyles of the Rich & Famous format," says Ed Williams, CEO and cofounder of the company. When the Danvers-based company debuted its TV show in June 2003, he decided that only houses valued at $1 million or more would be considered for the featured slot. The threshold made sense at the time. But lately, Williams says, he's gotten worn out from having to turn down sellers wanting to showcase their middling million-dollar homes. "These days, $1 million can be a shack. It's out of control," he says. "Modest ranches don't have entertainment value."

It would have been hard to sustain a half-hour show on a boxy three-bedroom contemporary recently on the market in South Brookline. No matter. The house with the nice interior balcony but drab, flat-front exterior sold for $1.1 million one day after Philip Movshovich advertised it on "When you hear million-dollar home, you think of some mansion owned by a celebrity," says Movshovich. "But times change, and we happen to be on the positive side of this boom. We're just riding it out."

Still, if the million-dollar mansion is a thing of the past around here, most of us missed the memo. Ask anyone who is not actively shopping for or selling a house to describe a million-dollar home, and you're likely to hear about sweeping staircases and circular drives.

"We had to try to service that image," says Bryan Hale, one of the people behind a new reality show called The Mansion that will debut on the TBS cable network next month. The show, whose working title was The Million Dollar Mansion, will toss eight contestants into an impressive old estate. Along with the requisite reality doses of back-stabbing, scheming, and smooching, the contestants will renovate the house, and then viewers will decide which of the eight gets to keep it.

Hale, the director of development for the company producing the show, says the budget for purchasing a property was $700,000. "That led us off both coasts and into the middle of the country," he says. They ended up in Cincinnati, landing a stately 7,000-square-foot Tudor sitting on 4 acres, with a lengthy, tree-lined driveway, a carriage house, and a private pond.

The most expensive single-family home currently on the market in the Boston area also sits on about 4 acres. The Brookline estate doesn't have its own pond, but it boasts an indoor swimming pool, seven bedrooms, and 18,000 square feet of living space. To hand over his keys to this exquisite Georgian Revival, Frank McCourt, the Boston bigwig and new owner of the Los Angeles Dodgers, is asking $22 million.

As much as the market has upended the natural order and relaxed lending rules have allowed average joes to take on jumbo mortgages for anything-but-average sums, McCourt's house shows how the rich manage to keep to themselves. Some high-end financial planners now eschew garden-variety millionaires, restricting their services to the Edens of decimillionaires and centimillionaires. And to help navigate this new Lake Wobegon world where every home price is above average, real estate brokers have created new categories. The numbers get more exclusive as you climb upward. For the first half of this year, the MLS Property Information Network, which tracks real estate listings in Massachusetts, reports about 450 sales between $1 million and $1.5 million but only 20 between $3 million and $4 million. (The figures do not include most sales in Cape Cod and Western Massachusetts, which MLS-PIN does not cover, and many of the highest-end properties, like the McCourt estate, which are handled privately.)

Although most shoppers are initially shocked at how little they can get for $1 million, they get acclimated pretty quickly, says Phyllis Aaronson, an agent with W. H. Lyon Real Estate who brokered the nearly $1.2 million sale of that shopworn contemporary in Lexington. She admits the house doesn't look like a million bucks but says the location is "priceless" -- eight-10ths of an acre abutting more than 5 acres of preserved open space. The buyer, a respected economics professor, knows a good deal when he sees it.

There's a new price point where people expect more, Aaronson says. "A million and a half is the figure at which people say, 'Where's the beef?'"

Despite all the talk that the real estate bubble is about to burst, home sales continued to be brisk this summer. A big reason for that was interest rates, as buyers raced to close deals before further hikes kick in.

Brokers do admit seeing signs the market is beginning to slow. The crazy bidding wars that erupted at open houses as recently as the spring have largely disappeared. And more million-plus properties saw price reductions as the summer wore on.

But before taking this as proof of the wisdom in staying on the sidelines, remember this: People were talking about similar signs of softening four years ago. That was before the housing market here plowed right through a recession. Before all those prospective buyers, who had folded rather than ante up $300,000 for a three-bedroom Cape, realized the market correction wasn't coming. Before they ended up paying double to land their Cape and finally get into the game.

Harvard's Nick Retsinas and Northeastern's Barry Bluestone say that even if the economy worsens and the bubble bursts in other parts of the country, Boston's unusually tight supply suggests that single-family home prices will probably continue to appreciate but at a much slower pace. Bottom line: The sidelines are not necessarily the smartest place to be.

If you can afford the $1 million high stakes but insist on getting a place that looks like a million bucks, take heart. There are still a few out there.

For $950,000, you can score a 25-room mansion in Franklin, featuring hand-painted Delft tiles from Holland and eight fireplaces of Italian marble. Just off the front hall, with its sweeping staircase, there is a lovely "flower room," where freshly cut blossoms would be delivered, washed, and arranged daily in the 1920s, when the mansion was home to a larger-than-life industrialist.

But to get this much house for this kind of money, you'll need to make a few compromises. The rolling acres that once insulated the sprawling Georgian were sold off long ago, so now the view is obstructed by a charter school with attached modular classrooms. With no central air conditioning, the third-floor ballroom gets pretty hot in the summer. And, oh, yes, if you buy the house, there are nine days every August when you're legally required to turn your backyard over to the St. Rocco's Festival, whose Ferris wheel, live bands, and endless supply of cannoli attract a crowd of 30,000.

A hassle? You bet. But at least nobody will ever confuse it with a two-bedroom ranch.